Craig Reigel left the for-profit world to become managing director of NFF Capital Partners, a subsidiary of the Nonprofit Finance Fund that works to advance the collective thinking around — and secure — growth capital for nonprofits, in 2006. In the years since, Riegel has focused much of his time and energy on structuring philanthropic equity investments high-stakes investments of philanthropic dollars with the potential to dramatically improve social outcomes and help nonprofits achieve sustainability. The results to date of the sixteen equity campaigns mounted by Riegel and his colleagues and the lessons they have learned are detailed in NFF Capital Partners' 2010 Portfolio Performance Report (24 pages, PDF). Philanthropy News Digest spoke with Reigel in February about the report.
Philanthropy News Digest: Do your philanthropic equity investments always result in a return of capital to the investor?
Craig Riegel: There are lots of types of growth capital out there that promise a financial return for investors, and for some organizations that's exactly right. On the other hand, we believe there are a lot of situations where that doesn't make economic sense, where returning capital will undermine the social mission of the organization, and the philanthropic equity work we do falls into that category. So, not only do not all of our philanthropic equity investments provide a return to investors, none of them provides a financial return on the capital invested.
PND: Can you be more specific about the kinds of returns you and your colleagues are looking to achieve? And how do you measure those returns?
CR: We're looking to do two things with the investments we facilitate. One is to create powerful social impact; that's the real goal. And the second is to ensure that that happens consistently and reliably over time; that's about sustainability. So the measure of success of an equity investment involves two things. One, does the organization create social value in its community — is it teaching more kids how to read, providing more poor people in India with reading glasses, creating meaningful opportunities for volunteers? And two, is the organization able to generate recurring revenue streams to pay for the program year after year. That revenue can be earned, contributed, or a combination of the two, but the important metric is that by the time the investment has been fully paid out, the organization's business model is sustainable without additional infusions of philanthropic equity. It's only by accomplishing both of those things that we deem an investment to have been successful.
PND: What would you do in a situation in which an investment was helping to create significant social impact but not advancing the sustainability of the organization?
CR: That's a good question. First, remember, these investments are made without any plan to recoup them. This is about placing a bet on an organization's ability to succeed, and the possibility that some will not fully pan out is to be expected. One hopes, however, that if you do this with a lot of organizations, enough of them will succeed so that as a portfolio you'll see strong outcomes. But if, over the course of an equity investment, an organization has delivered on the social dimension but failed to achieve sustainability, the question, for those who have invested in it, then becomes, "Do I believe this organization can never achieve sustainability, or does it just need to course correct?" That's a subjective evaluation. You have to look at facts and draw your own conclusions. If it looks like they're making progress but still have a ways to go, then the right answer might be that it's worth doubling down on the investment, in which case either the same or a different set of investors could do that. If, on the other hand, the original investors decide the organization is unlikely to achieve sustainability, or that the management team isn't up to the task, or whatever the reason is that causes investors to view sustainability as unattainable, then the right answer is to say, "That's it, we're done, we'll cut our losses here."
PND: Why haven't we seen wider adoption of the equity investment approach?
CR: In part, it's a timing issue. We happen to have been pushing our approach and methodology at a time of economic stress. A lot of these types of investments come — and should come — from foundations, and foundation payouts over the last few years have not been what they were before the financial crisis of 2008. But that's not the whole story. There's also an awful lot of conflicting advice out there about how one should think about equity investments, what mechanism to use, and so on. My sense is that the more success stories we can point to, the more foundations will be drawn to this approach; we're starting to see that. The conversations I've had with folks who are managing philanthropic dollars have shifted from passing curiosity to genuine interest. We haven't hit the sweet spot yet, but we're beginning to see a lot of dollars flow into these types of investments. And that leaves me optimistic that, as the success stories become more compelling and are shared more widely — and as the economy and foundation endowments continue to recover — things are going to get a lot bigger.
PND: As an asset allocation strategy, what percentage of a foundation's annual payout should be allocated to equity investments?
CR: That's a great question. One of the things about philanthropic equity being successful is that it entirely depends on the nonprofits you invest in being able to fund their programs on a sustainable level. So the recurring dollars need to be bigger than the investment you start with. But it's not as though I'm looking for all foundations to make investments like this. I'd be delighted with something on the order of 5 percent to 10 percent of grant dollars; that would be transformative for the field. The question is, if you think 5 percent is the magic number, would it be better if 5 percent of foundations allocated 100 percent of their payout this way, or if 100 percent of foundations allocated 5 percent of their payout? My guess is that the correct answer is somewhere in between, with a bias toward it being more concentrated toward fewer foundations allocating more. If we had a reasonable number of major foundations putting a significant portion of their grant dollars to work in this way, it would have a very powerful effect.
— Mitch Nauffts