Rev. Leon Sullivan’s Progress Plaza, in Philadelphia, Pennsylvania, was the first shopping center in the United States owned and run by African Americans. (Photo courtesy of Ford Foundation)
Throughout this article series, it has been fascinating and encouraging to read the authors’ reflections on the importance of putting racial equity at the center of the impact investing movement—and the most effective ways of doing so at this pivotal moment. In preparing our contribution, we have been thinking about how the Ford Foundation’s use of impact investing tools, and our work on racial equity, have evolved over the past half-century, and how that history informs our path today.
At the height of the United States Civil Rights Movement in the 1960s, the Ford Foundation was looking for new ways to invest its resources in marginalized communities. Already, it had used grants to support individual leaders and institutions—funding research and building fields like public interest law—but it was no secret that it would need to do more to address the tangled root causes of racial inequality. In fact, the national director of the Congress of Racial Equality, Floyd McKissick, challenged Ford Foundation Vice President Mac Lowry to consider funding disparity. One could, as he put it, “get very irritated with foundations, which give $25,000 to a man to write a book about the problems of the people who are trying to organize these communities, but then refuse to give a nickel to those people who are actually fighting the problems.”
The comment typified a larger, ongoing conversation about how a foundation like Ford could invest its capital in the people and communities closest to social problems. By 1968, spurred on by such critiques and the urgency of advancing racial equity, the foundation had helped pioneer an innovative tool intended to unlock new philanthropic resources: program-related investments (PRIs). Early on, the foundation committed $10 million to PRIs, and among the first initiatives was Rev. Leon Sullivan’s Progress Plaza, the first shopping center in the United States owned and run by African Americans. By directing capital to communities and entrepreneurs long denied it, PRIs could complement the foundation’s broader strategy for economic empowerment, racial equity, and social justice.
In the 50 years since the development of PRIs, the Ford Foundation’s fight for racial equity and our use of new impact investing tools have gone hand in hand. As time has passed and tools and circumstances have changed, we’ve continuously looked for new ways to answer a version of that original question: How do we get more capital to the people and communities who truly need it?
Beginning in the 1980s—in an effort to confront inequalities caused by racially biased bank practices, discrimination, and redlining—we made grants and PRIs to develop and scale the community development financial institution (CDFI) and affordable housing industries. Today, we use many types of resources to address inequality, and specifically racial and gender inequality, in all its forms. These include grants in our gender, racial, and ethnic justice program; PRIs; and mission-related investments committed from our endowment. While our philanthropic investment used to focus on only 5 percent of our resources, we are beginning to unlock the other 95 percent toward this goal, with a recent commitment to allocate up to $1 billion of the endowment for a new mission-related investment strategy.
Two Interrelated Gaps: Investment and Investment Managers
Without adequate capital, entrepreneurs cannot develop their ideas and products into sustainable, well-organized enterprises that bring meaningful value to them and their customers. Yet—as others have thoughtfully considered throughout this series—when it comes to receiving venture capital and private equity, founders of color are not given the same support as their white counterparts. Black women especially continue to lack venture capital funding, despite being—according to Bari Williams in Fast Company—“the most educated and entrepreneurial group” in the United States. These financing gaps persist in other areas too. For example, black and Hispanic businesses received only 2.5 percent and 5.8 percent, respectively, of funding under the US Small Business Administration’s largest lending program since 2014.
So when promising individuals—whether it’s a hairdresser looking to open a new salon, a chef starting up a restaurant, an app developer, or artist with a big idea—lack access to capital, it prevents them from pursuing opportunities that could have a positive impact on both them and their communities. (For more about the connections between business ownership and wealth creation for entrepreneurs, families, and communities, see this essay by Lisa Hamilton of Annie E. Casey Foundation.)
This gap in available capital is reflected in, and affected by, another disparity—one that pervades the investment profession. A US Government Accountability Office report documents the point: Investment firms owned by women and people of color manage less than one percent of the $70 trillion in assets under management in the United States, even though women and people of color make up about 70 percent of the US population. This is particularly striking in the private equity industry, where firms owned by people of color represent only 3.7 percent of the industry and manage only 3.4 percent of industry assets.
Meanwhile, a report from the Library of Congress shows that small business investment companies with racially diverse staff are more likely to invest in both women and minority-led or -owned businesses, in addition to businesses within low and moderate-income communities. In other words, these interrelated gaps—lack of investment in individuals of color and investment professionals from diverse backgrounds—exacerbate one another. They are products of historical inequities, a persistent racial wealth gap, and implicit bias. They also keep capital from flowing to underrepresented communities by building and protecting structural barriers to equity and prosperity. That lack of access to capital prevents talented people from creating new products, jobs, and industries, which hurts the overall US economy.
That’s why, at the Ford Foundation, a core pillar of our impact investing strategy is a commitment to investing with and in funds managed by diverse professionals.
How We Invest in Diverse Managers for Impact
Inspired by the work of our colleagues at Kellogg, Knight, and other foundations leading the way in investments in funds led by women and people of color, we are directing more capital toward diverse managers—and by extension, women entrepreneurs, and communities and entrepreneurs of color. And while we seek impact over the long term, we have already started to see results.
Teachers at Miller School in Pittsburgh, Pennsylvania—part of a major grantmaking outlay in the 1960s called the Great Cities School Improvement Program. (Photo courtesy of Ford Foundation)
By working with an organization called MACRO, which supports media created or driven by people of color, we’re investing in diverse storytelling and production within the film and entertainment sector, lifting up new voices in Hollywood and beyond. With the help of Illumen Capital, we’re working on training fund managers to identify the biases that inform investment decisions, and potentially keep capital from flowing toward women and communities of color. With the private equity investment management firm Fairview Capital Partners, we are supporting funds sponsored by venture capital, and private equity firms owned by women and people of color, as a way to scale capital allocations to more diverse fund managers. And thanks to the Impact America Fund, we (and others, including the Surdna Foundation) are addressing the venture capital funding gap and connecting capital to startups like Mayvenn, a platform for independent hairstylists based out of Oakland, California.
At the same time, we’re making grants and investing in internships that will help build a pipeline of new managers who will steward capital in new ways, as well as making grants for research in support of this approach. We hope that our partners are encouraged by the data; research by Harvard Business School Professor Josh Lerner, commissioned by our colleagues at the Knight Foundation, shows that managers from diverse backgrounds perform as well as their peers. Indeed, as Sherece West-Scantlebury of Winthrop Rockefeller Foundation asks in her essay in this series: Might bias have a role in causing some to assume otherwise? As we invest in diverse managers today and into the future, we believe we will see more inclusion in the sector, more investment in communities of color, and more products and services championed for individuals and communities of all economic backgrounds.
Investing in the Future, Building a Movement
There is no single remedy or short-term solution to the glaring inequities in the capital markets. To effectively right these structural and institutional wrongs, we must seriously re-evaluate where capital is going and how we make our investments. We will need to continue investing in capacity, as we have done in other fields, and over the long term. And as our colleagues at the Kellogg and Mary Reynolds Babcock foundations, among others, point out, we will need to use every tool at our disposal. Like the rest of the investment market, not every investment in diverse companies and diverse managers will be a resounding success, so we must learn as we go and stay the course.
As we conclude this in-depth series, presented in partnership with Mission Investors Exchange, we stand with a growing movement of organizations. We hope other foundations, pension funds, sovereign wealth funds, and other institutional investors will join us in this pursuit of justice and greater returns, and step forward to ask the hard questions—as Robert Ross and Amy Chung of The California Endowment note in this series—to achieve meaningful organizational change. We are heartened by the recent announcement by the Kresge Foundation to move 25 percent of its assets under the control of women and firms led by people of color by 2025. Together, we can address these gaps at every level, and direct our resources toward greater equity, prosperity, and progress.
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Read more stories by Roy Swan & Darren Walker.