Lessons from Packard Foundation’s $750 Million in Mission Investments

As more foundations start to deploy impact investments to accomplish their philanthropic goals, some pioneers in the field of mission investing are sharing their hard-earned lessons to perhaps boost the confidence of recent adopters.

The David and Lucile Packard Foundation, for example, with a $180 million mandate for impact investments, has released an outside analysis,“Mission Investments at the Packard Foundation” that includes some useful takeaways from the foundation’s 25 years of practice.

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Since 1980, the Packard Foundation has made more than $750 million in debt and equity investments to achieve its philanthropic goals of “improving the lives of children, enabling the creative pursuit of science, advancing reproductive health, and conserving and restoring the earth’s natural systems.” Most of the investments have been in the form of program-related investments, or PRIs, that count toward the foundation’s required annual distribution of five percent of its $6.9 billion endowment (as of the end of 2013).

The foundation’s PRI debt was instrumental to launching our second fund, allowing us to attract nearly five times the investment in private and tax credit equity which wouldn’t have otherwise been possible.Ecotrust CEO, Bettina von Hagen.

In the 1990s, the foundation started using PRIs to fill so-called “capital gaps” — sectors or markets where demand for capital outstrips available supply, by helping social enterprises to attract capital from commercial sources. In 2006, the Foundation established a $180 million investment portfolio with a “mandate to take risks in service of the foundation’s mission.” In 2015, the Foundation began experimenting with blending grant and investment strategies in some of its sub-programs seeking to maximize the impact of both strategies. Among the lessons:

1. Design investments alongside grants.

Blending grant and investment strategies can maximize the impact of both approaches by informing the grant-making strategies and ensuring greater flow of capital to most impactful opportunities.

For example, the Foundation provided a $4.5 million low-interest loan as seed capital for Afaxys, a for-profit company that offers affordable oral contraceptives to public health clinics. The investment allowed Afaxys to significantly scale its operations, furthering the foundation’s mission of advancing reproductive health. The foundation has also benefited from the company’s market knowledge and its private sector perspective. Using their deep knowledge of various impact areas, foundations can pave the way for other mission investors to channel funds to opportunities with the most impact.

“We need to think more creatively about how to build PRIs into our [program] strategies,” says Curt Riffle, Program Officer at the Packard Foundation.

2. Deploy mission investments in support of policy efforts.

Mission investments can be a powerful tool to influence policy makers. For example, in 2013, the Packard Foundation along with the Betty Moore and Kresge foundations, provided a $5 million growth capital investment to The Freshwater Trust. Freshwater Trust seeks to restore rivers and streams in the US and has been working with conservation organizations and regulators to develop water quality credits. Similar to carbon credits, industrial users can purchase the water credits to comply with regulations. Thanks MIto the PRI investment, Freshwater Trust growth enabled it to play a key role in the refinement of EPA policies and procedures in connection with the administration of water temperature and quality credits.

3. Pay the price for social impact.

Many investments with social impact carry higher risk– they are often investing in new markets, unproven business models, and very early stage ventures. Such investments typically require patient capital, and entail greater efforts to conduct due diligence and structure deals. Mission investors may need to assume higher risk positions in the capital stack, make longer-term or larger investments (even though these may be riskier than smaller deals with quicker exists) and put in more “sweat equity.” These trade-offs can help attract private capital and scale the impact.

For example, Packard provided a $4 million low-interest loan to refinance some of the debt of Acelero Learning and repay early investors, after the company’s Head Start programs generated impressive academic gains but modest returns. The loan will save Acelero about $1 million over five years, increasing its ability to reinvest in its programming.

4. Play a variety of roles in the “capital stack.”

Mission investors can deploy capital strategically within a capital stack in a way that shifts the risk-return profile and makes it more attractive to commercial investors. This can include providing “first-loss” capital to protect market-rate investors, enhancing returns for other investors and/or serving as a “vote of confidence” to signal the impact potential and boost the investee’s credibility.

For example, the Foundation’s $10 million concessionary debt investment in Ecotrust Forest Management enhanced returns for the equity tranche in the fund and thus helped attract a $10 million founding equity investment from a private investor. In total, the foundation’s investment “crowded in” $42.2 million in equity investments from other foundations, individuals, and institutional investors.

“The foundation’s PRI debt was instrumental to launching our second fund, allowing us to attract nearly five times the investment in private and tax credit equity which wouldn’t have otherwise been possible,” says Ecotrust CEO, Bettina von Hagen.

5. Look beyond the nonprofit sector.

Mission-driven early stage for-profit ventures or low-margin companies may be too risky and not an attractive option for market-rate investors. Mission investors can support these businesses on their way to becoming more profitable and transformative by providing flexible capital.

“The foundation’s loan came at our [Afaxys] critical start-up phase, allowing us to grow our business venture through challenging early times,” says Afaxys president Ronda Dean. “We have achieved breakeven and are now serving approximately 15% of the institutional reproductive health market, in large part because of that early seed capital PRI loan.”

Disclosure

The Packard Foundation is a sponsor of ImpactAlpha.

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