At foundations, it’s commonplace for a dedicated program team to focus on grantmaking while a separate team focuses on investing the endowment. The result? Approximately 5% of resources are used to advance the mission at many foundations, while the other 95% is invested solely for profit, without regard for the mission. In recent years, this bifurcated structure has been called into question, with a growing number of foundations using impact investing as a tool for mobilizing more capital to have a positive social or environmental impact that aligns with the mission. Yet impact investing remains niche, with a study just last year reporting that only 5% of foundations invest for impact.
This year, as many in philanthropy have called for foundations to increase their grants payout from 5% to 6% or even 10%, the endowment continues to be at the top of my mind. More money out the door as grants is fantastic, and I absolutely support and appreciate the funders who have committed to more grantmaking to meet the needs of the moment. But what about the other 90-95% that’s being invested solely for profit? Why do we continue to accept that the majority of U.S. foundation assets (which add up to an estimated $1.6 trillion) are held in investment portfolios that have no accountability to our missions—and that might even be in direct conflict with our grant-funded work?
What if changing the way our endowments are invested is as much a solution to the growing needs and crises of our time as increasing our grant budgets? How can we change this dynamic and connect our endowments to our missions?
For those of us sitting on the program side, in roles such as program officer, program director or manager, and even executive director, this may seem like a hard question. Many of us sit far removed from investment decision-making and have been told that the grants budget is our lane. How can we play a role? One answer that I’d like to offer up comes in the form of catalytic capital.
Catalytic capital refers to investments that have a lower expected financial return and/or higher risk than conventional investments as a tradeoff for the high impact they generate. Catalytic capital can be a transformational tool for social and environmental change, filling important gaps in access to capital and supporting entrepreneurs to build a track record for impactful investment strategies. In other words, when banks say no to a loan because of limited credit history, or investors say no to a deal because the perceived risk is too high, catalytic investors can step in to support people and communities, enable experimentation, and unlock impact. Foundations are uniquely positioned to deploy catalytic capital through the program-related investment (PRI) – a unique tool designated by the IRS that allows foundations to make investments that may produce a return but that have a primary purpose of producing impact via a charitable purpose.
Repairing Systems and Building Local Power
Potlikker Capital and The Boston Impact Initiative are two examples of program-related investments made by The Woodcock Foundation, where I serve as Executive Director. These investments are part of a dedicated catalytic portfolio that is separate from, and in addition to, our grantmaking budget. This allows us to put more capital at work each year in direct support of our mission.
Potlikker Capital is a nonprofit dedicated to supporting predominantly BIPOC farmers and food business owners across the country, with a focus on the South. Potlikker recognizes historic injustice and disinvestment from communities and seeks repair by serving as a partner to farmers to care for their land and rebuild local economies. In 2022, the Woodcock Foundation made a program-related investment to Potlikker Capital in the form of a three-year loan with an interest rate of .5%, prioritizing impact over financial return. The same year, Potlikker provided both a grant and a flexible loan to Cruz Farm, a multi-generational pasture-raised hen operation and family farm in Douglas, AZ, managed by Gabriel Cruz. Alongside the farm, Gabriel also runs Finca Colibri, a nonprofit through which he provides education, teaching, and training in the ways of building and growing ethical and sustainable farming enterprises. After experiencing pandemic-related challenges, a loan from Polikker strengthened Cruz Farm’s business and created economic stability for Gabriel and his family. Over the last four years, Potlikker provided 36 grants and 34 loans to farms and food businesses like Cruz Farm while also creating business connections for farmers and putting farmers in relationship with one another as part of an ecosystem-building approach to change.
Further north, the Boston Impact Initiative (BII) is playing a key role in building financial, social and political power across historically marginalized communities by using loans and equity investments to support asset ownership. BII also takes an ecosystem-building approach, supporting communities to leverage their relationships with each other while also creating connections to other stakeholders with power and resources that can benefit those communities. A great example is the East Boston Neighborhood Trust. As BII explains, the project “will keep 114 units permanently affordable and controlled by residents and community advocates. It is the first mixed-income neighborhood trust (MINT) in Massachusetts.” This is taking place in a part of the city where roughly half of residents are Latino and where steadily rising rents have threatened affordability for the area’s working-class families. The success of this project was largely due to BII’s creativity in structuring a deal that worked for the community along with their incredible efforts to coordinate a diverse group of stakeholders that included nonprofits, funders, investors, and government partners.
The impact of organizations like Potlikker Capital and the Boston Impact Initiative is both broad and deep, creating positive outcomes for individuals, communities, and local economies.
Their work also offers a template for replicating impact in other regions that can move us toward an economy that works for everyone. BII and Potlikker both raise grants to support their operations and their communities. But most of the capital they raise from funders and investors is in the form of catalytic capital.
Beyond their impact on organizations that receive capital, PRIs can be a tool for change within foundations by demonstrating the power of impact investing and sparking a broader conversation. At Woodcock, the impact we saw as we built a portfolio of PRIs excited our Trustees and led to further conversation about the endowment, its relationship to our mission, and our commitment to impact investing. After a journey that started with PRIs, today we’re committed to aligning 100% of our endowment with our mission. As I’ve talked to other foundations engaged in impact investing, I often hear a similar story of impact-first investments being the catalyst for learning and engagement around aligning investments with mission more broadly.
An Invitation to Learn Together
PRIs can create transformational impact in communities, have ripple effects across the economy and serve as proof points for sparking internal conversations at foundations about impact investing and alignment beyond the 5%. I would love to see more foundation leaders and program team leaders being invited into conversations about the role of investing in increasing our impact. I’m offering one such invitation here.
If you’re curious about the power of PRIs, please join me on November 19 at 2:00 pm ET for a virtual conversation with fellow GEO members about PRIs, catalytic capital, and the ways in which program teams can use these tools to support your foundation’s missions.
Stacey Faella is dedicated to building a more just and sustainable world through philanthropy and impact investing, currently through her role as Executive Director of the Woodcock Foundation. With over 15 years of experience in the nonprofit and philanthropic sectors, she has created and contributed to initiatives spanning gender and racial equity, food systems transformation, inclusive economic development, biodiversity and climate change, and democracy.