A Fiduciary's Approach to Impact Investing

A Fiduciary’s Approach to

Impact Investing

Lauryn Agnew, Seal Cove Financial

Christa Velasquez, Annie E. Casey Foundation

Georgette Wong, Correlation Consulting/Take Action!

March 14, 2011

Bay Area Equity Fund I

� $75M private equity fund

� Invests in companies in low income communities of the Bay Area

� Partnership with Bay Area Council for deal flow and workforce development

� $1.65M Casey equity investment (PRI)

� 10 year partnership

� Originally set PRI-like return expectation

of 10-12%

� Now performing in top quartile and

expect 20+%

� 10 year goal of 1,500 new jobs created

� Cumulative jobs created since inception

(2010Q1): 2,125

� Cumulative jobs for low-income

individuals created: 1,224

Agenda

� Evolution of Impact Investing Strategies

� Role of the Fiduciary

� Defining Mission and/or Values

� Implementing Impact Investing Policies

� Expectations of Return

� Building Impact Portfolios

� Collaborating and Networking

Who’s investing?

More than foundations

Asset Owners

• Foundations

• Individuals, Families & Family Offices

• Major Pension Plans – CalSTRS, CalPERS

• Insurance Companies – Prudential

Motivations

Financial

• Looking for outperformance

• Qualitative signals

• Reduce risk

• Transparency

Social/Environmental

• Tangible Impact – beyond

intent

•Alignment with values

• Use all assets – financial and

non-financial

Interdisciplinary, Silo-Busting

Business, Finance, Nonprofits, Government

Their Ecosystem

• Consultants/Financial Advisors

• Philanthropic Consultants

Asset Managers & Other Intermediaries

• Across asset classes

• Investment Banks – JP Morgan, Morgan

Stanley, Goldman Sachs

History of Impact Investing

� Predominantly in the public equity space

� Socially Responsible Investing: negative screening

� South Africa Free/anti-apartheid

� Faith based screening

� Weapons, tobacco

� CDFIs/Community Investing

� ESG: Environmental, Social & Governance

� Green themes, Workplace issues, Shareholder Activism/Proxy voting

� Sustainable Investing – smarter company management yields better returns?

� Green, upstream & downstream influences

Impact Investing Terminology

� Program Related Investing (PRI) specific for foundations

� Primary motivation is social impact; financial return can vary

� Mission Related Investing (MRI) specific for foundations

� Supports mission

� Returns can vary; greater emphasis on competitive returns

� Impact Investing * ESG/Sustainable * Triple Bottom Line

� Market Rate (or greater) Financial Return + Social Impact

Impact Investments & Themes(Source: Solutions for Impact Investors: From Strategy to Implementation, Rockefeller Philanthropy Advisors, p. 64-65.)

Impact Investing Policy

� Policy decisions

� Across impact investing spectrum

� Across asset classes

� Ongoing program or opportunistic

� Direct investments or through intermediaries

� Create new product

� Sole investor or with co-investors

� In-house expertise or contracted

Impact Investing Process

� Articulate Mission and Values

� Create Program/Impact Themes

� Define Desired Impact

� Develop Impact Investing Policy

� Generate Deal Flow

� Analyze Deals

� Evaluate Impact

� Source: Solutions for Impact Investors: From Strategy to Implementation, Rockefeller Philanthropy Advisors

Case Studies

� Annie E. Casey Foundation

� Social investments complement grantmaking and provide

additional philanthropic tools

� $125 million allocation of endowment

� Flexible terms but always invest through financial

intermediaries

� Leverage/co-investment requirement

� Systems in place to track financial and social returns

PRI

MISSION INVESTMENT PORTFOLIO POSITIVE VALUES-DRIVEN

AECF SOCIAL INVESTMENT TAXONOMY

Source of $: endowment

Below market rate

Clear program link (all program areas)

Meets IRS charitability requirements

Source of $: endowment

Market rate

Clear program link (place based, FES)

Source of $: endowment

Market rate

Proactive

Clear link to Casey mission but doesn’t have to meet IRS charitability requirements

Source of $: endowment

Market rate

All non-SRI investments with social purpose

No specific connection to Casey mission

Source of $: endowment

Market rate

No specific connection to Casey mission

MRD

Deposits

MRIHigh

impact

PRI

Source of $: grant

Very high-risk PRIs

Tracked separately from SI portfolio

Below market rate

Clear program link (all program areas)

Meets IRS charitability requirements

Screened

SRIDBL

Example:

ACCION Texas

Example:

EBDI

Example:

Latino Credit Union

Example:

Invest NW

Example:

Generation

Community Inv. Index

Example:

Clean-tech or Green funds

Positive Negative

Guidelines for Impact Investing

� Fiduciary

� A person to whom property or power is entrusted for the benefit of

another

� Standard of Conduct

� Fiduciary duty to act with care, skill, prudence and diligence

� Prudent Person Standard

� ERISA and UPMIFA

Strategic Considerations

� General economic conditions

� Inflation/deflation

� Make decisions on a total portfolio basis

� Allocate risk and return across the portfolio

� Consider needs and resources to achieve both prudent

spending levels + capital preservation

Establishing Policies

� Investment Policy

� Asset Allocation

� Due Diligence and Monitoring

� Stable Spending Policy

� Smoothing over time: rolling 12 quarters

� Prudent levels of spending vs. asset allocation

� Code of Fiduciary Conduct

� Checks and Balances, no conflicts of interest

Integrating Impact Investing

� Assess portfolio positioning

� Which asset class (es)?

� Carve out % or 100%?

� Time Frame

� Risk and Return Expectations

� Impact Expectations

� Measuring Impact

� Deal flow and other investment opportunities

� Collaborations and Structuring deals

Impact Investments & Themes(Source: Solutions for Impact Investors: From Strategy to Implementation, Rockefeller Philanthropy Advisors, p. 64-65.)

Case Studies

� United Way of the Bay Area

� Mission: Cut Bay Area poverty in half by 2020

• Themes: affordable housing, community development

� 100% Impact portfolio across all asset classes

• Attractive to donors for permanent gifts

• Spending from the endowed portfolio goes to support operations

-> cuts need for fundraising for operations

• Asset allocation being developed

– Liquidity needs may affect asset class choices in the near term

– Measuring impact and developing policies

Collaborations and Co-investors

� Deal Structures can be creative

� Unique risk and return expectations for each investor, collaborations

provide liquidity

� Collaborating for Impact

� Community Foundations

� Private and quasi-public foundations and charities

� Public funds: redevelopment, agency or district funds

� Community development financial institutions

� Conferences, networking and databases

Example: Initial Deutsche Bank

Eye Fund Structure(Source: Deutsche Bank Global Social Investment Funds & Community Development Finance Group)

36% first-loss protection, 1% loan loss reserves, 6-month interest reserve

Example: Living Cities Catalyst Fund

$55M bank debt

LIBOR + 250-300 bps

$17.3M PRI

3.5%(can be but not always subordinate)

10% grant funded

equity

� The Integration Initiative

� Restricted fund in Catalyst

� $80M invested in 5 cities

� Designated financial

intermediary in each city

� Flexible resources to

integrate change across

• Disciplines

• Geographies

• Sectors

• Funding sources

Impact Investing Resources

Not-For-Profits

� Confluence Philanthropy: www.confluencephilanthropy.org

� Global Impact Investing Network (GIIN): www.thegiin.org

� Initiative for Responsible Investment: www.hausercenter.org/iri

� Investors’ Circle: www.investorscircle.net

� More for Mission Campaign: www.moreformission.org

� Rockefeller Philanthropy Advisors: www.rockpa.org

� Social Investment Forum: www.socialinvest.org

Impact Investing Resources

� Monitor Institute: www.monitorinstitute.com

� FSG Social Impact Advisors: www.fsg-impact.org

� Other impact investors:

� FB Heron Foundation: www.fbheron.org

� KL Felicitas Foundation: www.klfelicitasfoundation.org

� PRI Makers Network: www.pri-makers.net

� Foundation Center: www.fdncenter.org (PRI Directory)

� Grantcraft: www.grantcraft.org (PRI grantcraft guide)

Biographies

Georgette Wong, Correlation Consulting/Take Action!

Georgette is the Creator & Curator of the Take Action! Impact Investing Conference series and President of

Correlation Consulting. Georgette currently is assisting the US State Department, the Board of Governors

of the Federal Reserve System and the Federal Reserve Bank of San Francisco’s Center for Community

Development Investments to catalyze impact investing across the government, private and public sectors.

She is considered a leading speaker and advisor on trends in impact investing. Georgette's most recent

work has been published in Community Development Investment Review (Federal Reserve Bank of San

Francisco), Solutions for Impact Investors: From Strategy to Implementation (Rockefeller Philanthropy

Advisors), Private Asset Management, and Financial Planning Magazine.

Over the last eighteen years, she has: advised families, foundations and Fortune 100 businesses on public and

private investments; developed and funded early stage companies; and created organizations focused on

strategic philanthropy and partnerships between the business and social sectors. Before starting

Correlation Consulting, Georgette was: a Director of Client Relationships for Sterling Stamos, a multi-

billion dollar private investment firm; a Financial Advisor at Piper Jaffray; and the Development Director

for the Asian Law Caucus, the nation’s oldest legal and civil rights organization for Asian Pacific Americans.

Georgette is a graduate of the Anderson School of Management at the University of California, Los

Angeles (MBA) and Amherst College (BA magna cum laude).

Biographies

Christa Velasquez, Anne E. Casey Foundation

Christa is Director of Social Investments for the Annie E. Casey Foundation, a private charitable organization

whose principal mission is to help build better futures for disadvantaged children and families. She is

responsible for managing the foundation's $125 million social investment fund. Her work encompasses all

aspects of social investing, including program design, developing investment strategies, underwriting and

structuring investments and portfolio management. She is a leader in the social investing field and helped

found the More for Mission Campaign and the PRI Makers Network. Prior to joining the Foundation,

Velasquez spent six years at the consulting firm Brody-Weiser-Burns, specializing in social investing,

community development financing and business planning for social ventures. Her current and former

board experience includes: The National Writing Project, TRF Urban Growth Partners, the American

Visionary Art Museum, Catholic Charities of the Archdiocese of Baltimore and Goodwill Industries of the

Chesapeake. She received a Bachelor's degree in Latin American Studies from the University of Chicago

and an MBA from the Yale School of Management.

Biographies

Lauryn Agnew, Seal Cove Financial

With nearly three decades of experience in developing and implementing strategies in the institutional

investment industry, Lauryn Agnew provides leadership and insight to public fund trustees, non-profit

boards and committees, and to investment consulting and advisory firms.

Lauryn serves not only as a resource to non-profit organizations for investment consulting services and

provides fiduciary education and trustee training for public fund and non-profit board and committee

members, she also offers strategic marketing analysis and recommendations to firms with specialized

investment strategies.

Currently, Lauryn is a Trustee on the Board of the San Mateo County Employees’ Retirement Association

(SamCERA), is Chair of both investment committees at the United Way of the Bay Area and the Girl Scouts

of Northern California, and is a member of the finance committee of the Immaculate Conception Academy

of San Francisco. Lauryn has a Bachelor of Arts degree in Economics from Whitman College in Walla Walla,

Washington and an MBA in Finance from the University of Oregon. She is a member of the CFA Society of

San Francisco and the Financial Women's Association of San Francisco.

Appendix

UPMIFAUniform Prudent Management of Institutional Funds Act

(Source: www.upmifa.org)

UPMIFA requires a charity and those who manage and invest its funds to:

1. Give primary consideration to donor intent as expressed in a gift instrument,

2. Act in good faith, with the care an ordinarily prudent person would exercise,

3. Incur only reasonable costs in investing and managing charitable funds,

4. Make a reasonable effort to verify relevant facts, (due diligence)

5. Make decisions about each asset in the context of the portfolio of investments,

as part of an overall investment strategy,

6. Diversify investments unless due to special circumstances, the purposes of the

fund are better served without diversification,

7. Dispose of unsuitable assets, and

8. In general, develop an appropriate investment strategy for the fund and the

charity.

UPMIFAUniform Prudent Management of Institutional Funds Act

� Prudent Person Standard for Non-Profits

� No conflict of interests

� Expectation of higher standard of behavior

� Updates financial concepts

� Total return, portfolio risks, diversification

� Aligns investment policies with spending policies

� Asset allocation strategies, stable spending, purchasing power protection