An unfortunate CEO expressed what many other business leaders think (but have the sense not to say publicly): “I would love to promote and hire more Black people but there just aren’t enough qualified for the job.”

And there it is, prejudice and ignorance expressed in a nutshell. We simply have to do better. We have to open our eyes to all of the talent surrounding us and look outside our daily professional interactions. These talented individuals might not look like the corporate success archetype (white male of a certain age) but they bring tremendous experience and skills. Diverse teams do better (if you don’t believe me, look it up).

But convincing you that diversity, equity, and inclusion matters isn’t the point of this blog. Nor is educating you about systemic racism and gender bias or tips to be a good white ally. We have other blogs and podcasts for that.

This is HOW to express these values and gain access to this talent, through your investments.

At Cogent, from our perch working with foundations across the country interested in exploring innovative and prudent ways to put more of their assets to work for mission, we see many approaches to tackling systemic racism and gender bias. To approach the work, we’ve developed an approach we call the “Equity Triple Play” to help guide our clients seeking to add diversity to their investments. Many foundations, nonprofits, and corporations share these values and we’ve found this approach helps them get started fast, go deep, and see results quickly.

There’s no time to lose.

So, what is this “Equity Triple Play”? We look at gender and racial equity investing in three levels:
Investment decision-makers: who makes investment decisions?
Investee leadership and team: who runs and works at the companies investors choose?
Positive product or service: who benefits from the products or services provided?

Let’s unpack each level of “play”.

Going for the Triple Play is the goal and reviewing your investment through these three levels establishes a baseline. As a Little League Mom for 14 years, my son’s coach used to holler at the home run hitters, just get on base! Many times these powerful hitters struck out swinging for the fences and every now and then, they hit a home run. My son listened to his coach and, more times than not, found a way to get on base. And once he got on base, everyone knew that Danny would find a way to get home.

By all means, swing for the fences if you feel your organization is ready to seek the Triple Play. But it’s also ok to start by picking managers and investees with one or two levels of “play”, as that is better than a strike-out on diversity. Do it again. Keep score. Hold yourself accountable for results. This is how change happens.

The Triple Play gives you an avenue to start and that’s what matters. Get in the game.

Susan Hammel Bio: As a philosophy major who went to Wall Street, Susan Hammel translates between passionate social changemakers and expert accountants. In her role as CEO of Cogent Consulting, Susan is celebrating over 20 years as an impact advisor and is serving her sixth year as Minnesota Council on Foundation Executive in Residence for impact investing. Like in her youth, Susan remains optimistic and passionate about changing the world and enjoys downtime by the lake with her husband and the 4 adult children in their blended family, their partners, plus a recent addition of a beautiful grandson.

Seeing a lot for sale signs lately around your neighborhood? 

But the prices are astronomical? 

The more you look, the more you notice that your neighborhood isn’t truly yours anymore. 

It seems as if your neighborhood is being gentrified. 

Gentrification is the process of renovating and improving a house or district so that it conforms to middle-class taste.

If you look across America, this is slowly becoming the standard: pushing Black, Indigenous, people of color (“BIPOC”), and other marginalized groups out of their own neighborhoods. However, this shouldn’t be the case at all! 

Marginalized groups should have the opportunity to grow and strive within their own places with true ownership. 

This is where people can use capital for social justice. Foundations create mission-related investments (MRIs), program-related investments (PRIs), and other types of impact investment to help those who typically do not have access to traditional capital markets. For example, some foundations, such as Duluth LISC have used impact investing to create storefronts in Downtown Minneapolis for minority and female business owners. Also, social entrepreneurs use impact investments to “buy back the block”, meaning buying and re-vitalizing the block for those in the community at a non-inflated price. These types of investments allow marginalized groups to stay and flourish in their neighborhoods. 

Impact investing gives marginalized groups opportunities for which they wouldn’t normally be considered It is quite interesting how Black women are the most educated group in America but have the least venture capital. They are also given less support in the financial world compared to their white counterparts. Foundations and other organizations can help Black people receive proper support. The traditional sources of financing have denied marginalized groups suitable access to the investment world for too long. It’s time for people to put their money where their mouth is and use their capital for justice. Create an opportunity for marginalized groups to generate wealth for their future generations. The time for change is now and that change is impact investing at the forefront.

Take Action

To learn more and dive deeper into these topics, learn more about:

• Shared ownership models as a key tool for social change. Check out a group we admire: The Democracy Collaborative
• Community land banking as vehicles to retain community ownership such as Land Bank Twin Cities
• Shop and buy local. Amazon is NOT helping your neighborhood’s vitality!
• If you own your own business, consider converting to a shared ownership structure.
• If you’re an investor, consider asking potential investees if they would consider a shared ownership model.

In light of everything that has been going on in our country lately, many Americans have started to look into social change and social impact. How can they create social change in their communities? How can we be the change we want to see? How can my actions have a social impact?

Furthermore, during this pandemic, many Americans have also started to look deeper into their finances. Should we start a high yield savings account? Should we start investing in companies or stocks? What if I told you that you could combine these two sentiments? Yes, you could invest in something that will have a social impact while giving you a financial return. Impacting investing aims to generate specific beneficial social or environmental effects in addition to financial gains. This type of investing is sometimes called social impact investing, double bottom line investing, and social change investing. These types of investments use your money to invoke social change while receiving a financial return. It is truly a win-win.

Now impact investing isn’t just for big companies, but for non-profit foundations and entrepreneurs. There are several types of impact investing. You can invest your money in developed or emerging markets in a variety of industries, such as education and healthcare. Wouldn’t it be amazing to know that you’re helping an overloaded healthcare system or underfunded schools? Impact investing gives investors a chance to give back to communities that have been neglected or overlooked. 

Now, I’m sure you may want to know, how can we trust our money is going to the right company? That’s when we check out the company’s commitment to corporate social responsibility (CSR), their sense of duty to create a social impact in society as a whole. For example, let’s say you’re really into renewable energy and want to invest. Look into companies that are all about renewable energy and invest your dollars with them. Another good way to get started is to seek out a “b-corp” bank such as Sunrise Banks or b-corp companies such as Peace Coffee. They are dedicated to producing public benefits (and we’re proud to say that our company, Cogent Consulting just became a PBC last year!). With impact investing, you will be helping to invoke a social impact while receiving a financial win. Like we said before, it’s truly a win-win.

Invest in small businesses and nonprofits!

Put all your money into finding a vaccine!

Emergency responses are the only option now!

Spend everything you have, now, on all of the above!

The noise is deafening because there is no SINGLE  way of responding to COVID-19. Every investor has a different investment strategy, timeline, and impact integration method. Yet we all feel the urgency to respond to what has become a global health crisis, economic disaster, and systemic risk. 

As we face this global health crisis, we are seeing the closure of small businesses, the deepening of existing social inequities, and the largest hardships for our most vulnerable communities. It is imperative to utilize every tool available in building response and to not let marginalized communities be further marginalized.

In response, there is a reinvigorated need for collaboration. Between investors and investments, foundations and grantees, and governments and communities, society as a whole must work together to combat COVID-19 on a medical front, an economic front, and a social front to ensure that as many resources as possible are accessible for those who need it most.

Alongside donations and grants, impact investments have a powerful role to play in stepping up to address today’s problems. From maintaining a nonprofit’s operations to ensuring that small businesses actually receive Paycheck Protection Program“PPP” loans, investors of all kinds, investment managers, and consultants are offering creative solutions that further the fight against COVID-19.

Grant Making vs PRIs?

As the Minnesota Council of Foundations recently urged in their “Integrated Capital Crisis Response & Recovery Approach”, the devastating impact of COVID-19 requires foundations to be “bold, creative, and fast” in deploying capital.

So why Integrated Capital? By incorporating Program Related Investments (PRIs) alongside the more traditional form of grant-making, philanthropy can activate more of its capital to be working towards solutions for the world’s problems. Through PRIs, a foundation is able to activate capital in its endowment or re-deploy investments in the future, allowing for the capital to continue towards the foundation’s mission over time. 

How are Impact Investors Responding to COVID-19

Here are some of the ways we see impact investors step up to the task:

Bridge Loans – This can be the difference between small businesses and nonprofits staying in operation or closing their doors. With bridge loans, nonprofits that serve the most vulnerable in our communities can maintain payroll and turn their energies toward evolving their services to public health regulations.

Flexible Interest Payments and Terms – All investors and foundations have existing grantees or investments facing the challenges of COVID-19. By waiving interest payments, extending payment deadlines, and opening communication channels, impact investors can continue to support current grantees and borrowers. 

Open Communication – The unexpected economic impact of COVID-19 may cause fear of change in grant availabilities. Actively addressing these changes and concerns is an important component of supporting communities during this time.

Capital for Community Development Financial Institutions (CDFIs) – In accessing money from the Paycheck Protection Program (PPP), qualified banks must also have enough liquidity to provide capital to their clients for an eight week assessment period before they are reimbursed by the Small Business Association. By providing capital for CDFIs, more PPP money will be accessible to small businesses in marginalized communities that are underserved by commercial banks.

A Highlight (PPP and CDFIs)

The Center for Responsible Lending (CRL) estimates that upwards of 90% of POC owned businesses face being shut out of PPP loans when applying through mainstream banks or credit unions. Many banks participating in PPP are only issuing these loans to existing clients, which is a barrier to People of Color (POC) owned businesses that are less likely to have commercial banking relationships.

Major banks have also been accused of prioritizing larger loan applications in order to maximize loan-related fees and profits. This shuts out small businesses as a whole since PPP loan sizes are based on a businesses’ average monthly payroll. The prioritization of larger businesses disproportionately affects POC- and women-owned businesses, which on average have 30% fewer employees compared to their white- or male-owned counterparts. 

Community Development Financial Institutions (CDFIs) are “profitable but not profit-maximizing”, ensuring that the community is put first, before shareholders. They are financial institutions that focus on personal lending and business development in poorer local communities. With their focus on communities traditionally underserved by commercial banking, CDFIs are especially well suited to tackle issues with PPP funding distribution.

Final takeaway:

“Know this: you have a choice about how to weather this crisis as a player in the impact marketplace, and it is not a binary one. Your actions today can determine the longer-term impact and returns you help generate. We are not asking for you to put the viability of your own organization at risk, but to remember (or even prioritize) the ‘impact’ in impact investing.”  – Open Roads Alliance, Quoted in Impact Alpha March 19th 2020

Home Matters

by Susan Hammel, CFA, Founder and CEO Cogent Consulting PBC

We need to come together (from a distance) now more than ever as we battle COVID-19.

More of us are spending a great deal of time at home these days with the Stay-At-Home and work remotely orders. It got me thinking about how grateful I am to even have a home and especially to have the ability to work from home. I look out my windows and see neighbors I’ve never seen before out walking their dogs, pushing strollers, walking alone and with friends (6 feet apart, of course).  Home, neighbors, communities: place matters.

In my gut, I’ve known this truth for a long time which is why I’ve focused on “place-based impact investing” aka a fancy way of saying invest in the places you love, but that’s the topic of a prior blog “Build on the Love People have for Where they live.”

This pandemic is laying bare the glaring injustices and inequities in our communities, our regions, our world. So far COVID-19 has hit the developed world hard but next up is the developing world. If it’s been bad here, what will it be like there? And it’s not equally bad for everyone here in the U.S. For people lacking health insurance, loving families, safe neighborhoods, jobs, and yes homes, they are facing hardships much beyond getting bored with Netflix.

As usual, during times of trouble, I find strength through my Catholic faith, passed down by generations of strong, faith-filled women in my family. Pope Francis said it best:

Praying in an empty, rain-soaked St. Peter’s Square, Pope Francis on Friday likened the coronavirus pandemic to a storm laying bare the illusions that people can be self-sufficient, and instead leaving “all of us fragile and disoriented” and needing one another’s help and comfort.” Star Tribune 3/28/2020

In other words, the time for investing in place is now. We need to marshall all the resources at our disposal to build strong, resilient communities that work for all. If you’re a social entrepreneur doing that, NOW IS YOUR TIME. If you’re an investor who’s dabbled in impact investing, DO MORE. We need you now, more than ever because once the charitable and government supports run out, we need smart, compassionate entrepreneurs and investors to launch solutions, retool factories, and get capital flowing to underserved communities be they African American, Latino, Native American, Asian American, LGBTQ, rural,  and economically depressed.

When the reality first hit home for me in the past 2 weeks I wasn’t sure if all the wonderful social entrepreneurs and impact investors I know and love would just stop. I worried they would think now isn’t the time to try something new or innovative or take the risk. And while people are certainly hunkered down, my phone is ringing off the hook with people wanting to help: what can impact investors do? How can small manufacturing businesses help out? What innovative solutions can help bring us all together? In particular, I’m inspired by:

• Kenya McKnight, working to build wealth among black women 
• Kate Barr, helping Minnesota’s nonprofits weather this crisis
• Susie Brown, launching a disaster recovery fund for grant-making organizations
• Minnesota Governor Tim Walz, steering a steady course to keep us safe
• Melanie Audette, rallying national impact investors to address the crisis

I hope this leaves you feeling inspired to step up and out to serve our community during this time. Stay safe: enjoy your home: and don’t lose the faith (whatever yours is). We will get through this, together.

MN resources

• For entrepreneurs, link to Impact Hub MSP
• For foundations, Minnesota Disaster Recovery Fund 
• For small businesses and nonprofits, SBA and MN DEED
• For people wanting to donate: Headwaters Foundation for Justice, OneMPLS Fund

National resources

• The Case Foundation is aggregating relief efforts, COVID19 Capital Relief Dashboard

Susan Hammel Bio:  As a philosophy major who went to Wall Street, Susan Hammel translates between passionate social changemakers and expert accountants. In her role as CEO of Cogent Consulting, Susan is celebrating over 20 years as an impact advisor and is serving her fifth year as Minnesota Council on Foundation Executive in Residence for impact investing. Like in her youth, Susan remains optimistic and passionate about changing the world and enjoys downtime by the lake with her husband and the 4 adult children in their blended family, their partners, plus a recent addition of a beautiful grandson. 

This article was originally published by Minnesota Council on Foundations in Giving Forum Magazine’s Spring 2019 Edition

Written by Susan Hammel, CFA

Call me Pollyanna but I believe there is still a real chance these new investment flows may actually benefit the people living in the designated zones. For that to happen though, we need the philanthropic community to engage. The good news is that many foundations around the country and here in Minnesota are doing just that. If more of our foundations step up to partner with people in the zones, perhaps another “Minnesota Miracle” can indeed happen.

First, a quick primer: O-Zones 101

The Tax Cuts and Jobs Act of 2017 created Opportunity Zones (“O-Zones”) to spur economic development and job growth in distressed communities by attracting private capital investment from individual investors to those communities through a combination of capital gains tax deferrals, reductions, and exemptions. During spring 2018 governors in each state designated more than 8,700 zones, primarily in low-income census tracts, with final approval from the U.S. Treasury in April, 2018.

Are you ready for some tax talk? I promise to keep it brief.

Investors who have done well on their investments can benefit through investing capital gains from the sale of property, businesses, or securities into qualifying O-Zone funds.

How do they benefit?

• Deferred taxes: This benefit allows investors to defer paying taxes on the capital gains used to invest in qualifying O-Zone Funds for up to seven years.
• Reduced taxes: Investors will pay 10% less tax on those capital gains if they hold the O-Zone investment for at least five years. If they hold the investment for seven years, they receive an additional 5% reduction (to a total of 15%).
• Exemption: Best of all, if held for ten years or more, the investments made by the O-Zone Fund are exempt from all capital gains.

There are timing constraints on how quickly investors must invest those capital gains (within 180 days), how quickly the O-Zone funds need to invest the money they raise (six to 31 months, depending on the type of investment), and on how long the benefit will be available (currently the full benefit is available to investments made before December 31, 2019, but this may be extended). O-Zone funds can invest in businesses, property or equipment finance.

That’s it for the tax talk, I promise. There are a ton more details so please consult your favorite tax advisor about any/all of the above. I’m a CFA, not a CPA for goodness sakes.

How will this play out?

First off, timing matters. Since the investors need to act by the end of this year to get the maximum benefit, they prefer projects that are ready to go. Second, investors prefer real estate projects because the physical address of the investment makes meeting the geographic constraints of the O-Zone regulations simpler than when investing in a business, which is more likely to relocate. And third, investments in real estate are both easier to underwrite and much more common than investments in businesses in these neighborhoods.

In addition to the tax savings, there is another force pushing investors into opportunity zones: the high price of real estate. Real estate investors, who are used to 9-11% annualized returns, have begun to eye less-affluent areas for investment as the returns on projects in “core markets” (typical real estate developments in major city centers) have pushed prices high enough to reduce prospective returns to 5-6%. These investors will be the first to move capital into Opportunity Zones, purchasing the properties most fit for new apartments with high rents.

Financially motivated investors will move swiftly. After the most appetizing market-rate investments have been made, impact investors and community development organizations will have the chance to push forward projects that would benefit the community.

What are the requirements to make this work?

While the interests of impact investors and community development organizations are closely—albeit obliquely—aligned, both groups must surmount significant barriers if impact investments are to be made. There are two requirements:

First, there is the issue of investor confidence. The initial Opportunity Zone regulations outlined the basic shape of the tax deferral, reduction, and exemption, but left investors unsure as to how Opportunity Zone investing would work in action. The IRS has since released clarifying regulations, but investors are still uncertain about a range of things, particularly if they will be able to reinvest gains from O-Zone sales back into other O-Zone investments. While the absence of regulations has done little to stop some types of investors, impact investors are cautious by nature, and many are reticent to deploy capital into uncertain situations.

Second, community voices are essential. Community development organizations are faced with the challenge of determining which projects are best positioned to benefit their communities and then promoting those projects to investors. There is currently no federal-level policing of gentrification projects, and it has fallen on community organizations and local governments to develop and enforce do-no-harm policies in their neighborhoods. The difficulty in communicating community needs to investors is that community development organizations and individual impact investors have little to no experience working together. Community development organizations have worked with banks, foundations, and developers while investors have worked with advisors and most often, through investment managers, rather than directly in projects. The community development organizations have extensive affordable housing and community development project experience, but do not have experience working with individual investors or setting up funds.

This sounds hopeful, so why am I worried and what can the philanthropic community do to help?

O-Zones hit all of my impact investing concerns head on. The good news is that while foundations’ tax-exempt status precludes them from benefiting from the Opportunity Zone tax incentive, they hold tremendous power over the outcome of the legislation in their communities. Several Minnesota foundations realized this and have taken action to bridge the gap between community development organizations and impact investors.

Support social impact measurement.

Impact Washing refers to companies marketing a social or environmental impact that doesn’t exist. Unlike previous federal programs such as Low Income Housing Tax Credits, New Markets Tax Credits, and Enterprise Zones, there are not yet regulations defining impact in O-Zones. So anything goes, as long as they meet the zip code and other non-impact requirements.

Philanthropic Community action steps needed: As of this writing we are eagerly waiting for new guidance from the Treasury Department. Rumor has it they may adopt similar impact requirements as with New Markets Tax Credits. Until then, there are three measures we can take:

1. Inform our elected officials that we support strong impact requirements.
2. Support projects that offer measurable social impact, with metrics co-created with the communities involved. The McKnight Foundation and the St. Paul and Minnesota Foundations sponsored Twin Cities LISC and Duluth LISC offices to create a Social Impact Investing Framework (full disclosure, LISC engaged my company, Cogent Consulting PBC, as a partner in this work).
3. Fund the impact measurement component of such projects.

Share investment information.

Impact investor opacity creates challenges for entrepreneurs since it is difficult to know who is doing impact investing, what kinds of investments they make, and how to apply for them.

We are seeing more public information about O-Zone projects but the investors are remaining private since many are private companies and individuals.

ACTION STEPS NEEDED:

• Support project portal development so investors can easily find projects. MCF member Duluth Superior Area Community Foundation is doing just that.
• Create educational opportunities where potential investors, their advisors, and project sponsors can meet. The McKnight Foundation, the St. Paul Foundation & Minnesota Foundations, and the Duluth Superior Area Community Foundation sponsored Twin Cities and Duluth LISC offices to hold an educational “Think Like an Investor” session with the Minnesota Opportunity Zone Advisors providing much of the curriculum.

Require public communication and disclosure of deals in which foundations provide risk capital.

Take some risks.

Silicon Valley has a culture of “just trying stuff. That attitude leads to many failures but it also leads to spectacular successes. For O-Zones, this risk aversion is even more dramatic because investors will only receive their maximum tax benefits IF the underlying projects succeed. Unlike the tax-credit programs that came before it, the O-Zone benefits offer no risk mitigation.

ACTION STEPS NEEDED:

• Provide Program Related Investments and other types of subordinated capital, and credit enhancements such as guarantees to de-risk the investments for O-Zone investors. We are developing such structures as part of the project with the LISC offices mentioned above.
• Open a Venn Foundation account. New MCF member, Venn offers a flexible and scalable model that could greatly reduce costs of PRI syndication and help nonprofit CDFIs or CDC’s all around the state capitalize any PRI with any combination of donors.
• Offer grant capital to cover extra costs that help ensure project success such as technical assistance, mentoring, and ongoing advising.

Pollyanna…or ?

By now I hope you’ll join my cautiously optimistic view. After all, O-Zone is the first new federal incentive to invest in low income communities in almost two decades. Plus, unlike previous incentive programs, there is no cap on investment into O-Zones. Not all of the $8-11 trillion in unrealized capital gains is expected to be realized to take advantage of the O-Zone benefits, but we can anticipate between $100-400 billion will be invested over 2018-2019.

MCF philanthropic members care about what happens in these zones. Many foundations and nonprofit intermediaries have invested in these places for decades. We also care about the people living in these zones. Let’s get to work showing how MN O-Zones truly are places of opportunity for all.

I would love to hear your thoughts about O-Zones! Tweet me @susan_hammel or [email protected]. Also, a big thanks to Cogent colleague Eric White, our team O-Zone expert.

This interview was written by Nicole Melancon and originally appeared on the Impact Hub MSP’s Blog

Making an Impact: Susan Hammel, Cogent Consulting

Susan Hammel is the founder and president of Cogent Consulting, an independent, Minneapolis-based strategic, financial, and impact investing firm empowering purpose-driven organizations that drive positive social impact in their communities.

Cogent Consulting applies traditional investment discipline, community engagement, and creative design to impact investing and strategic advising. They work with a diverse set of mission-driven investors and entrepreneurs through evidence-based and actionable advice.

We had the opportunity to sit down and learn more about Susan’s background and what drove her to launch Cogent Consulting. Here is what she had to say.

Tell us more about yourself and your background.

Susan: I am the founder and president of Cogent Consulting. We are a public benefit company with a mission to empower purpose-driven organizations to drive positive social change in their communities. I was trained in finance and worked on Wall Street. While I was there, I was struck by the powerful notion that money can be used as a force for good and came up with the idea of founding Cogent Consulting as a way to help organizations figure out how to invest according to their values, mission, and passion.

What was it like working on Wall Street?

Susan: Being on Wall Street was a huge culture shock especially since I worked for a small non-profit before coming to Wall Street. At the non-profit, I saw that despite the enormous amount of passion and energy the staff had, we still couldn’t do more to create change. I realized that I needed to go where the money was so I moved to Wall Street to learn the investment industry with the goal of bringing that knowledge back to the non-profit world.

Five years later I went to grad school at Harvard where I learned about government and the public sector which gave me insight into how I could harness my passion for helping organizations invest to make a positive social impact. I moved to Minneapolis, began working in this area and then launched Cogent Consulting.

We are advocates for people who have a passion for their work and a commitment to creating their own success. Our financial acumen is balanced with demonstrated leadership ability, appreciation for the values of people we assist, and an innate ability to communicate effectively. We empower individuals to achieve their organization’s mission, and in turn they shape lives and make a difference in their communities.

– Susan Hammel, CEO

What have you learned since founding Cogent Consulting?

Susan: That “doing good” means different things to different people. For me, I have faith-based values and social justice, taking care of the earth and people are very important to me. Clients have a variety of different issues that empower them to do good ranging from climate change to racial injustice to sustainable agriculture. Good can be defined in many different ways.

Why did you choose finance as your focus?

Susan: In social impact, sometimes it is hard to know if you are making a difference however with finances you have concrete ways of measuring your impact and that can be very empowering.

What makes you inspired about your work?

Susan: I bring passion to work with me every day. I am excited to bring the finance piece of work into the social justice and impact sector, to marry the two worlds and create something better. Many people think you can’t do well and good at same time. However, I’m here to show people that you can make money and do something positive. If everyone thought about where their money was invested, it would change the world and that excites me.

How long have you been a member of the Impact Hub and what do you like about being here?

Susan: I have been at the Impact Hub for almost 4 years and I love the new space. I love the positive environment, and how active the social impact community is here at the space.

This article by Mission Investors Exchange originally appeared on the Mission Investors Exchange blog in May 2017

A Closer Look at the Minnesota Collaboration

Mission Investors Exchange members recognize the power and impact in sharing knowledge, building networks and investing together. One excellent example is bearing fruit right now in Minnesota where that state’s Council on Foundations just announced a first-of-its-kind impact investing collaborative in the US: a $20 million fixed-income bond fund focused locally, specifically to benefit affordable housing and small businesses in their community.

Minnesota’s Council on Foundations credits its peers from the Council of Michigan Foundations with seeding this idea during a presentation at the May 2016 Mission Investors Exchange conference. Susan Hammel, an Executive-in-Residence for Impact Investing at the Minnesota Council on Foundations (MCF) and founder of Cogent Consulting, leads the collaboration and spoke with us about it.

MIE: What was the impetus for this collaboration?

SH: The momentum began last spring right after I started my residency at MCF. Members said they wanted to do more in impact investing and something together that specifically targets Minnesota. The pieces were in place: number one, my being in the field for years, the relationships were there. Number two, we got word of Michigan’s work on a collaboration.

It’s funny, sometimes it’s easier to get people together when we’re out of town. And the Mission Investors Exchange Seizing the Momentum Conference last May in Baltimore was a perfect venue. The Minnesotans were eager to learn from our peers in Michigan, who would also be there. That’s when the spark was lit.

When we got back home the foundation members said, “What’s next Susan? This sounds interesting. Let’s go!” So, we brought the interested foundations together that September to evaluate different investment manager options for creating and managing this vehicle with us.

MIE: What is the actual investment?

SH: The product is the Minnesota Impact Investing Initiative, a virtual fund within a bigger fund managed by RBC Global Asset Management. Like the name says, it’s a Minnesota-focused fund, where RBC has the mandate to find new or existing investment opportunities across the state that benefit affordable housing, small business and civic infrastructure. The return would be consistent with other investment funds focusing on short duration government asset-backed securities, historically a two to three percent yield above Treasuries.

We have raised more than $17 million toward our target of $20 million so far. We think this is something that can be done across the country, and we invite other investors committed to the Midwest to join us in this pilot and learn by doing. This collaborative model is an onramp for foundations that are thinking about making mission investments and would like local partners in that effort.

The minimum investment of $100,000 is much lower than the typical investment minimum of $1,000,000 for most private impact funds. It is accessible to everyone from small foundations with $3-5 million in assets to those institutions with billions. This collaboration is helping to seed new impact investing efforts and expand existing programs.

MIE: Who was involved?

SH: The real purpose of this work is to bring the community together to increase our mission-aligned investing. Not surprisingly, almost all the participants are also members of Mission Investors Exchange!

We have talented mission investing leaders in Minnesota. I give them credit for mentoring me in all aspects of my residency, in particular, The McKnight Foundation’s Elizabeth McGeveran, Northwest Area Foundation’s Amy Jensen and Minneapolis Foundation’s Karen Florez. These leaders helped us craft a solution that would work for most. The Bush Foundation is also an investor and funds my position here.
There are at least eight other first-mover foundations actively bringing this opportunity through their internal review processes. These include the Initiative Foundation, Mortenson Family Foundation, PFund Foundation, Otto Bremer Trust and other community foundations, small family foundations and rural-based foundations. Since our announcement, I’m delighted to share that three more foundations have committed to the fund: Sundance Family Foundation, Schnieders Family Foundation and the Minneapolis Foundation.

MIE: What does this experience tell you about the state of the impact investing ecosystem?

SH: Impact Investing has a long arc. In the last three years it has gained in popularity for more kinds of investors to align their investments with mission. Here in Minnesota we’ve had foundations doing impact investing for years. That’s probably why Mission Investors Exchange chose to hold its 2014 conference here. Now the discussion has jumped across the program/investment tracks and we hear more foundations talking about the other 95 percent and focusing on the endowment. That’s where we’re seeing a great deal of interest and appetite.

Our local impact investing ecosystem has grown from 50 people to triple that just in this last year. And it includes all three parts – investors who need something to invest in, investees who need capital to grow programs, and intermediaries who help bring them all together. You can see a map of our thriving ecosystem online at http://cogentconsulting.net/map.

MIE: What are you working on next?

SH: We welcome learning together and from other communities. We are exploring different options and thinking about different asset classes, about a mix of risk-return tradeoffs. This collaborative investment focused on improving community outcomes in Minnesota is causing Chief Investment Officers at foundations to think differently. We are particularly interested in how impact investing can be a powerful tool to accelerate change in communities of color. We have a fantastic group of thriving CDFIs and are exploring innovative ways to activate more investment capital flowing to them.

Michigan has been an inspiration and generous in sharing what’s worked and what hasn’t – we’re tracking their work closely – hats off to Debbie McKeon of the Council of Michigan Foundations for sharing their experiences as they have built their ecosystem over the past four years. Sharing learnings are a big piece for moving forward, and we’re more than happy to pay it forward by telling others about our efforts.

How to Launch a Collaborative Fund

By Eric White, CAIA and Susan Hammel, CFA, Cogent Consulting

Ever since we launched the Minnesota Impact Investing Initiative in March 2017 through the Minnesota Council on Foundations, impact investing practitioners from across the country have asked us how we created a place-based impact investing vehicle attractive to philanthropic investors. The answer is simple: by involving those investors in a collaborative creation process.

Our goal was to design an impact investing opportunity accessible to foundations of all sizes and impact investing expertise that would invest in Minnesota. By creating an impact investing vehicle for our state, we would create an opportunity for foundations to begin impact investing while activating more philanthropic capital for Minnesota.

This guide to launching a collaborative fund is organized into four steps. However, more important than the steps themselves are three principles they represent:

1. A collaborative fund requires a collaborative process.
2. Keep it simple!
3. Use resources and infrastructure that are already in place.

Step 1: Survey the Foundations’ Interests & Lay the Groundwork

The first principle is to design an investment opportunity with, rather than for, philanthropic investors. There is no shortage of fund managers who have crafted what they believe to be the perfect impact investing fund yet struggle to find investors. We chose to bring philanthropic investors together to collaborate on an impact investing opportunity that meets their needs. Therefore, the first step in creating this fund was surveying the interest of foundations in a collaborative impact investing fund.

Our conversations began as casual inquiries which quickly built in momentum as excitement grew. Not only was there a strong desire for an impact investing fund, but the foundations that we spoke to also affirmed our belief that such an endeavor should be collaborative. Through these conversations we learned which features and constraints were the most important for the foundation’s investment boards. For our community, the top needs were:

• Liquidity: the fund must be liquid, ideally with daily liquidity
• Specificity: foundations wanted to be able to specify both the geographic location and the social impact theme of the investment.
• Competitive: the fund should provide a competitive financial return relative the investments of similar risk.
• Inclusive: since the fund is to be a collaborative effort, it must have a low minimum investment as not to exclude smaller foundations.
• Reporting: Foundations wanted to be sure that the fund was not greenwashing investments. Therefore, diligent reporting was nonnegotiable.

It is important to understand that these criteria were important to our community, and directly informed our approach and collaborative design process. In other communities, different criteria will be foremost, and efforts in those communities must follow those criteria to have the potential to achieve the success that ours did.

Step 2: Provide Choices

Now that we had stated interest from a dozen foundations and a list of requirements, we could begin designing a fund.

The list of constraints was long and strict, but fair. If foundations were to move their assets from their endowment to a new fund, it had to be worth it. As we sketched out ideas for the fund, we considered how capital could be deployed to benefit affordable housing, small business, and other civic investments in our state.

Several existing entities had funds that met or approximated our list of constraints, which we assessed according to our five constraints. What was important to consider was not just what their existing funds provided, but how we expected their strategies to adapt to our constraints and the managers’ willingness to be flexible. We didn’t want to encourage the investment managers to change or expand their investment strategy; we wanted them to make available the portion of it that met our needs..

After that initial assessment, we arranged to have the two leading candidates come to Minnesota to present their potential Minnesota fund to the 12 foundations who were leading the interest in a collaborative pool. For each of the foundations, we invited the decision makers for impact investing: a selection of CIOs and senior decision-makers.

By offering a face-to-face presentation, the foundations were able to ask questions and voice their concerns candidly. After the presentations, we called the question of whether the foundations were interested in pursuing this collaborative fund. The response was cautious, but positive. This was our go-ahead to dig deeper into the two candidates and begin structure design and flexibility conversations.

Step 3: Fund Design

We performed further due diligence on the two leading candidates, and began structure negotiations in earnest. This process lead to a final assessment of the investment firms, their strategies, and the structures they were willing to offer. We did not complete a formal recommendation, instead leaving room for each foundation’s investment staff or investment consultant to perform their due diligence to engage those resources in the process. Engaging their internal investment staff and/or external investment consultants was essential to activating investment capital, rather than grant capital.

Step 4: Foster Collaboration

The last step was to present that final assessment of the relative benefits of the candidates to the foundations and ask them if they are willing to make the leap. Each foundation had its own processes for evaluating investments and making investment decisions, and allowing for those processes without performing the work for them was essential. The key of this step is patience. You must understand when to respect the autonomy and unique needs of each foundation and when to push them to compromise and collaborate. We were fortunate that three well known, innovative and experienced foundations agreed to be anchor investors: the Otto Bremer Trust, the Bush Foundation, and the McKnight Foundation. Their leadership opened the doors for philanthropic investors of all sizes to join.

Giving foundations the space to do things their way reduces internal friction in their decision making process and allows less experienced foundations learn how to make impact investments while building a process that works for their organization. However, foundations need encouragement, and there will be times when they need to compromise. In these moments it is important to rally around unity and collective goals. For example, the shared location of the foundations offers a common impact theme. Remind foundations that the purpose is not to create the perfect impact investment, but to create the momentum of impact investing in your state. For larger, more experienced foundations, their role inspires, guides, and enables the smaller foundations to do impact investing.

The Result

Today the fund, called the Minnesota Impact Investing Initiative or “MI3” for short, includes 12 philanthropic investors putting $23.9 million to work for good in Minnesota. Managed by RBC GAM, MI3 is a virtual “sleeve” within their $700 million Access Capital fund.

For more information, see the MCF Impact Investing website, and Mission Investors Exchange Building a Place-Based Impact Investing Ecosystem.

Getting Out of My Basement: Why I Love The New Impact Hub/FINNOVATION Lab

At first, it was all about the coffee. Consulting entails many coffee meetings and the cost was adding up. Plus sometimes I couldn’t face another cuppa; I just wanted to connect with people, especially fellow mission-driven folk.

Being a financial consultant, I did the math. With latte’s going for $3.59 each multiplied by 8-10 such meetings per week, the cost added up fast: about $120 a month. That made a coworking membership look like a reasonable investment even for a frugal small business owner such as myself. For 20 years I have kept Cogent overhead low so we could work with nonprofits and mission-driven for-profits. The reasonable coworking prices compared to the unnecessary caffeine made me a convert.

So why did I chose Impact Hub?

Was it because they serve Peace Coffee, a for-profit company with a social mission?

Was it the chance to connect with other passionate financial and community leaders in the Impact Investing Community of Practice?

Maybe it was the inspiring people who came through the Hub such as Eisenhower Fellow Vhahangwel Manavhela, Director for the South African Public Investment Corporation Vhahangwele Manavhela.

Or, the chance to have a private room for our whole team?

Of course another reason could be getting to know the amazing Jacquie Berglund, Founder and CEO of FINNEGANS, a beer company with a mission which donates all its profits to charity?

Or was it the cool vibe from hanging out with smart people in hoodies, our do-good techies?

Or was it to make great new friends, like YouthLens360, featured on KTCA today?

Of course, I found a home with Impact Hub/FINNOVATION Lab for all of these reasons. I came for the coffee and I stayed for the community.