This post is an excerpt from the complimentary resource Essentials of Impact Investing: A Guide for Small-Staffed Foundations, created by Exponent Philanthropy and partners Mission Investors Exchange and Arabella Advisors. Want to align your investments with your mission? Download Essentials of Impact Investing: A Guide for Small-Staffed Foundations >>
By Cynthia Muller and Catherine Toner, Arabella Advisors
For the 90-year-old Edward W. Hazen Foundation, making impact investments was not a question of if, but how. The board was eager to more closely align the foundation’s investment portfolio with its mission. With the corpus entirely in screened investments, the board had voted to allocate $1 million, or 5 percent of its total corpus, whichever is less, to test mission investing—but found it challenging to identify transactions that met its criteria.
The foundation found [its first investment]—as well as two other potential transactions that are in the pipeline—thanks to the board and staff’s efforts to solicit suggestions from peers.
To successfully invest for impact, you’ll need a steady pipeline of investable transactions. Because the field is relatively new, finding investment opportunities that are aligned with a foundation’s interests and goals often requires extra effort and effective collaborations with colleagues, partners, and advisors. Foundations active in impact investing point to a number of ways you can find or develop investable opportunities:
Conduct a landscape scan
This will identify fund managers or investments that are aligned with your foundation’s investment criteria (investment, program, geographic requirements). Peer funders are especially helpful to speak to when identifying specific investment opportunities within your area of interest. Industry platforms such as ImpactBase, Aeris, ANDE, and ImpactSpace are good resources as well. If you are able to identify specific opportunities through these resources, the next step is to have a conversation to clarify if the fund manager or organization is actively raising funds and the timeline for possible investment.
Review your grantee portfolio
You can also discover investment opportunities by exploring which of your foundation’s grantees may benefit from impact investments. It is essential, however, that the grantee organizations have the capacity to manage a loan or equity investment so that a return can be realized. Many grantees will be unfamiliar with investments. They may have different risk/return expectations, and their investment wishes may not always correspond to the foundation’s impact investing protocols.
Look to your grantmaking
Grantmaking can help you generate transactions. You can use grants to analyze and conduct research on an issue area or specific investee needs, as well as to build capacity in nonprofits and social enterprises to help make them investable. Field-building grants that, for instance, generate market data, can help make the local environment more conducive to impact investing.
Search databases and explore networks
Because the field is new, many investors cultivate transactions through word of mouth and referral. CREO, Toniic, and other groups of like-minded investors may be looking for similar opportunities in the same field. Impact investing conferences and convenings are also places where ideas for investments and relationships with intermediaries emerge.
Issue requests for proposals
Some foundations institutionalize the process of finding investments by developing requests for proposals and regular application forms. You can find sample templates such as this one from The California Endowment on the Mission Investors Exchange website.
Seed a new investment vehicle
If there are not enough investable opportunities to accomplish your impact investing goals or you want to help build capacity in a specific geography or issue where none exists, you may consider seeding your own fund. To do this, you would partner with an intermediary or fund manager with the capacity to absorb investment capital and deploy investments into organizations and enterprises that align with your strategy. You can also use a new fund to attract and pool additional capital from like-minded investors. Community development financial institutions (CDFIs) make good partners because they have the existing staff, networks and relationships, and track records.