Pools of capital reserved for use in doing good have been developing in the US since some of the countries early philanthropists such as Andrew Cargnegie, John D. Rockeller and others began providing money first from their own pockets, and then when they wanted to shelter their holdings from the Personal Income Tax, from philanthropic foundations.  According to the Urban Institute, there were 79,765 private foundations filing with the IRS in 2006 and these entities collectively held assets valued at $472.7 Billion, producing income of $72.4 Billion. While the vast majority of foundation disbursements were in the form of outright gifts, an increasing number of foundations have been making Program Related Investments (PRIs) since the invention and codification of this form of social investing began with the Ford Foundation in 1968. PRIs are investments made by foundations to support charitable activities that involve the potential return of capital within an established time frame. PRIs include financing methods commonly associated with banks or other private investors, such as loans, loan guarantees, linked deposits, and even equity investments in charitable organizations or in commercial ventures for charitable purposes. In order to qualify as PRIs under the IRS code, they must be structured to yield less than a risk adjusted market rate of return.

Pools of social-purpose capital in the US have been developing outside of the foundation world, as well. Wealthy and super wealthy individuals who want to use their capital for social good and still earn a fair return have increasingly decided to act as social investors without sheltering their financial assets in a private foundation. A well known example is Omidyar.net, an entity through which retired E-Bay co-founder Pierre Omidyar and his wife Pamela Omidyar intend to conduct most of their double bottom line investing. Thus far, a substantial amount of the Omidyar’s social investing has been in the field of non-philanthropic micro-finance. Wealthy corporations are also starting to eschew the foundation format because they fear that the rules and regulations governing exempt foundation giving and investing will be too limiting. A prominent example is Google.org, a for profit entity funded entirely from Google revenue and now holding approximately $1Billion in assets.

Additionally, community investment pools have grown up such as Calvert Community Investments, Partners for a Common Good, RSF Social Finance and others. Community banks  (such as Shore Bank) and credit unions (such as Self Help Credit Union) have flourished, localized revolving loan funds have grown to number in the hundreds, and development corporations in the thousands. Finally, a new breed of venture capital groups such as Pacific Community Ventures, Coastal Ventures and Good Capital are starting to builds track records. In all, these non-foundation and non-corporate sources total $24 billion in the US.

This social-purpose capital, e.g. Grants or Program Related Investments (PRIs) by philanthropies, social investments by wealthy individuals, union pension funds, etc. can be used instead of conventional sources to provide lower cost or free “first loss” financing layers, either bringing a financing structure which had heretofore been impossible into the realm of possibility, or substantially driving down the all-in financing cost or otherwise changing the terms of equity and/or credit favorably.

Affinity groups such as the AARP, national church organizations, and others are also accumulating pools of mission-based capital, and are looking for more effective ways to give or invest funds from their foundations, trusts, and even pension funds.

This capital is being used in a variety of ways within the healthcare sector. This ranges from traditional giving by a host of foundations, funds and wealthy individuals to individual providers for the acquisition of equipment and facilities, to the investment of equity in new for-profit ventures doing research and development on new pharmaceutical interventions for “orphan diseases.”

Those donors and social investors hoping to maximize the impact of their gifts and investments are finding that investment in higher risk layers of structured transactions, e.g. equity or low priority debt offers opportunities for sometimes startling amounts of leverage, attracting multiple amounts of capital lower risk/reward profile.

The New York City Affordable Housing Acquisition Loan Fund (the Acquisition Loan Fund) has created a multi-tranche financing structure which includes a very low priority lien “mezzanine” debt layer in the form of a guaranty fund, supplied using Program Related Investments by a consortium six leading philanthropic foundations, including Rockefeller, Ford, Robin Hood, and MacArthur.  This fund substantially enhances the senior debt’s credit quality, making it far less expensive when it is supplied more or less conventionally by a bank syndicate. A key element of this structure is an extensive legal opinion which gives comfort to the foundations that their investments in the Guaranty Fund qualify as Program Related Investments from the moment the money is deposited in the Fund, (rather than from the time the money is committed to specific projects), as long as the return expected on the fund is at a below risk-adjusted market rate. The PRI investment was a $32.6 MM, making possible a total Acquisition Loan Fund size of over $200 MM, to be made available on a revolving basis to non-profit and for-profit developers of affordable housing for initial land acquisition at an all-in interest rate of 7.65%.

This affinity group’s foundation invests heavily in legal advocacy on a range of issues effecting the financial and medical well-being of low income and other vulnerable people over 50. Examples from the foundation’s website of recent efforts in the healthcare finance sector with direct bearing on uncovered medical expenses include:

• An appeals court found that Arizona’s failure to provide Medicaid-funded home based care violated federal law, as AARP Foundation Litigation attorneys have urged in their 7-year representation of the plaintiffs. The ruling is a win for Arizonians seeking to avoid institutionalization as well as for all Medicaid beneficiaries seeking to enforce their rights in court.
• AARP attorneys represented a Maryland woman fighting to stay out of a nursing home and obtain Medicaid home and community based services. An appeals court found that the state used an overly restrictive reading of the law, and that the decision-makers did not allow her to present all the evidence she should have been allowed to present.
• A California appeals court agreed with AARP that a disabled worker’s age could not be used to reduce workers compensation benefits

 

This foundation is also able to mobilize large numbers of volunteers – human capital – to assist vulnerable people over 50.  For example, Foundation organized and supported volunteers help low and moderate income people fill out their tax returns free of charge, making sure that such tax-based subsidies for the poor as the Earned Income Tax Credit are applied for and maximized.

Established in 1995 when Calvert Group, the socially responsible mutual fund company, teamed-up with the MacArthur, Ford and Mott foundations, Calvert Foundation has demonstrated that socially-minded individuals and institutions are willing to invest, at “blended value” rates, to meet the financing needs of vital nonprofits dedicated to strengthening communities. As of YE2007, Calvert Foundation administers more than $200 million from investors and donors. Capital is invested in almost 250 nonprofits (and some for profits), comprising a diversified portfolio spanning the areas of affordable housing, small business, nonprofit facilities, social enterprise and micro-enterprise development.  Specifically, Calvert Foundation is invested into a diversified pool of assets, including loans to CDFIs, affordable housing developers and other community-based intermediaries, and deposits into regulated community development banks and credit unions. Overseas, Calvert Foundation has lent directly to microfinance institutions (MFIs) and US or European-based technical service organizations that provide capital to affiliates and projects. Also, Calvert Foundation has begun to lend to fair-trade coffee cooperatives, social enterprises and independent community-based media. Calvert Foundation has concentrated on the high-end of credit quality, achieving consistent performance with losses of less than ¼ of 1%. Additionally, a smaller, grant-funded, higher-risk pool has permitted Calvert Foundation to diversify into new areas and to reach populations not serviced by more established intermediaries. Investors buy CCI Notes in for as little as $1,000 for a fixed term that pay up to 3% interest annually.

• Social Purpose investors willing to accept high risk and receive relatively low return can leverage in substantial amounts of more conventional capital which has different risk/reward profiles
• Investment in – or mobilization of – human capital, focused strategically on key leverage points, e.g. the legal frameworks for existing social insurance and tax programs, can also yield substantial multiples in benefit flowing to low income and other vulnerable populations.

Speaks to multiple leverage points:

• Healthcare as a public good
• Public subsidies for healthcare, e.g. the Medicaid program, can be seen as expressions of political belief that healthcare is a public good, at least for the very poor. Initiatives which seek to change policy and improve coverage by these programs can help reduce the amount of uncovered expenses for the target populations
• Programs such as RealBenefits, the Benefit Bank, etc. also use compassionate capital simply to improve sometimes disgracefully low participation rates in existing publicly funded programs.
• Potential  of new alliances to create risk pooling or collective purchasing/action
• As entities such as AARP explore ideas such as non-profit medical credit, they could find interesting new partners, e.g. those with compassionate credit to invest in equity or mezzanine tranches of medical credit card receivables transactions.