F4F - Finance for Foundations

Abstract

This paper looks at the decision problem of foundation boards seeking greater impact through financial investment. Boards need to grapple with the following two questions: First, how can we invest part of the endowment into assets that create both risk-adjusted financial returns and impact? Second, how can we generate higher risk-adjusted financial returns through investments in alternative asset classes? To facilitate the thought process, this paper provides six conceptual building blocs and practical examples for discussion. Concept Appendix 1 calls upon foundation board members to examine whether foundation assets are in fact invested to maximize risk-adjusted returns. Whereas large endowments can allocate a percentage of the endowment in alternative asset classes such as private equity or hedge funds, smaller foundations often face difficulties in accessing top-decile funds. Concept Appendix 2 argues that financial engineering and investment banking techniques can be equally applied to the funding of civil society organizations and enterprises, and examines how capital could be allocated more efficiently in the social capital market. Current capital allocation costs in the US nonprofit sector are very high - between 22%-43%, as opposed to 2%-4% in the for-profit sector. Among other things, this produces fragmentation of initiatives, with less than 0.1% of nonprofits founded in the US in 1970 or after having reached annual turnover of US$ 50 million or more by 2003. Concept Appendix 3 argues that to design appropriate financial solutions, investors need to understand the fundamental differences underpinning the activities of small and medium enterprises, entrepreneurs, and microfinance institutions. Case Appendix 1 describes the mechanics of one example of financial innovation in the field of finance, the International Finance Facility for Immunization (IFFIm) Bond. Borrowing against future grant pledges through a capital markets transaction, the GAVI Alliance (formerly known as the Global Alliance for Vaccines and Immunisation) was able to tackle a time-critical public health issue - immunization - prior to the actual disbursement of the funds by donor governments. Case Appendix 2 looks at another example in the field of public health, this time in the sub- Saharan context: the prospects of generating impact and financial returns via investments in small and medium enterprises - hospitals, pharmacies, vaccine producers, and so on. Case Appendix 3 goes a step further. Single capital market transactions may be valuable, but mission related investing scale requires the emergence of a liquid market for mission related investments. What kinds of legal frameworks would be needed to enable the creation of such markets?