In 2012, the endowments of US Foundations represented $715 billion in aggregate assets and they distributed approximately 7% ($52B) per year for grants, operations and program related investments (PRIs).
According to Larry Kramer, President of the William and Flora Hewlett Foundation, the question is “whether the social returns generated by our non-concessionary impact investments are greater than the social returns that would be generated by the grants?”
He acknowledges that the empirical data is weak with respect to answering the question and that it raises concerns about what happens if large grant-making foundations shift more of their resources into impact investment.
Nevertheless, there are a growing number of foundation leaders asking whether the current requirement of distributing a minimum of 5% per year is sufficient to address critical social or environmental problems. A handful of leaders believe that more endowment capital can be unlocked for “mission-related investments” (MRIs) to drive innovation and inclusive growth while enabling foundations to amplify the fulfilment of their missions.
In fact, the recent tax legislation passed by the US government in December penalizes university endowments with a 1.4% tax if they have more than $500k in their endowment for each active student. Whether you think this is a good idea or not, the new law indicates that the winds are changing, that doing the minimum with your assets may no longer be enough. If university endowments cannot have unlimited growth, independent of the mission of the institution, how long before private foundations are required to distribute more of their assets?
Who is already doing MRIs at Scale?
To date, the most high-profile example of leaders deploying MRIs at scale is the Ford Foundation. In 2017, Ford announced it is committing up to $1 billion from its $12 billion endowment over the next 10 years into mission-related investments. Their MRIs are focused on financial services and affordable housing. This commitment is also intended to help advance the broader marketplace for impact investing and move market-based economies toward “the high road—squaring the dynamism of markets with society’s highest values, especially fairness and human dignity.”
According to CEO Darren Walker: “If we expect to overcome the forces of injustice and inequality, we need to expand our imaginations and our arsenals. In short, we must begin to more deliberately leverage the power of our endowment.”
Other leaders making significant MRI allocations include W.K. Kellogg Foundation and MacArthur Foundation. The W.K. Kellogg Foundation has committed $100 million to MRI, deploying funds through various products including Community Development Financial Institutions in Detroit and Louisiana. The MacArthur Foundation has committed $225 million of it $6.2 billion portfolio to MRIs to advance impact investing, climate change solutions, and energy efficient and affordable housing.
How are impact investments performing?
There are two critical studies which point to impact investing as a very compelling investment and social impact strategy and that they need not be concessionary:
- According to a 2015 study by Cambridge Associates and the GIIN, the impact funds had a net IRR of 6.9% to investors, compared to 8.1% for conventional funds. And impact funds under $100 million returned a net IRR of 9.5% to investors, outpacing comparable conventional funds returning 4.5%. Impact funds over $100 million returned 6.2%, underperforming comparable conventional funds returning 8.3%. Emerging markets impact investment funds have returned 9.1%, significantly outpacing 4.8% for developed markets impact funds. Those focused on Africa have performed particularly well, returning 9.7%.
- A 2016 study by the Wharton Business School found that market-rate-seeking impact investments had a (gross) IRR of approximately 13%, indicating nearly identical performance with the market index. Similarly, impact mission-aligned exits returned 33.5%, compared to the larger universe of exits at 35%. They concluded that market-rate-seeking impact investments can be financially competitive with other equity investing investment opportunities, and there appears to be “little inherent tension between profits and purpose.”
Moving MRIs Mainstream
Mission-related investing is still in the nascent stages. Measurement and reporting in the impact investment space has played an important role in moving capital into the space. Yet, robust MRI data lags far behind, with the most comprehensive report dating back to 2012. Over the coming years, we hope that compelling data generated by pioneers like the Ford Foundation will play an important role in activating migration of foundation’s assets to MRIs.