Blog Post #10 - Getting Started and Sourcing Deals

Thursday, February 24, 2022

Getting Started and Sourcing Deals  

February 2022 Blog Post • By Jennifer Oertel, CMF Impact Investing Expert in Residence

What does it take for a foundation to begin impact investing? And once those initial steps are underway, how can philanthropy continually identify opportunities for investment? These two issues – getting started and sourcing deals – were key questions raised by respondents in a recent survey CMF conducted among participants in the Michigan Impact Investing Hub when asked about their future needs and current barriers. In this blog post, I’ll share how to navigate these challenges.  

Getting Started 

In my experience working with foundations and nonprofits around the country who are interested in exploring the possibilities of impact investing, I often hear their most significant barrier is getting buy-in from their Board and leadership. Recognizing that buy-in is sometimes stymied by a lack of understanding around the benefits and opportunities impact investing offers, my earlier blog post, “The Why of Impact Investing,” can be a helpful resource. This misunderstanding in the field has perpetuated impact investing myths among trustees and executives alike.  

My blog post highlights that you don’t have to sacrifice returns unless you choose to and environmental, social and governance (ESG) investing performs equally or better than other investments that don’t take ESG into consideration. The blog may also be helpful for your team as you contemplate a start in impact investing.   

Understanding that impact investing can be a complex effort; some organizations engage outside consultants to assist with their journey. Talking with a foundation colleague already steeped in this work can also prove invaluable. One of the many great things about our CMF community is that your peers engaged in this work are eager to discuss their experience in impact investing, including their solutions to common challenges with getting started. You’re encouraged to reach out to Ask CMF with questions or to get connected to the robust network of foundations in the impact investing ecosystem.  

Once your organization decides to begin your impact investing journey, it is critical to review your governing documents (articles, bylaws) and investment policy to ensure the intended activity is permitted. Most governing documents won’t prohibit impact investing unless you intend to make grants to non-501(c)(3) organizations, and the documents state that grants may only be made to public charities. If that’s the case, your governing documents are likely in need of an update anyway!   

Most organizations carve out a portion of their investment portfolio for impact investing – whatever “impact investing” may mean to them. The importance of defining impact is so that your outside advisors will know how the organization wants to focus its impact investing and so that your internal team is on the same page. Investing in market-rate impact funds and ESG investing are strategies that your investment advisor can discuss with you. Still, given their firms’ restrictions, most can only recommend investments that have been thoroughly vetted through an extensive and expensive process, they likely won’t be able to advise you on local, direct investments. If those sorts of investments are of interest, you can instead proceed with the advice of knowledgeable board members or volunteers, combined with your accountants and lawyers. Or you could engage an investment advisor that specializes in these more direct investments.  

A Note on Working with Investment Advisors  

We’ve seen large investment advisors recommend against more local, direct transactions. If your organization inclines to move forward with such investments, keep in mind that you are the client, and your advisor is just that – an advisor. They work for you. Just because they can’t advise on a particular transaction does not mean that it’s not worthwhile. We’ve also seen advisors convince organizations that what they’re intending “isn’t really impact investing” and instead offer a proprietary product that is impact investing. Again, while it is important to listen to the advice of seasoned and trusted advisors, it is up to you, the organization engaging and paying that advisor, to determine what you view to be an impact investment. There is no magic formula or definition, and some professional advisors (as well as accountants, attorneys and consultants) may attempt to exercise undue influence over fledgling impact investors who may be quick to defer to the “experts.” The bottom line: Ensure your impact investing thought partners and hired professionals are clearly and openly discussing the many options impact investing offers in support of your goals and your mission. 

Sourcing Deals 

If you’re investing in ESG and larger, established impact funds, your investment advisor should be able to source the investments for you based upon your impact theme. (Click here to see examples of evidence-based investment themes as provided by our national partners at GIIN.) We are even seeing the emergence of ETFs that aim to tackle one or more of the United Nation’s Sustainable Development Goals. If you’re looking for opportunities for more direct investment, you may already have valuable connections at your disposal. Some organizations want to align with their areas of grantmaking focus. Others want to invest in traditionally under-represented entrepreneurs or fund managers. Others want to invest in their local community.  

Place-based funders may want to connect with their local government leaders as another resource for sourcing deals. Municipalities often have a plan – a “wish list” – for their community that could be examined for impact investing opportunities, such as financing the construction of a community center or playground.   

Our colleagues with Mission Investors Exchange maintain an excellent national resource of impact funds, including funds investing in BIPOC (Black, Indigenous and People of Color) entrepreneurs.  

Once you identify your impact theme, you can then determine your budget (the amount to invest and transaction costs). This step is often a challenge because the transaction costs for a relatively small investment transaction and a large one are nearly identical. Nonetheless, as an organization just getting started, it may be best to start small. And just because your investment is small doesn’t mean that the deal itself has to be small – you can utilize your organization’s connections and convening power to bring together other potential funders around a larger-scale project that would be beneficial to the community. Also, don’t underestimate the power of combining donations with loans to maximize the dollars raised for any particular project.  

In all cases, be smart about public perception and avoid even the appearance of impropriety and conflicts of interest. If a family member of your organization’s president is the project owner, for example, any positive social impact will quickly be overshadowed by negative press.  

In our next blog, we’ll discuss what happens after you’ve identified the deal you want to pursue and help to demystify the investment process.  

Want more? 

Learn about place-based impact investing from MIE. 

Interested in the Michigan Impact Investing Hub? Click here to access a brief online form to indicate your interest in participating in the Hub. The CMF team will reach out in follow-up with more information to get you started! 

If you don’t know where to begin, please reach out to the CMF team and we will do our best to connect you with the resources you need.  

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Jennifer Miller Oertel is CMF's Impact Investing Expert-in-Residence and a shareholder in the law firm of Bodman PLC, where she leads the firm’s Tax-exempt Organizations and Impact Investing Group.  With a background in securities law, private equity and mergers & acquisitions, Jennifer utilizes her corporate law and governance skills to assist family and corporate foundations, community foundations, public charities, regional associations, trade and labor associations, chambers of commerce, religious organizations and other tax-exempt organizations as well as impact investors, impact funds, and social enterprises, in all aspects of their business.