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:
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:
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.
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.
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.
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.
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.
Top of my mind these days is investing in line with Diversity, Equity, Inclusion values. Many institutions promised bold moves after George Floyd was murdered. Who is following through and doing this well? Racial justice requires new pathways for capital flows. I’m excited to be part of the McKnight Foundation’s Groundbreak Coalition, aiming to deploy $2b in flexible capital over 10 years to disrupt the status quo. In Minnesota we are a generous state, a charitable state, a hard-working state: we need to try new approaches to create that famous quality of life for all. We are leading a session on Place Based Impact Investing at the Mission Investors Exchange conference in Baltimore. Reach out if you’ll be there so I can include you in the informal MN meet-ups.