Q: Why impact investing?
A: Commonwealth is an impact investing fund to expand market-based solutions to society’s toughest challenges. In other words, it’s where capitalism meets philanthropy. These two great traditions in America has led to unprecedented growth and compassion. Tying these two strands together guards against the unintended consequences of unbridled wealth accumulation and good intentions-based poverty fighting.
We believe that good stewardship includes giving generously and we have other services aimed at growing American generosity. But when it comes to solving poverty, we are convinced that only enterprise solutions will work.
With our impact investments, we are simultaneously seeking to improve the economic participation of low-income neighbors and the economies of low-income neighborhoods. This will become a virtuous cycle leading to security for family and place by prioritizing outcomes such job creation over handouts.
Q: What is the landscape for impact investing?
A: There are two statistics that inspire Commonwealth fund managers. First, Americans give more than a $1 billion per day to charity. And second, there is more income wealth in a high poverty neighborhood than a wealthy suburban neighborhood. The first statistic will likely surprise you and the second statistic will confuse you. To understand them better, click here and here.
Combined, these two statistics explain much about the rise in impact investing. Americans have always been generous and now their generosity is being spiked by the greatest wealth transfer in human history. The heirs of that wealth are millennials desiring more personal engagement with their charity and more purpose to their capital. The tech sector has disrupted philanthropy with a rise of results-oriented innovations.
These trends have combined to give rise to impact investments which describe investments across many assets classes, sectors, and regions. It is rapidly growing as evidenced by the following chart:
Q: Why do you focus on Donor Advised Funds as the primary investment technique?
A: Donor advised funds are one of the fastest growing trends in the financial services industry. There are now over a quarter million funds which have grown in the double digits each of the past seven years. Assets are over $80 billion and funds to nonprofits each year are approximately $15 billion.
Yet, with the rising number of accounts, there is a growing controversy over the amount of funds standing idle amid dire social needs at home and abroad. Commonwealth’s impact investing deals allow latent capital to become active capital with measurable social results and a predictable return to the DAF.
Q: Why do you employ Private Equity and Venture Capital techniques in social impact deals?
A: Private equity conjures images of Gordon Gekko-style buying of companies, stripping them down, and selling off parts for profit. But it’s a discipline that’s all about turning underperforming businesses into high performing ones and that’s exactly what’s needed in the social sector.
Americans give hundreds of billions to charity each year and nonprofits accounting for 1 in 10 jobs in the American economy. These numbers suggest that the social sector is big business yet it’s really small business with a sore lack of market discipline. Consider: of the $378 billion in American philanthropy last year, 77% came from individual donors averaging $1500 per year. On the demand side, three-quarters of America’s 1.5 million nonprofits operate on budgets less than $500,000. The transactions between the small givers and small charities are rarely driven by any meaningful understanding of results or return on investment.
Commonwealth’s impact fund remedies this problem by bringing venture capital-style due diligence to nonprofits and companies seeking to produce social good. The US venture capital industry has fueled invention, innovation, and economic growth. This is due to the niche VC capital fills in the financial services industry and the diligence that is imposed before investments are made. Similarly, Commonwealth’s fund offers the same levels of funding (seed or growth) and exit events and rigorous delta reports tracking financial and social returns.
This approach is being called for by a growing class of experts. David Hutchison, former head of UK investment banking at Dresdner Kleinwort and chief executive of Social Finance, says that there is "considerable mileage" in bringing investment disciplines to bear on socially minded organizations, "particularly a focus on performance management and a sense of accountability for delivery." This elevated approach differs from too many attempts to invest in positive social or environmental impacts under the motivation of corporate responsibility more than business strategy. Social impact has been merely "an attractive by-product", explains Hutchison. "What you need to ﬁnd is capital that values the social impact being delivered and doesn't just tolerate it. [This] is more than an extension of philanthropy."
Commonwealth produces rigorous business intelligence on each deal and regular reports analyzing economic gains and social impact.
Q: What is the role of community?
A: Building on the private equity or venture capital emphasis on diligence and business strategy, Commonwealth also emphasizes relationships between its donors and social entrepreneurs. The bridge between funding source and change agent can only be effectively constructed in a community context.
Poverty is rooted in broken relationships. This lack of social capital is also one of the persistent barriers to restoring health in many areas of life. Humans are biologically hard-wired to connect and this applies to all income strata. Commonwealth’s markets are therefore formed by donors and entrepreneurs who share a city or a cause.
Q: How long has Commonwealth been in the impact investing business?
A: Commonwealth is part of the Sagamore Institute family of businesses. Sagamore opened its first line of performance philanthropy in 2011. Since then, Sagamore has received over $30 million in donations (leveraged by a 50% state tax credit) by more than 1,000 donors creating scholarships for thousands of income-eligible K-12 children.