Joy Anderson and Kevin Jones, principals at Good Capital, submitted a series of comments to a post that Phil at Gift Hub wrote in response to my Good Capital post.
Joy Anderson writes: Social sector organizations swim in complex economic systems. The goal is to find the appropriate capital to sustain the mission. We are focused on one gap in this ecosystem: risk capital for scaling social enterprises. We are raising capital from investors who recognize that there is a cost of doing good and that therefore market rate returns are not appropriate or to be expected.
What we are finding is that many experienced philanthropists are able to add social investing to their portfolio because they know about how capital moves in organizations today and they understand the problem we are solving is important one for the organizations they care about. They can think about the gaps and what would become possible with risk capital that expected real but appropriate returns. This is one of many opportunities where investors can meet the capital needs of organizations committed to social good. For some people the fund feels like a new kind of investing. For others it feels like a new kind of giving. For still others, it’s nothing new but the institutionalization of something they’ve doing on as needed basis for individual mission focused organizations they support.
Whatever the starting place we are helping the movement of more capital to good places where it is truly needed for serious missions.
If social investing has a for profit component and the degree to which the returns are sub market rate is what makes up the “gift”, might we see the use of derivatives in the future that would allow for splitting the transaction? A donor would make a small gift that was matched with a larger investment. The “donor” would receive no return and the “investor” would receive a market rate return. This might allow social investment opportunities to tap into the huge pool of market rate return investors by leveraging the gifts of donors.
The reality this is already happening in many settings. Perhaps not formally but informally. In the course of things philanthropic gifts can leverage more debt or investment capital. Think microfinance, housing, community development.
But I think building it into a specific transation might muddy the water more than not. We get variations the same question frequently. Why would I continue to give to an organization that someone else was making a profit on. How do I know know I am not subsidizing someone else’s return. Our current answer is that organizations are complex beasts that take a variety of capital. And the organizations we are looking at need risk capital that expects an appropriate return.
We are finding that investors get the idea of a separate class of assets. They have lower expectation of return and a higher expectation of social good.
The other benefit is with this separate investment bucket we can actually begin to rationalize and therefore hold people accountable for this new market of investments.
I had the same thought. The structures might exist that could align grant giving organizations with the private equity world and the private equity world with triple line companies.