Mission Possible: How Foundations Are Shaping the Future of Impact Investing
Mission Possible: How Foundations Are Shaping the Future of Impact Investing
This series, produced in partnership with Mission Investors Exchange, will explore what’s next in impact investing and what we can learn from some of the most innovative foundations.

Even through the fog of post-election ambiguity, it is clear that philanthropy and social investors will play a pivotal role in ensuring that capital finds its way to—and can productively be put to use in—communities where opportunity has been slow to take hold, and where too many people feel left out and left behind.

The Kresge Foundation seeks to advance opportunity in American cities. But in each of our program areas, we have to contextualize and deconstruct the obstacles to that objective with an eye toward assembling the right combination of tools, in the right doses, to address them.. And that combination increasingly pairs our grantmaking with social investments that provide both a financial and social return. In turn, we need to increase the diversity and flexibility of our social investment tools—whether loans, equity investments, deposits, unfunded guarantees, or mission-related investments.

The centrality of this mind-set recently impelled our board of directors to dedicate 10 percent of our corpus—$350 million—to social investments by 2020 and to leverage $1 billion from other investors along the way.

The 2016 election cycle has not altered this commitment, but it is worth pausing to reflect on whether the aims or forms of our social investment capital will change.

The answer is both no and yes. It seems unlikely that the new political calculus will necessarily translate into increases in the volume or quality of capital flows to places where the bedrock elements of opportunity are in short supply. There will be a persistent need to prime the pump or fill gaps for investments that spur affordable housing, support small business formation and growth, expand early childhood development opportunities, adapt public infrastructure to adapt to rising sea levels, or seek to even the playing field in so many other ways.

Philanthropic social investing doesn’t seek to substitute for private markets over the longer term. But it does seek to catalyze the markets—providing proof points for private and public investment; catalyzing financial systems to expand their aperture so that they can take in new possibilities of social benefit; and ushering along different combinations of public, private, philanthropic, and nonprofit capital in pursuit of shared goals. What was true before this new administration will be true going forward: We will continue use social investments to help dismantle the persistent and pervasive social, racial, and economic barriers that so shamefully impede pathways to equality and justice for low-income people and people of color.

Kresge will supplement this constancy of aim, however, with three forceful realignments in our approach.

First, we will explore new avenues to build relationships with partners in less-familiar sectors—including the private sector, donor-advised funds, commercial banks, and high-net-worth individuals.

The philanthropic sector has seen decidedly mixed results in creating platforms conducive to these connections. The Edna McConnell Clark Foundation— impressively—has broken new ground in aggregating capital from multiple sources for youth-serving agencies, and Mission Investors Exchange has articulated forcefully the case for next-generation capital strategies. But the scale of these initiatives has been limited—and their aspirations remarkably short of imitators.

The new era in Washington, with its breakaway rhetoric about change, is a clarion call for audacious new mechanisms that can bring a full spectrum of first-time entrants into the social investing space. As private philanthropy builds a more robust track record of working with an ever-broader range of investors in a wider variety of structures, it can approach this challenge with greater credibility and skill.

Second, we intend to ramp up our use of non-cash guarantees.

Given the ability of a guarantee to “buy” impact without requiring current liquidity from a foundation’s corpus, it is a remarkably underutilized philanthropic resource in de-risking transactions for which we need market-rate investors. Detroit Home Mortgage (DHM), launched last year at the behest of Detroit Mayor Mike Duggan and with considerable assistance from the White House, is illustrative.

The program provides financing for single-family homes in Detroit, where only 12 percent of all home sales in 2014 were financed with mortgages, largely because of low appraisal values and the high cost of renovations necessary to make properties habitable.

DHM allows homebuyers to obtain a first mortgage based on the appraised value of the home and a second mortgage of up to $75,000 beyond the appraised value for needed repairs. Kresge, the State of Michigan, and the Ford Foundation provided some $11 million in grants and guarantees to secure the participation of a consortium of a six local banks. The program is betting that the increased volume of purchases and renovations will raise home values, creating a virtuous cycle that will introduce more-normalized market dynamics—all the while providing an outlet for properties the Detroit Land Bank wants to return to the hands of neighborhood residents. Ultimately, our aim is to leverage more than $100 million from the bank investors and provide more than 1,000 new mortgages in Detroit. In its first year, the initiative closed approximately 60 mortgages.

These kind of transactions have led us to work with the Global Impact Investors Network, the Council of Development Finance Agencies, municipal bond issuers, and others to identify sectors, issues, and circumstances that are particularly well-suited to guarantees.

Third, we will seek out investments that braid across disciplines.

If the new era in Washington hopes to uproot stale and unproductive patterns of public sector policy and practice, it will be well served by gaining a deeper understanding of the interdependence of public systems at the local level. Long gone are the days when we could divorce housing from human services, climate change from public health, job access from transportation, and education from neighborhood stability. Over the past eight years, we have seen ambitious attempts to recalibrate federal capital flows to align with the interweaving dynamics that define daily urban life.

Even with—or perhaps particularly because of—a potentially divergent political philosophy, philanthropy can seek to push the boundaries of capital strategies that bridge disciplines. Kresge has actively pursued social investments that enable the co-location of health clinics and affordable housing, facilitate the provision of housing enriched by human development supports, use arts and culture to create vibrant food hubs that make fresh food available in low-income neighborhoods, and test payback strategies of energy efficient retrofits in disinvested commercial and residential properties.

We intend to explore other forms. With the Robert Wood Johnson and Ford Foundations, for example, we are funding an initiative called the Strong, Prosperous, and Resilient Communities Challenge (SPARCC) that will provide grant, loan, and guarantee capital to real estate developments that are accessible by public transit, offer community-based public health services, mitigate the effects of climate change, and are culturally enriched.

Social investing holds the possibility of presenting a different face of philanthropy to the new political decision-makers in Washington. It creates beneficial adjacencies between social purpose and private capital, and provides pathways for individuals to invest in proven models of successful innovation. It promises to link investment to tangible outcomes. Philanthropy has already done some of the difficult spadework by more closely drawing together markets and social benefit. Now we only need the verve to keep all our tools at the ready, work together, and leverage what we’ve learned in whatever uncertain times lie ahead.