More Than a Donation: Why Modern Foundations are Acting Like Venture Capitalists

Hedge Fund Alpha has covered numerous 990-PFs from the foundations established by hedge fund and venture capital managers, even creating a bespoke 990-PF tool to give investors more insight into foundations’ investments. One thing many foundations have in common that’s clearly noticeable is investments in impact funds.

Non-profit organizations are an institutional-investor powerhouse, with about $8.62 trillion in financial assets, including equities, mutual funds and debt securities, according to the Board of Governors of the Federal Reserve System’s Financial Accounts. Private foundations alone have about $1.8 trillion in financial assets.

For comparison, total assets under management by hedge funds hit $5 trillion last year, according to analysis by Hedge Fund Research, as cited by CNBC.

Foundations might redeem funds from impact funds if they fail to meet their impact goals or provide the expected financial returns. As their name suggests, impact funds differ from other types of investment funds in that they are set up primarily to have some kind of impact on the world.

From ESG to impact

According to Scott Stevens of Grays Peak Capital, impact funds typically have included ESG funds, so previously, environmental areas like solar, wind and sustainability were common focuses of these funds. As far as social impact, he said the Grays Peak ICF funds tend to focus on economically or socially disadvantaged groups or communities, which tend to skew toward minority areas. One other area Stevens highlighted was funds that help children with health-related issues, with a common skew toward kids. He also mentioned veteran-related funds.

“Some of the impact is economic and social, so trying to get people more education, trying to get people more food, trying to get them anything that they need that they just don’t have access to,” he added. “So I think it covers a broad part of that impact, but it tends to skew on the economic and socially disadvantaged, but for us, I think it’s been surprising as to how broad it is. It’s everything across from educational to recreational to food, to health care, almost everything that you could think about in your daily lives.”

While foundations themselves can operate impact funds, anyone can do so. Stevens said it’s a question of who wants to spend the energy and capital needed to get it done. He said there are donor-advised funds, foundations and other philanthropic organizations operating impact funds.

Social Finance

One organization that manages a small number of impact funds is Social Finance. Kirstin Hill of Social Finance said the organization is pretty unusual. It’s a 15-year-old 501(c)3 organization, but it also owns a registered investment advisor as a wholly owned subsidiary. That RIA works in service of the non-profit’s mission, which is to leverage more tools to deploy more capital in more ways to do more good.

“We use financial tools to drive social progress,” Hill said. “There are challenges and opportunities where deploying capital in between the binary of investing to maximize returns and grant-making to do good can do more good at greater scale, more accountably and more effectively. Whether capital is coming from philanthropy and using financial tools to recycle dollars or deployed as an investment we can think differently about risk and expected returns — with impact as the primary purpose and sustainable financial returns as a secondary goal, rather than maximizing financial returns.”

A focus on impact

As mentioned, while Social Finance itself isn’t an impact fund, it does manage some impact funds. For example, in the impact-first investing business, the team invests for impact first and financially sustainable returns second, as opposed to financially maximized returns. One way they do that is through a diversified fund called the Impact First Fund. The second is by supporting the creation of customized portfolios they design or manage on behalf of individual philanthropists or foundations. Social Finance launched the Impact First Fund a few years ago.