Social Impact Investing - Jackie Khor

Uploaded by Google on 16.07.2007


FEMALE SPEAKER: Greetings and welcome to
the afternoon session.
I would like to take this time now to introduce our next
speaker, Jackie Khor.
Jackie Khor is Associate Director and Manager of the
Rockefeller Foundation's Program Venture Experiment,
also known as ProVenEx.
ProVenEx is an investment fund within the Foundation that
extends loan guarantees and makes program-related and
private equity investments to catalyze private sector
capital into underserved sectors and geographies.
Jackie is responsible for making and managing ProVenEx
investments and private sector partnerships in the following
sectors that reflect the Foundation's thematic
programs: agriculture in sub-Saharan Africa, global
public health, inner city employment, and community
development in the United States.
Prior to joining the Rockefeller Foundation, Jackie
was Director of the New York City
Partnership's Employment Program.
She was previously a Vice-President in Lehman
Brothers Public Finance Investment Banking Unit in New
York and San Francisco.
And she also worked in mergers and acquisitions consulting to
the insurance industry.
Without further introduction, please welcome Jackie Khor.
JACKIE KHOR: Hi, everyone.
My job here this afternoon, after lunch, and after one of
my heroes, Maria Otero, is to give you a crash course on the
full spectrum of what we're calling social impact
investing products and strategies that institutions,
including foundations and corporations and individuals
such as yourselves and I, could invest in a better way
to align our investments with our social values or
philanthropic mission.
My subtitle, "Capitalism for the 21st Century?" is intended
to be a bit of a provocative question.
Right now, the field is just beginning to register in the
There's a lot of skeptics.
Rightly so, actually.
A lot more analysis and reexamination of fundamental
investment tenets are needed before this field of social
impact investing can really be viable.
And a lot more on that analysis of the social impact
that these strategies could actually deliver would also
need to be made.
So I will begin by first presenting the spectrum.
A full spectrum of social investing instruments that are
available to both individuals and institutions, depending on
your risk appetite, and depending on whether you're
willing to accept lower risk adjusted rates of return,
although that is not necessarily always going to
have to be the case, and depending on what sectors your
social objectives align with.
Walking through the spectrum, starting with the green side,
on the right-hand side, your right, are sort of more market
rate investment opportunities, beginning with public
equities, which is basically the ability to buy shares in
publicly traded companies, largely through screened
mutual funds, which I'll describe a little bit later.
Private equity is basically venture capital types of
investments directly into the shares of
privately held companies.
Fixed income is basically bonds.
Fixed income instruments that allow an investor to receive a
fixed interest payment and a date certain upon which your
principal will be repaid.
Cash is fairly self-explanatory.
Guarantee mechanisms. For those of you who were here
when Maria was speaking, Maria spoke about this potential for
the guarantee mechanism to be used at ACCION International,
I believe, if I recall correctly.
Their guaranteed Bridge Fund leveraged over ten times
capital from banks and other financial institutions.
And this is the ability for institutions with credit
worthiness, Google, Rockefeller, ACCION
International, to lend your blue-chip credit worthiness to
allow other institutions to access capital, often at lower
interest rates and lower cost of capitals, and especially
for sectors that wouldn't otherwise have access to
capital to be able to receive capital from the banking
sector and the private capital markets.
Moving down through the spectrum, I'm now on the blue
side, are really the instruments that are generally
associated with below-market investments.
Within this category are what is known as program-related
These are investment strategies, investment tools,
that foundations, private charitable foundations, are
allowed to use by the IRS that allows them to make
investments, structure them with a
financial return component.
Usually, as I said, the return is below market.
This particular tool is most often used in underserved
sectors or geographies when it is important and imperative to
bring in the private capital markets.
And microfinance is one of the early examples of that.
US Community Development Sector is also another area.
Actually, in my presentation, I'm going to be drawing from
examples not only for microfinance, but also more
locally from community development and enterprise
entrepreneurship development here in the
United States as well.
On the far left-hand side, I put in that spectrum of social
investing instruments the grant-making instrument.
As Maria alluded to, grants are a very precious resource,
and I don't want this discussion about social impact
investing to cloud or to make us forget the importance of
grant-making, especially when you want to build enduring
institutions in the not-for-profit sector, because
that is really the only source of capital that
not-for-profits have to be able to build and grow.
As Maria mentioned, institutions that are now
household names today like Grameen, like BRAC, like
ACCION, were basically built by good old-fashioned grants
that were given to them by individuals and by
institutions and foundations.

The field of socially responsible investing is
actually one of the elements of the social and impact
investing spectrum that I showed you.
It is today in the United States a $2.3 trillion market.
That might sound like a lot, but it's only actually 9.4% of
the total assets under professional management in the
United States.
Out of the socially responsible investing
universe, social screening, which is what most of you have
probably heard about, accounts--
social screening of some kind accounts for approximately 73%
of the socially responsible investing universe.
That's a significant majority of this field is all about
positive and negative screening.
Shareholder advocacy, i.e., using your proxy voting to be
able to either propose or vote on certain social issues,
accounts for almost a quarter of this universe.
Community investing, which includes investments in
community development institutions and also
microfinance institutions, is a very tiny
slice of this universe.
As you can see, it's about 1%.
I want to highlight a couple of statistics that came out
from the Social Investment Form Foundation's recent
report on socially responsible investing trends.
Over the past decade, socially responsible investing assets
have grown by about 258%, versus 250% for growth of the
broader, professionally managed asset market.
So it's grown at slightly higher rate than the growth of
professionally managed assets in the United States.
That could be promising opportunities.

In the public equities area, as you might notice, a quarter
of the socially responsible investing universe is
accounted for by shareholder advocacy.
The leading social issues resolutions that were reported
by the Social Investment Forum and the Investor
Responsibility Research Center, which is the world's
leading provider of impartial and independent research on
corporate governance and shareholder proxy voting, are
the issue of the areas of political contributions, equal
employment, climate change, and global labor standards.
So even as one of the most underutilized tools in this
area is actually just voting your proxy as a shareholder.
Obviously, the most leverage you have is when you have the
most number of shares, and usually it's institutional
investors, including nonprofits and foundations
that own a significant number of shares of
publicly traded companies.
By far the largest segment in the socially responsible
investment universe is actually the socially screened
separate accounts.
This area has grown by about tenfold to $1.5 trillion over
the past decade.
Almost all of these accounts are held by institutions,
primarily public pension funds, nonprofit institutions,
and also foundations.
A tiny sliver of this, $17.3 billion, is actually in the
form of professionally managed personal investment portfolios
for individuals.
So you as individuals can actually talk to your
financial advisor about structuring these socially
screened separate accounts with your Charles Schwab
broker, your broker at Citigroup Private Client
Group, or at Lehman Brothers, some of the representatives
here, and talk about the types of asset classes you want to
get involved in, in terms of bonds or equities, and the
types of social issues you might want to
put your money behind.

The socially screened mutual fund sector is usually--
even though the numbers are not that large, it's usually
the sector that most people hear about because some of
that brands associated with these mutual funds or the
money managers managing these mutual funds are now becoming
household names.
Mutual funds in this area, they number a little over 200,
and they manage about $179 billion in assets.
As an example, in terms of types of money managers in
this space, one of the probably better-known names
are Domini Social Investments.
The chart I'm going to show shows an example by way of the
historical returns over the past 15, 16 years of the
Domini Social 400 Index compared to the S&P 500.
And you can see that the Domini Social
Index at is red line.
The S&P 500 is the blue line.
And especially over recent years, the Domini Social Index
has outperformed the S&P 500.
And this is an index of investments in screened
publicly traded securities screened along
certain social criteria.
Other well-known fund managers in this area include Calvert
and Pax World.
The Sierra Club also manages or sponsors a socially
screened mutual fund along environmental lines.

Moving down that spectrum again and bringing up-- just
highlighting some examples from the microfinance sector
in the area of private equity and debt.
These are, again, as Maria mentioned, investment of
shares and bonds in microfinance institutions.
You already heard from Maria about what ACCION does.
Gil Crawford later on in Panel A going to be talking about
MicroVest. It's a fund that makes both debt and equity
investments in the top 200-- the next tier, the 200 largest
microfinance institutions globally that serve
Sam Moss, on that same panel, will be talking about Gray
Ghost Fund, which is basically a fund of funds, another
intermediary to aggregate capital into the
microfinance sector.

I'm now going to highlight some specific examples, not
necessarily from microfinance, but more local in the area of
social impact investing, in the private
equity asset class.
A local example is one from our own portfolio.
It's a venture fund known as community
Pacific Community Ventures.
It invests in businesses that are hiring from or located in
low-income communities in California.
One of their investments, actually, you guys probably
know this investment, is actually an investment in
Timbuktu, the very expensive trendy messenger bag company.
A number of you have their bags.
Pacific Community Ventures actually recently exited out
of that investment.
As part of the deal, as part of their investment, they
structured their deal whereby $1 million was given as a
bonus to the company's 40 low-income employees.
So this is a very good example of how a community development
venture capital fund such as Pacific Community Ventures
basically uses bona fide venture capital techniques in
a way that makes sure that the wealth creation is spread out
a little bit broader.
Other examples of venture funds of this ilk include: in
the Northeast, another investee of ours, Boston
Community Capital.
It invests in growth-oriented local businesses that, again,
create jobs in disinvested communities, and also at the
same time, build stronger communities in the Northeast.
Also in the Northeast, one of our grantees is SJF Ventures.
It makes investments both in the environmental sector and
in the manufacturing sector in growing companies that are
generating innovations and workforce development in the
eastern United States.
The Enterprise Foundation is a very large, very
well-established not-for-profit entity that
invest capital and develops affordable housing to move
people up and out of poverty into mainstream American life.
They are a partner of ours in a number of funds, especially
in many disinvested cities in the eastern United States.
I should also mention that, because I know that Rachel
asked me to at least give you an idea of what the return
potential could be in the private equity space, both in
microfinance and community development.
They can range up to ten to 15% in terms of IRR.
I always like to use this opportunity to provide some
advertising to our investees.
I know that might be allowed, hopefully.
One of our investees is the Calvert Foundation, and they
have a product that you and I as individuals could go out
and buy in minimum denominations of $1,000.
These are called Calvert Community Investment Notes.
What Calvert does is allows you and I as individual
investors to pick interest rates ranging from zero to 3%,
as I mentioned, in minimum denominations of $1,000.
What they do is they aggregate this capital from you and me
and other institutions and channel them to microfinance
institutions and community development groups worldwide,
including ACCION International, including
MicroVest. So they are another form of an intermediary that
has the potential to actually be the Charles Schwab for
microfinance and community development maybe, as sort of
a retail intermediary.

Another type of fixed income or bond product that is also
available to institutions and individuals are what is known
as community investment indexed funds.
One such manager is the CRA Fund Advisors.
What they do is they, again, aggregate capital and then
channel into economic development loans, affordable
housing loans, enterprise development loans in
disinvested communities in the United States.
And they have a mutual fund, an open-end, no-load mutual
fund with a minimum investment of $500,000 for institutional
investors and $2,500 for individual investors.
It also manages separate accounts with a minimum
investment of $5 million.
As you can see the chart here, since its inception in 1999,
the returns from the CRA Fund Index, again of community
development investments, has matched very closely, in fact
slightly exceeded, the Lehman Brothers US
Aggregate Bond Index.
Over the past six years, the return on the CRA Fund has
been 6.7% and the return on the Lehman Brothers Aggregate
Index has been about 6.6%.
These are gross returns.

Another relatively low-risk strategy to deploy capital for
social investing is by investing through certificates
of deposits in community development banks.
This is a relatively low-risk way--
many of you probably have certificates of deposits with
your local bank.
The difference being that a community development bank,
which has a mission to channel capital into underinvested
communities to underserved entrepreneurs, would turn
around and lend this money into small businesses or
affordable housing projects targeting this particular
One of the blue-chip names in this sector is actually the
Chicago-based bank known as ShoreBank that's based in
Chicago but also has branches in Detroit and Cleveland.

It's a billion-dollar bank today.

I mentioned to you that, if you remember that spectrum on
the blue side, foundations have available to them this
very important and actually underutilized tool known as
program related investments.
These are basically investments that foundations
could structure, typically structured as loans into
microfinance institutions or community development
institutions, which is often used to leverage more money
into a particular underserved sector.
Local examples include Lenders for Community Development,
which is actually in the microfinance sector.
It is based in San Jose, and it is the Bay Area's largest
microfinance provider.
San Francisco-based Low Income Investment Fund does basically
similar things.
It channels capital into not-for-profit intermediaries
and developers of affordable housing projects.

Taken from our own portfolio, we recently made a
program-related investment in a rather innovative real
estate development project in San Diego that's sponsored by
the Jacobs Center for Neighborhood Innovation.
It's actually funded by Jacobs Family Foundation, which was
endowed by Joe Jacobs, the founder of Jacobs Engineering.
What they did was to develop a 155,000 square foot retail and
commercial space in a community in San Diego which
was largely disinvested.
Over the past five years, now they have a supermarket.
They've created almost 200 new jobs.
Actually, the innovation here is, as part of this process,
they have put together an initial public offering of
shares in this project.
The individuals from this disinvested community could
have an opportunity to invest in and therefore potentially
participate on the economic upside of
this type of project.
And you very rarely find that opportunity in terms of,
again, wealth creation, providing access to equity
upside for local community residents of underserved
Finally, I just want to highlight a project that a
number of foundations like ourselves in New York City
have invested together with New York City which could be a
model here in the Bay Area because we face similar issues
vis a vis the shortage of affordable housing.
So we, the Ford, the MacArthur, George Soros'
foundations have put together a guarantee fund, about $40
million, targeted towards affordable housing in the
lowest income communities in New York City, which is going
to leverage at least-- at least--
five times that amount of capital from
banks in New York City.
So that's another example of how guarantee mechanisms can
be put together by a number of institutions to leverage
capital from other sources.

Moving away from community development microfinance area,
I wanted to at least, again, highlight how you can do
different types of investments in different sectors, not just
necessarily microfinance and community development.
One of our investments is actually in a project that's
run by the Smithsonian Institution.
It's actually an internet download website,
but not like iTunes.
The kind of music that this website focuses is actually
culturally important music that's important to
What this website does is it digitizes this very culturally
important archives and it distributes
it via digital downloads.
I would encourage you to take a look at it if any of you are
interested in music from developing countries.
The website it's,
all one word.
Probably one of the more challenging but yet
potentially most impactful investments that we've ever
made is actually an early investment we made directly in
a biopharmaceutical company that's developing a
microbicide to protect women against HIV. We invested in
this company about six years ago.
Today, this company's lead product is in the final stages
of clinical trials in West Africa.
If successful, there could be a product in the next 12 to 18
months that women could use, that women could control, to
protect themselves against HIV.
Finally, I don't want to be self-serving
about our own portfolio.
But from the portfolio of our brethren at the Ford
Foundation, and it's also another local example, the
Ford Foundation about two or three years ago made a loan to
TransFair USA.
Many of you who buy fair trade products probably recognize
this label, especially when you go to Starbucks.
This loan enabled TransFair to expand their marketing and
outreach and branding, which obviously creates much more
economic opportunities, especially for small coffee
growers in developing countries.
Economic opportunities for small farmers in terms of more
stable prices and premium pricing for their products.
So I just whizzed through this whole spectrum.
I just want to hone in on a few critical--
you know, we're here at
What are we all about?
We're all about trying to connect, at the end of the
day, the capital markets to entrepreneurs.
That's really what we're all about.
The entrepreneurs I'm highlighting here are a woman
farmer in Kenya, a woman entrepreneur who's selling
seeds and other agricultural inputs also in Kenya.
What's needed in order to connect them to the $24
trillion in capital under professional management just
here in the United States are intermediaries.
Intermediaries such as the Calvert Foundation.
Intermediaries such as ACCION, MicroVest, Gray Ghost,
institutions that you're going to be hearing a lot more from.
What these institutions do is, they provide
the governance structure.
They provide different levels of capital structure that can
be leveraged depending on the risk appetite of various types
of investors.
They provide professional management, analysis,
packaging, and administration in a much more efficient
format, that allows individuals like ourselves to
make sure that some of this capital gets channeled in a
way that could make a difference in terms of
providing economic opportunity to people all over the world.
So what really is needed to make social impact investing
the capitalism of the 21st century?
A lot, actually.
You hear--
the reason why it's very easy to focus on microfinance, to
be honest, is that this is one of the few proven sectors.
So in order to work, we want to make sure that investors
create social impact and get their money back, right?
So it's not just an investment in the guise of a grant.
There's very few sectors that this is proven.
So microfinance, US community development, clean technology
potentially is also another sector that
there are proven models.
As I mentioned, in terms of the types of investment
products, there are screened mutual funds that in the
public equity space, depending on what your social goals and
what your screening criteria, you can recoup your capital
and get a market rate of return.

So you need intermediaries, you need backable
So again, let's not forget what Maria said about how long
it took to build this sector.
It took over 45 years that you've been around actually,
ACCION International, and Grameen started in
the '60s and '70s.
But that's when the opportunity is.
A lot of people have spent blood, sweat, and tears, lost
a lot of money.

What's left is actually a cadre of institutions that is
ready for prime time, and I think that's the potential
that we stand here at the cusp of in 2006.
What is also important, again, back to fundamentals, when we
talk with the whole spectrum of social impact investing
instruments, is the importance of grant-making, to continue
to build those enduring institutions, so that you can
provide the public good, such as business management
assistance, at different levels, either to
micro-entrepreneurs or to the intermediaries that need to
scale up, or are ready for scale-up.

So just some basics about what socially oriented investors
need to do.
First of all, obviously, be realistic about the level of
financial return and your risk-reward trade-offs.
There might not necessarily have to be risk-reward
Again, in microfinance, and in publicly screened securities,
you can see that the track record shows that you can get
market rates of return.
But really, what it really depends on is what are your
social or philanthropic objectives?
If your objectives can be delivered through a
market-based mechanism that already exists, the chances of
getting market rates of return are much higher.
If it's really a neglected sector, such as providing
access to health care, or drugs for neglected diseases,
then the market mechanism still needs to be primed.
You probably need to take more risks.
You probably need to be more creative and innovative.
Again, that's where the potential is.

Finally, just back to one of the early things that Maria
touched on.
At the end of the day, in this world that we're in, the 21st
century, awash with capitalism, it's not just
about investing dollars if you're really trying to make a
difference in terms of social impact and investing.
It also takes investing your brand.
This is more sort of a reminder for those of us in
institutions with global brands that this brand has the
power to influence and the power to inform.
So we should be very thoughtful about how-- and
quite strategic about how we use this brand.
Also, since we're here at Google in the heart of Silicon
Valley, the investment isn't just going to be about
dollars, but it's also the power to connect by virtue of
technology platforms and the networks, both social networks
and physical networks.
So let's not just think about that it's all about money
because it isn't.
On that last point, I would like to leave you with the
timeless words of the English poet John Donne, written
almost 400 years ago, which seems particularly appropriate
today when we consider how capitalism and globalization
are interconnected, but not always for the good.
"No man is an island, entire of itself.
Every man is a piece of the continent, a part of the main.
And therefore never send to know for whom the bell tolls.
It tolls for thee." So in conclusion, I leave it up to
you to consider and to help us possibly playing a role in
resolving that question that I left in my subtitle of my
Can social impact investing be a more progressive and
positive approach for
capitalism in the 21st century?
That power to make that change is in your hands as
individuals and as institutions.