March 19, 2014
By Farrah Azizi

“It’s either a really obvious idea, or a really radical idea.” Antony Bugg-Levine, Chief Executive Officer, NonProfit Finance Fund (NFF) explained to an audience of philanthropic, corporate and foundation leaders at The Center on Philanthropy and Public Policy’s Conversation on Philanthropy, referencing the luncheon’s topic – Impact Investing: An Opportunity to Make a Difference.  Bugg-Levine was joined by Andrea Phillips, Vice President, Urban Investment Group, Goldman Sachs, to explore: what impact investing is, what challenges and new investment opportunities it presents, and what philanthropy’s role is in this innovative approach to community problem-solving.

Bugg-Levine, who literally wrote the book on Impact Investing, was one of the first individuals to design and lead such an initiative during his time at the Rockefeller Foundation. Today, under his leadership, NFF oversees more than $225 million in investment capital and acts as a financial intermediary to leverage capital for mission-driven organizations. Opening the conversation, Bugg-Levine shared how the oil spike in the 70s led to a number of nonprofits seeking grant dollars to help with heating costs only to be presented instead, with opportunities for a loan towards securing more efficient boilers.  This resulted in some of the early effective impact investments and also, is from where NFF developed. Bugg-Levine described that impact investing is a really simple idea. “This sounds really sexy: I can make lots of money and do good.  Well who wouldn’t want that?”

“But it’s hard to do, and the organizations that are doing it, it’s like brain surgery trying to get a deal done. The organizations that are doing this, they’re taking a big risk to do something differently,” continued Bugg-Levine.

One of those organizations is the Urban Investment Group at Goldman Sachs which has been a pioneer in creating new instruments to invest in impact, including social impact bonds. Phillips and her team led an investment in Rikers Island focused on stemming inmate recidivism rates in partnership with public agencies and nonprofits. This was the first such transaction ever executed by a financial institution in the US market. “When we did this first investment, we thought it was really an exciting way to use both our human capital, our structuring expertise, and technical understanding of public-private partnerships, as well as the firm’s capital, to make this type of investment,” Philips described.

“When that investment was announced, there was a bit of a ground swell from our clients, where the phone kept ringing from colleagues, literally from across the world saying, “Wow, this is really interesting, this is really compelling stuff, we care about these issues in our communities, can we co-invest? How can we have exposure in our portfolios to investments like that?” And we really have spent the last year and a half trying to focus on how to be responsive to that.  We think it’s a very exciting moment. There’s a growing understanding that there’s not just your right and your left hand – but that there really is this middle way where you can invest in a way that has an intentional social impact.”

In addition to the traction each subsequent investment receives as Phillips’ described above, she and Bugg-Levine point to the shift in wealth to a younger, more entrepreneurial generation, the ongoing, and increasing, demand for social services, and a developing range of tools and investment vehicles to explain the significant growth observed in recent years.

“There’s an issue around generation and gender. The millennial generation is really excited about this. Women are more inclined to do this.  There’s going to be a $30 trillion dollar wealth transfer in the US over the next 30 years and it’s a fascinating opportunity to create impact investing vehicles that are providing millennials and women investors with what they want around impact. So again, there’s the supply. I think the other really important point is demand.  And those of you in philanthropy know, either analytically or viscerally because of the conversations you’re having with your grantees, that our social system is in crisis.”

Phillips adds, “Impact investing is not a replacement for grant making. It’s another tool in the tool box.” Emphasizing that philanthropy is still critical in addressing social needs, Phillips pointed to the need for grant making to fill the role of early capital. “When we think about these deals in terms of the capital stack, to get it done, or what the different roles are, we tend to view the real role for grant making as critical to what we do, and that’s the early risk capital.” Referencing the radical idea he opened with, Bugg-Levine noted, “this is a very important role for philanthropy to give grants to great organizations who need the space to do something differently. You can use your grant funding to kind of complement all of this energy. And there it’s really about leverage.  In many deals, there’s been a role that a private foundation has played to make the deal a little bit less risky, so that the other capital can flow.”

Referencing the future of impact investments, Bugg-Levine described how private philanthropists and foundations are also beginning to participate in impact investing by aligning their endowment investments with their value.  “There is a gathering storm of evidence that if you were smart about it, you can both make money and also target social issues you care about. Then the fiduciary duty of an endowment’s investment committee becomes very interesting. What is the responsibility of someone who is charged with investing in endowments assets?

“And the truth is, this is really hard. It’s not easy. It takes a lot of attention, and I don’t want to dismiss the fact that this is difficult, but I think we’re beyond the point now where we can say we can have a debate about whether it’s possible or not. It is. It just depends on the will and the creativity of the foundation.”

This Conversation is made possible by the generous sponsorship of the Goldman Sachs Philanthropy Fund.