At NFF, we're fortunate to work with some of the most creative foundation leaders who are wrestling with the challenges of connecting the resources they have to the social outcomes they seek. In this new interview series, NFF CEO Antony Bugg-Levine chats with some of these foundation partners about various aspects of philanthropy and financial strategy. We hope foundation and nonprofit leaders alike find sparks of inspiration and challenge in these explorations of how money can best support mission in the social sector.
Our guest: Kimberlee Cornett is managing director of The Kresge Foundation’s Social Investment Practice. Kimberlee works closely with the foundation’s program teams to make capital and financing available to organizations working on key, strategic priorities of the foundation. She identifies capital gaps and then structures loans, loan guarantees and alternative financing through banks, community development financial institutions and specialized lenders to meet specific project needs.
Antony: The Kresge Foundation is a leader in social impact investing, going beyond grant-making to support nonprofits with other types of capital. What have you learned as you've built the social investment practice at Kresge over the last 4 years?
Kimberlee: There is a reciprocity between grants and investments. We knew this from an academic perspective, but are now developing muscle memory about it. I estimate that for every ten dollars we've invested, it has been supported by a dollar in grants. Some of these grant dollars have been used to better understand what types of capital are needed and to seed future investment. Serving as both grantmakers and investors gives us incredible leverage in terms of financial impact, influence, and knowledge, which makes us able to do our work better. The foundation is exercising a different way of making change around complex social problems using grants strategically as an onramp to other kinds of capital. Man cannot live on grants alone!
We're finding a similar dynamic with our clients' needs for advisory services and lending. One of the things organizations need most in today's environment is resources to enable them to adapt, but a loan is not the right starting point for adaptation in most cases. An organization needs a business plan before they need a loan. Can you speak more about the "knowledge leverage" you achieve by making both grants and investments?
Awhile ago, we did a sort of "speed dating" exercise with program and investment staff. We found that our program staff knew a lot that our investment staff did not; our investment staff knew a lot that our program staff did not. This approach is still in its embryonic stage, but it has helped inform the development of our comprehensive healthcare investment thesis, covering everything from grants to market-rate investments. We have now invested in two healthcare companies, with products that relate to safety net and vulnerable populations, and are looking at our third now. We call this our "better investor overall" project. If we really understand both sides of the equation, our hypothesis is that we may be a better investor with all of our capital resources.
That sounds unusual. For the grant and investment sides to come together, requires each side to change the way they think about how to optimize what they do. When Jed Emerson and I wrote Impact Investing, we couldn't find a single example of real collaboration between investments and grantmaking teams at foundations happening without the strong leadership of a foundation CEO or board.
It is unusual. Our CIO happens to be someone who takes fiduciary responsibility very seriously, but also has an open door. He's open to strategic opportunities where the endowment can play a role.
You and I agree that impact investing, while trendy right now, is not new. Community Development Financial Institutions (CDFIs) have been making impact-generating loans for decades, foundations have been using Program Related Investments (PRIs) since the '70s, and so on, but there is a lot of excitement around this latest wave. What new opportunities do you see?
Things are changing. Right now we're seeing more product and platform development. We did exploratory work with a crowd funding site tied to real estate development, and looked at using it here in Detroit. We're an investor in Sustainable Insight Capital Management. There's the McKnight Foundation's commitment of $200 million in impact investments, the Pay for Success agreement that Bank of America Merrill Lynch introduced in New York, and other examples. So there is certainly new momentum.
What do you see as the unique highest and best use of a foundation PRI program in a world where others, including banks, are making impact investments? It does seem that compared with CDFIs and other banks, foundations could have unique risk appetite, and could use that ability to catalyze deals and help crowd in other flows of capital.
I believe our best tool is our guarantee, which is inherently risk capital, even though we are judicious in deploying it. That capacity seems to catapult deals forward, sometimes even more than loans. Right now, we're developing an investment channel/thematic approach that will take us deep into a space that relates to the overall objectives of the Foundation, uses multiple forms of capital (including market rate investments), requires sustained focus, cross sector solutions and policy reform. We are mid-stream in this work but expect to be making investments and grants in 2015.
In terms of the evolution of the role of PRI programs, there is a need for programmatically agnostic social investors who just want to see the market move faster. But that's not where we are today.
How do you measure the catalytic power of social investments?
One example is a current partnership where we're looking at how a “forward commitment” of a guarantee might expedite the raising of other capital so the financing can get into the market sooner. If the guarantee allows the fund manager to expedite the capital raising process then that is time and money saved for the Manager and new value at work in a community that much sooner. A guarantee can also function as a stamp of approval for other investors. In the case of New York's Pay for Success contract, the Rockefeller Foundation's guarantee may have made the agreement easier to sell.
What advice to you have for foundations that are considering impact investing? Start slow and find good partners? Or has enough been done that foundations can leap in?
I don't think it is necessary for foundations to slog their way through some of the early learning that we did! Engaging program staff at the onset can catapult an effort forward. There is also a case to be made for buying the investment capacity externally and not building it internally.
Well, social investment requires time and expertise and capacity that few foundations have. If everyone builds, it leads to fragmented efforts where few teams achieve the scale that fosters expertise. At NFF we’re excited to use our investment capabilities and expertise to support foundations looking to partner to achieve their impact investing goals rather than go it alone. But I do think it is important for foundations, even those just getting started, to have an internal champion to connect deals from a mission and human perspective to the foundation.
Yes. A lot of times we have looked at what has helped us in terms of "skill and will" on program teams. Skill is an added asset but “will” is essential. We've recently interviewed a few candidates very carefully around “will”. Even if they weren't coming from a place where they had deep expertise with investment, we looked to see that they had an appetite and receptivity to using investment tools. Because we've hired people with “will”, we've seen a dramatic uptake in momentum. Kresge is changing from the inside out because program staff are increasingly interested, motivated and seeking a wider range of opportunities.
Interesting. Even if program folks haven't done deals, making sure they’re open to learning and using different types of capital to reach goals is a great approach to strategic hiring. We find a lot of our work comes down to figuring out best ways to deploy various types of capital to support social impact, and there is an element of flexibility and creativity in every success story. Thank you for sharing your insight from your work as a leader and doer in impact investment.