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Nobody knows when the next recession will arrive or how bad it will be. But there are plenty of signals that experts point to that can make investors cautious or nervous. Regardless of when the next economic downturn does arrive, foundations and nonprofit asset owners can—and should—play a crucial role. Both own a unique position in capital markets where they can use the social mandate of their organization and asset base to protect/defend industries and ideas that may otherwise succumb to exogenous shocks like recessions or economic downturns.
Foundations can’t replace slowing customer demand to support sales. But foundations can support a company’s capital needs. Remember that companies raise money from investors to support operations and growth and to continue to invest in their company until sales are so large that those cash flows can help the company grow. Foundations need to lean into this role when other funders retreat to provide capital to companies building products and services that reflect the products and services all communities need to thrive. But it is important for that role to escape the theoretical and land in the explicit and actionable. Foundations should call out this role in formal strategies. Codify it in the board minutes. State clearly that the foundation will look for opportunities to step in and fund and support business that are working to shape our society for the better.
A great example of this was when a group of investors including the Cal Endowment, JP Morgan Chase, and Richard W Goldman Family Foundation among others all committed to Capital Impact Partners’ COVID Response Fund for Community Health Centers in California. These investors recognized uncertainty that threatened a critical need and stepped up to support health centers in California.
We sometimes see in times of uncertainty, foundations reverting to what is known and familiar and shy away from investment strategies that appear or feel new or unproven – like impact investing. This is indeed what most investors do. But foundations are not most investors and have mandates to act in a certain way. Impact investing has now been around for long enough that there is quantifiable evidence to support its use.
- The International Finance Corporation (the private sector arm of the World Bank Group) shared a study that its private equity investments outperformed the S&P 500 by 15 percent.
- A study from the University of California calculated that the median impact-focused private equity fund trailed impact-agnostic funds by only 1 percent.
- A study published by Cambridge Associates showed that smaller funds (below $100MM of AUM) outperform larger funds by over 2.5 percent, making the case for smaller and more nimble impact funds.
Read the full article about impact investing by Cyrus Kharas at Exponent Philanthropy.