Investment Strategy Summary
Our Investment strategy is built on these core assumptions:
The first and most fundamental challenge to helping people help themselves out of poverty is lack of reliable work for pay. Employment is no longer a ready opportunity for which people need only to overcome some barriers whether natural or artificial to enjoy increasing prosperity. Reliable employment and the income that comes with it are increasingly scarce and erratic. An economy capable of offering a job to every willing worker, or at least to every household as well as a workforce capable of seizing the available opportunities is a fundamental prerequisite to achieving most other societal aspirations. We plan to invest in the building-blocks of that economy.
A corollary challenge is assuring that economic and technological innovation includes and enriches people and communities in poverty. We believe that the tacit assumption that our society must go backward economically and socially to compete in a global economy is mistaken. Technological and social innovation will change the nature of work, community, opportunity and philanthropy. New kinds of enterprises are being created and as the mainstream evolves from the past to the future, we will look for models of innovation that share future value with those now unserved. Our goal will be identifying and helping to nurture economically inclusive enterprises in the 'new' economy.
We are investing in a better economy, thus everything at our disposal is now a mission-critical resource. We plan to invest 100 percent of our endowment as well as other forms of capital for mission. Philanthropy's financial tool kit should include every investment instrument, all asset classes and all enterprise types. Endowments provide investable capital for fostering businesses, industries, and nonprofit organizations that may have the wherewithal to help in overcoming the new economic challenges. Philanthropy's collective talents and influence provide valuable intellectual and social capital, alongside its money. These will all be needed for the pursuit of goals that are, admittedly, much bigger than those we have pursued in the past. Accordingly, the use of all our financial capital, along with the intellectual resources of our Trustees, staff, financial managers, and strategic allies, are in play for mission.
How We Will Invest
The urgency and size of the problems we face require that we work differently. We aim to become a living laboratory of "the foundation as enterprise," operating to deploy maximum capital for maximum mission, with finding co-investors an indispensable element of success. For most of our history, the F.B. Heron Foundation has sought and tested effective approaches to deploying more of our capital for mission. That principle is unchanged in our current plans. If anything, we are redoubling our commitment to it in the following ways:
- We will invest the full spectrum of our capital (100 percent of our endowment) through a single capital deployment office, removing the traditional foundation's operating distinction between investments and grantmaking.
- We will engage with both social and business enterprises as a capital investor, dedicated to the viability and mission productivity of organizations and their business engines, regardless of legal form of business or tax status.
- We will seek opportunities to become a joint investor with others, including individuals, banks, government, foundations and businesses.
- We will redouble our determination to promote the simplified sharing of data, methods, underwriting, and research with others (and to borrow theirs) to reduce transaction costs for ourselves and others, improve efficiency for our investees and generally promote better-functioning, more efficient, and more productive "enterprise investing" relevant to our mission.
Investment Criteria Summary
We will seek financial capital investment and co-investment opportunities in enterprises that will:
- increase and maintain reliable employment;
- advance systemic innovations that will help individuals and communities succeed despite changes in the nature of work and a volatile environment; and
- result in net positive contributions to society's shared capital.
We are less interested in an investee's tax status (e.g. non-profit, for-profit, cooperative, etc.) or industry than the results of the investee with respect to the above.
Our investment stance is to allocate financial capital (whether in the form of purchases of shares of public companies, participating in private equity funds or related opportunities, providing debt directly, through bond purchases or through syndications and participations, or providing direct or participating grants) with an equity-holder's ethic, i.e. investing in the lasting improvement of delivery platforms of the enterprises that deliver mission results. For the most part, we will seek opportunities to invest in established enterprises with a proven track record of job creation, systemic innovation, and contribution to society's capital. Therefore, early-stage or start-up investments will be exceptions to our investment policy.
After we have identified a mission match (job creation, innovation, or contribution to society's capital), we will seek to understand "what difference does money make for this enterprise?" As a financial investor, we will look primarily at the financial argument from investees and engage primarily with investees around how capital is likely to make a difference for their ability to deliver results long-term, how capital will help them reach sustainability, and (where pertinent) how debt can be repaid. Capital investment will most commonly be used to support growth, but it could also be used to support a spin-off or a change in business model or other non-growth uses of capital that will improve, preserve or sustain an enterprise and thus the mission. In all of our investments we will look for a track record of positive social and financial returns.
Our Primary Investment Tools
Our investments are deployed in two primary ways:
- Capital Investments
- Philanthropic Contracts
Heron uses a number of different tools and vehicles to deploy financial capital. These include:
- Philanthropic Equity Grants (non-returning to Heron; for Growth or Change Capital)
- Program-Related Investments (debt and equity)
- Bonds and other market rate fixed income securities
- Private Equity
- Public Equity
For capital investments, we review:
- Stage of growth We rarely invest capital at a start-up or proof of concept phase. Most investees, therefore, must demonstrate that they have established, reliable revenue and three or more years of documented mission and financial results, including audited financials.
- Return of capital will the proposed investment return capital and revenue to Heron? If so, at what rate and on what schedule and terms? If no financial return to Heron is contemplated, will a proposed philanthropic equity investment provide financial returns to the investee? A potential investee must document a realistic timetable and revenue projections for reaching enterprise-level sustainability.
- Operating reliability (mainly for direct investment in companies) does the potential investee have a track record of successful operations, a well-articulated mission and strategy, a market assessment, a current business plan and a well-articulated financial model? Does the financial model clearly identify fixed vs. variable costs and a contingency plan if growth targets are not met?
- Readiness to raise capital either returning or non-returning (a philanthropic capital campaign) and are potential investors committed to providing support on an equity or revenue basis ("build" vs. "buy")?
Even before underwriting, a decision to proceed with a good candidate must clear a number of hurdles. The first is, very simply, availability of funds to invest. The second is balance with the rest of the portfolio with respect to return, risk, geography, industry and similar potential concentrations. A third consideration is whether our timing and the timing of the investment opportunity are likely to mesh.
Philanthropic contracts are expected to be a smaller percentage of the Foundation's charitable distributions and will largely support research and field-building activities. These philanthropic contracts will be to organizations that can help show the way to expand or improve employment, contribute to society's capital, or build the practice of philanthropic equity or the foundation as an enterprise. We view these as contracts for discrete deliverables delivered within a particular period. Heron will no longer provide ongoing revenue support for organizations.