Investments Update
As a reminder from our previous update on investments: our belief is that a tradeoff between impact and financial returns is a necessity, not a choice, especially given the financial resources of the communities we seek to support as well as the challenges and barriers in the countries we work. Therefore, our allocations of capital exist across a spectrum from impact ←> financial return orientations.
On this spectrum, our most impactful funding is and will forever be grants (100% trade off of capital for impact). Grants and our philanthropic strategy will remain the core of what we do and our strategy for these allocations will continue to evolve accordingly (see here for our philanthropic approach and here for philanthropic learnings to date).
This blog summarises our assumptions, learnings and decisions with respect to how we allocate capital that isn’t purely philanthropic and, therefore, has trade-offs with respect to how we balance impact and return. Within this spectrum, we break down our allocations into three categories beyond grants:
1) Direct Investments (Program Related Investments): direct debt investments into social enterprises. Due to the foreseen trade-offs to achieve impact, our target return at a portfolio level for this strategy was approximately negative 25% (yes, you read that correctly, we had a significant negative target return at the portfolio level). We piloted this strategy directly with feedback from our network.
2) Intermediated Investments (Mission Related Investments): intermediated private asset investments (i.e. private equity or debt) into investment managers that focus on Southeast Asia and overlap with our Foundation’s mission. This strategy’s target return was flexible, relative to mission and impact alignment with fund managers in the region. We explored this strategy with feedback from our investment advisors.
3) Intermediated Investments (Non-Mission Related): intermediated public investments into public debt and public equity using a do-no-harm approach that integrates environmental, social and governance criteria if/when viable and prudent. This strategy targets a 6% return. We piloted this strategy in collaboration with our investment advisors.
Within the above, we began each pilot with assumptions, then realized learnings and made decisions accordingly. These assumptions, learnings and decisions are further outlined below.
I) Direct Investments (Program Related Investments)
Assumption: Fly-in-fly-out models would not be productive for social entrepreneurs and communities that we seek to support. Supporting entrepreneurs at an early stage to design to solve problems would involve rolling up our sleeves as partners, both in thought and in practice.
Learning: The presumed needs of contextual understanding and ability to roll up our sleeves to support partners were quickly validated — it became clear that prospective partners’ needs went beyond capital, especially at an early stage, and that in order to support these organizations effectively there would be a need for deeper contextual understanding and increased touch points.
Decision: Rather than investing without the capability to effectively support our investments from the U.S., we decided to focus on recruitment in order to build a team that could work with early stage organizations and help to fill gaps beyond capital.
Assumption: Social entrepreneurs would be designing to solve problems first and foremost, rather than grow business models exclusively.
Learning: Due to various factors, including competitions and investor interests, the majority of social entrepreneurs we came across were not focused on solving specific social problems, but rather, were focused on scaling existing enterprises without proven models — this further reiterated our need to be able to support organizations at an early stage as they designed, rather than grew, their organizations.
Decision: Rather than take a scattershot or transactional approach, we decided to work closely with a few organizations and prospective partners in order to pilot our strategy.
Assumption: Capital needs primarily exist at an early stage where there is a need for patience and support beyond capital.
Learning: We realized that we were ultimately looking to support social entrepreneurs that were a rare breed: those capable of seeking to solve problems with flexible (or limited) prior investment, rather than scale with venture capital and private equity focused on exits. As indicated by our target return of negative 25% for this strategy to allow for emphasis on community based impact, we were not convinced that scale and exit opportunities should be the be-all-end-all of social purpose organizations that sell a product or service. Beyond the existing reports, we also verified first hand that capital needs to exist predominantly at an early stage → friends and family, angel investors and early stage impact investments are highly limited (particularly in the Philippines and Cambodia), especially if there is not a technological component involved.
Assumption: Although equity is a more traditional early stage asset class, debt (if designed appropriately) could play a more productive role given the markets of focus.
Learning: Social Enterprises that seek to solve problems, rather than focus exclusively on scale, can benefit from a combination of grants and debt, and the deployment and mix of funding needs to be co-designed strategically with management teams — an approach that is not and should not be purely transactional.
Decision: We decided to increase the flexibility of our funding to support organizations at an early stage (i.e. use a hybrid approach to funding that combined both grant and debt investments).
Assumption: International accelerators and incubators may be able to play a productive role in supporting social purpose organizations.
Learning: Accelerators and incubators (particularly those based abroad) with limited contextual understanding can likely only play a limited role: for example, one incubator we supported had two prospective investees join the cohort and one drop out primarily due to limited contextual understanding and mentor networks that were not relevant.
Decision: We decided not to fund accelerators, incubators or organizations that operate in Southeast Asia with management or leadership based abroad.
Assumption: We may need to play a role at an ecosystem level in the countries that we seek to operate in.
Learning: A role we could play in ecosystems is as a convener, rather than a funder — especially in those ecosystems where connectivity is disjointed due to competing interests and funder-led approaches that ultimately encourage ecosystem players to compete for resources, rather than collaborate.
Assumption: Our board would support our journey with patience and contextual insight.
Learning: Ultimately, what motivated us and our board evolved to be values alignment with management teams and their orientation to understand and solve problems, rather than their ability to design purely for scale or business success.
Assumption: Fast growing nonprofits may be able to scale existing solutions by selling the intellectual property, products or services externally from their pre-existing solutions.
Learning: Emphasis on scale from other funders can ultimately be counterproductive to nonprofits seeking to transition to selling a product or service externally.
Assumption: We could recruit effectively to deliver on this strategy.
Learning: Recruitment is extremely difficult — especially with respect to talent capable of supporting organizations as a true partner; this combination of empathy and the skillsets required to understand gaps and fill them effectively is not prevalent in the impact investing talent pool due to previous experience in traditional finance or consulting, rather than direct engagement in entrepreneurial activities.
Decision: We sought to find a candidate to lead our work in Southeast Asia with previous experience in social enterprise management — ultimately, this requirement was not possible to fill and we decided to move in a different direction.
Assumption: Values aligned individuals and social enterprises focused on solving contextual problems with coherent strategy exist and are investment ready.
Learning: Values aligned management teams may exist, but are often not investment ready due to a lack of coherent strategy and/or problem based approach: where we found values alignment, this was often due to flexibility and a lack of other funders having oriented organizations around scale and strategy; where we found investment readiness, we often lacked values alignment with management teams predominantly focused on strategic scale and competition for growth-oriented resources.
Due to the above learnings and the following two primary factors, we have decided to discontinue our direct investment strategy for the time being:
i) a limited pipeline of organizations that seek to solve social problems, rather than scale;
ii) an inability to recruit effectively in order to support social enterprises at an early stage of growth as they seek to solve problems — not because this talent doesn’t exist, but because we were not able to attract and retain this talent due to various factors.
II) Intermediated Investments (Mission Related Investments)
Assumption: The most productive role we could play would be to take risk on earlier stage managers (assuming our board would accept this risk appetite) given that longer time-horizons for exits make it difficult for fund managers based in SE Asia to establish track records and garner support for follow-on funds.
Learning: First time fund manager mandates are often driven by previous advisory experience with projected fund mandates also extrapolated from this work — therefore, earlier stage investment theses are often driven by previous and potential investor mandates.
Assumption: First time fund managers would have impactful deals that were aligned to support early stage social entrepreneurs since their investment sizes would be smaller — we could consider warehousing these deals in order to support first time managers using an approach that combined working capital and warehousing techniques for fund managers to have short term capital in order to build their track record and attract further investment.
Learning: Warehousing deals may lead to complications that put capital at risk, especially if/when deals go south — although this risk would be worth taking if we warehoused deals that were truly mission aligned, unfortunately, aligned deals that were presentable to our board did not come across our desk (note: although our exploration here was limited, we believe this was possibly due to the above-mentioned investor preference and emphasis on scale and financial viability, which often leads to impact integration as a secondary focus).
Assumption: Financial advisors with significant expertise in mission related investing would also have sector and geographic overlap in Southeast Asia with private asset strategies.
Learning: Financial advisors with expertise in impact investing have limited experience in Southeast Asia — primarily due to the fact that there is a limited pipeline of fund managers and this does not warrant targeted expertise.
Assumption: Values aligned second time fund managers would be feasible to source.
Learning: Values aligned fund managers exist, but their number is highly limited — we were unable to source enough managers that aligned with our perspective on what it means to truly support enterprises to solve social problems.
Assumption: Third time fund managers would be viable to invest in via our financial advisors and shared diligence with our network of like-minded family offices and foundations.
Learning: In addition to the above, due to short-term legal restrictions involving an upcoming restructuring, we are currently unable to invest in third time fund managers via investment advisors.
Decision: We have decided to put our private asset mission related investment strategies on hold for the time-being due to the above learnings and the following primary factors:
i) Although our board did accept the risk parameters and allocation strategies, ultimately our Investment team does not believe these risks were worth it with respect to potential impacts, when considering trade-offs between financial return, risk and impact;
ii) Warehousing is too costly and risky, especially without true mission/impact alignment of deals;
iii) Second time fund manager allocations, although still motivating due to positive interactions we’ve had, is not a viable strategy due to a limited pipeline of viable investment allocations and an upcoming restructuring;
iv) Third time private asset funds are not a viable option currently due to an upcoming restructuring.
III) Intermediated Investments (Non-Mission Related)
Assumption: Alternative investment managers would be proactively integrating environmental, social and governance (ESG) screens into their investment processes in genuine ways due to growing investor interest.
Learning: Alternative investment managers are not currently focused on integrating environmental, social and governance criteria into their investment processes (with the exception of a few funds — only one of which we felt was genuine in their desire to focus on the longer-term horizon, rather than utilizing ESG criteria for marketing purposes).
Assumption: Thematic investing and sustainable investing would ultimately have a noticeable effect on our public investment holdings — we assumed we would need to move away from large-cap (i.e. monopolistic or oligopolistic) holdings by integrating ESG criteria.
Learning: The most noticeable effect in our portfolio came from named exclusions (i.e. Facebook due to their lack of oversight and indirect role in the ethnic cleansing of Rohingya in Myanmar) rather than ESG integration focused on large cap allocations or public debt (note: due to prohibitive fee structures, we did not engage with managers that emphasize proxy votes, but we do value and appreciate this approach).
Assumption: Expected and target returns could be achieved while incorporating environmental, social and governance screens across 100% of our endowment.
Learning: Expected returns for many fund managers were achieved based on relative benchmarks and, after a journey of approximately two years, we have maintained our asset base (including our distribution requirements and operating costs for the last two years) which was our primary objective.
Decision:
Although we are still convinced that deep Environmental, Social and Governance screens are ultimately positive, we do not believe that the investment landscape that is finance first has caught up yet — many investment managers are primarily focused on ESG for marketing (or what is known as “greenwashing”) purposes, rather than deep and true integration into investment processes that focus on long term horizons, rather than short term gains.
Due to the above learnings and the following primary factors, we have decided to liquidate the majority of our investment allocations with the exception of one high conviction investment manager in preparation for our upcoming restructuring:
a. Our upcoming restructuring will require allocations that do not focus on managers based in the United States;
b. Market volatility and our overweight allocation to public equities due to a lack of alternative products that integrate environmental, social and governance criteria.
Summary
The last two years have been an insightful journey with respect to how we allocate non-philanthropic capital: we have gone from integrating a 100% environmental, social and governance (ESG) screen into our endowment allocations to piloting a direct investment strategy with two investments (approximately $50k each), to scoping the potential to allocate mission related investments across private asset strategies in Southeast Asia.
Ultimately, these approaches have provided significant learnings for us as individuals and for our Foundation at large. The primary constraint going forwards, should the Foundation seek to continue investing using private asset strategies, will be talent based in the region(s) that we seek to operate in, advisory capability with contextual place based understanding, public asset investment managers that seek to integrate ESG criteria beyond financial returns using genuine and structured approaches, and private asset investment managers with the flexibility to adapt their investment theses based on the needs of entrepreneurs and communities, rather than the mandates and return expectations of primarily financially motivated limited partners.
Although we are frustrated with our lack of inroads, especially with respect to our private asset allocation capabilities, we are proud of our attempts, our learnings and our decision making processes — ultimately, we seek to continue asking questions that interrogate trade-offs between impact on communities and the desire to seek financial returns: we fundamentally believe that approaches without trade-off between impact and financial returns, however appealing from financial projections and board rooms, will ultimately be detrimental to communities at risk, especially without deep understanding of communities and context.
