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private capital & the public good

All Things Impact for Sept 16: TPG launches $1 billion impact fund; can public equities have impact?; Clinton & Trump foundations

Brian WalshComment

Hi friends,

Welcome to All Things Impact, a newsletter of interesting things I've seen from across the spectrum of impact: responsible investing (in the public markets),  impact investing (in the private markets), effective philanthropy, and a wildcard topic. For previous posts, to subscribe, and for more information, please visit All Things Impact.

Here are four links worth your time (plus items of note, job postings, and a calendar of upcoming events):

1. Responsible Investing: can public equity investing have impact?
Mutual Fund manager Garvin Jabusch argues in Seeking Alpha against the notion that impact only happens through private investment. "An associated perception is that investment impact means capitalizing an enterprise beyond what would happen otherwise, meaning private equity alone has the power to provide real impact. But is this true?"

He goes on: 

"Publicly traded corporations are the largest and most visible social and environmental bellwethers of the global economy, and the high allocation to public equities in most investor portfolios means public equity investing is and must remain one of our key opportunities for impact. To cause a positive impact, families, institutions, and individuals can invest in public companies whose primary business activities address pressing social, economic, and environmental challenges at scale. This does not mean companies with a pretty sustainability report or that are incrementally making their operations less carbon-intensive, but firms that have made it their purpose to enable a better world with an indefinitely sustainable economy. Skipping traditional investment practices to focus on buying these companies sends the clear signals that markets do value solutions, and that markets will devalue businesses that are the leading causes of our most pressing risks. In addition, flexible, go-anywhere public equities strategies may invest in micro and small cap firms where there may be limited liquidity, and we can have meaningful impact just by being there.

Clearly, how we invest in public equities matters...

If economic history shows us nothing else, it is that innovation and better products and systems that perform better and cost less always win in the marketplace. And this is what sustainability is - innovation-led gains in efficiency that mean we can have a thriving economy while lessening our footprint on our required yet delicate earth systems. It's imperative to direct capital into the future that you in fact see coming, in part through public equity investing. That investment represents real impact and also positions your stock portfolio to grow as that future emerges and grows, supplanting the old fossil-fuels based economy.

For investors, the best Next Economy solutions simply outperform their old economy counterparts and predecessors, all while circumventing our most daunting long-term risks."


2. Impact Investing: large mainstream investor TPG launches $1 billion impact fund
The New York Times reports on what may be the largest impact fund to date: 

"TPG Growth has established itself as a boldface name in investing, with stakes in companies that include Silicon Valley darlings like Uber and Airbnb and the guitar maker Fender.

Now the business, part of the investing titan TPG, is planning to branch out into the world of so ­called social impact investing that is meant to be philanthropically and financially successful — and with operations on a big scale.

TPG Growth plans to raise money for what it will call its Rise Fund, which it hopes will eventually invest more than $1 billion, according to people with direct knowledge of the matter. The fund will involve a partnership with Elevar Equity, an investor that has backed 24 companies in seven countries...

The new fund, which has been in the works for about a year, is the latest entry into social impact investing. Most impact funds have been run by smaller investment firms, though last year Bain Capital announced that it had hired Deval Patrick, the former Massachusetts governor, to oversee what it called its Double Impact fund…

TPG Growth expects returns from the new fund to produce, at minimum, market­-rate returns...One major element of the Rise Fund is that it aspires to have rigorous metrics that quantify the social impact of its investments..."

3. Effective Philanthropy: comparing Trump's & Clinton's foundations
GuideStar CEO Jacob Harold has provided a nonpartisan examination of the available data on both the Trump Foundation (assets of $1 million and no staff) and Clinton Foundation (assets of $354 million and 486 staff).

“The Trump Foundation is legally categorized as a “private non-operating foundation” whereas the Clinton Foundation is a “public charity.” In simple terms that means the Trump Foundation is meant primarily as a vehicle for distributing grants from the Trump family fortune—although it also accepts funding from other donors. The Clinton Foundation is meant primarily as a vehicle for directly operating programs for the social good—while also making some grants to other organizations.
Despite these differences, both organizations are, in a (non-legal) sense, “celebrity foundations.” They are seeded by money donated by their founders and also serve as a vehicle for members of the public to demonstrate their support of a prominent person. At their worst, celebrity foundations are vanity projects with negligible impact. At their best, such organizations channel fragmented resources and yield extraordinary impact for society…
Transparency is not a guarantee of effectiveness—but, in general, we believe that transparency is correlated with excellence in nonprofits. Transparency indicates an openness to questions and accountability. And, importantly, the act of transparency can force an organization to be clear about its goals and strategy.
Most nonprofits—including the Trump and Clinton Foundations—are required by law to file a regulatory document with the IRS, the Form 990. The 990 provides important baseline information but does not give a full view of the nuances of nonprofit work. Accordingly, GuideStar invites nonprofits and foundations to share additional data. Approximately 128,000 have done so. Some 34,997 organizations have provided enough to get one of GuideStar’s four “transparency seals”; of those, 1,061 have earned the highest level, Platinum. The Clinton Foundation is one of them. The Trump Foundation has provided no additional information and so has not earned a transparency seal.
As a part of achieving a Platinum seal, the Clinton Foundation has provided a set of quantitative metrics about its programs. For example, one metric, “number of farmers benefitting from access to improved agricultural practices, increased yields, and enhanced market access,” rose from 66,124 in 2014 to 114,825 in 2015. Another, the “number of girls and women provided access to job skills training and livelihood support,” rose from 35,587 in 2014 to 48,696 in 2015. The fact that the Clinton Foundation provides such metrics makes it far easier for donors and citizens to meaningfully analyze the institution’s value to society.
The Trump Foundation provides no such metrics..." 

4. Wildcard Topic: have big banks gotten safer?
Writing in Money Stuff in Bloomberg, Matt Levine writes about the progress of banking reform.

Since the 2008 financial crisis, there have been two big impulses in banking reform:

  1. Banks are too risky and we need to make them less risky.
  2. Banks are bad and we need to stop them.

These are overlapping impulses, but they are different, and sometimes in conflict. If you fine banks all the time, they will have less money, and be more likely to fail. More than that, though, if you try to limit the businesses that banks are in and the profits they can make in them, and generally try to make the banks less fat and smug and more haggard and repentant, they will have less cushion to draw on in rough times. And so they'll be more likely to fail. And while their failure will be in some sense a satisfying outcome, for impulse 2, it does seem like, you know, a risk. And impulse 1 was to reduce the risks.

Anyway here is a new paper from Natasha Sarin and Larry Summers with the title "Have big banks gotten safer?" and the Betteridge-approved answer: not really. Sarin and Summers look at various measures of bank equity riskiness -- "price volatility, option-based estimates of future volatility, beta, credit default swaps, earnings-price ratios, and preferred stock yields" -- and find "little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased." They consider three possible explanations for this:

  1. "Market error": Banks were really riskier before the crisis, but the market misunderstood the risks and overvalued the banks. ("Implicitly, this is the view taken by the regulatory community.")
  2. "Bank capital mismeasurement": Banks are really risky today, and all of the regulatory measures on which they seem to be safer -- regulatory capital, etc. -- are false.
  3. "Declining franchise value": Higher capital requirements and so forth have helped make the banks safer, but on the other hand, "other developments have eroded their franchise value thus increasing their effective leverage and riskiness."

Explanation 1 is in some ways the most intuitive: When Citigroup's average pre-crisis price-to-book ratio was 2.31, that clearly reflected market expectations of a future that was very different from the one that actually obtained. But Sarin and Summers don't love it as a complete explanation: "It is easy to understand why excessive optimism about financial stability could have led to the overpricing of bank securities before the crisis. It is much less clear why it should have led to their being insufficiently volatile in response to daily news." They instead mostly opt for explanation 3, declining franchise value: Post-crisis fines, regulations, low interest rates and competition from financial technology firms have made it much less valuable to be a bank, making banks more likely to fail. "There is a possibility that by further eroding bank franchise value, further regulatory actions could actually increase systemic risk," they say.

That seems plausible to me, though I cannot let go of the market error hypothesis as easily as they do. (I mean, there was a pretty big crash, implying some pretty big prior errors.) I also sometimes think that something you might call "bailout value" has gone away. Prior to the crisis, there was an expectation that the government would step in to keep banks afloat; now, the government has created a lot of explicit rules and implicit expectations that that support isn't there any more. People often talk about this in terms of bank debt prices, the idea being that bank debt might be impaired in a pure failure but would be made whole in a bailout. But it strikes me as an equity issue too. In the actual 2008 crisis, the Fed and Treasury bailed out Fannie Mae and Freddie Mac's creditors while more or less zeroing the equity, but they also arranged a bailout of Bear Stearns's and AIG's creditors in ways that preserved some equity value. And they arranged programs like TARP that kept other big banks afloat as going concerns, without any need to directly impair the equity. The political will for programs like that seems to be mostly gone, these days, which could make bank equity investors a lot more worried about the downside risks. I guess that's a form of declining franchise value too."

5. Items of Note

6. Job Postings

7. Upcoming Events
Sept 19 Financial Advisor - Inside Alternatives Conference (Denver, CO) Impact, Responsible Investing
Sept 26-28 Exponent Philanthropy Conference (Chicago) Effective Philanthropy
Sept 26-28 ANDE Conference (Lessburg, Virginia) Impact Investing
Oct 9-14  Opportunity Collaboration  (Cancun Yucatan) Impact Investing
Oct 17-18: African Philanthropy Forum (Rabat, Morocco) Effective Philanthropy
Oct 18  High Water Women (NYC) Impact Investing
Oct 18-20 Conscious Capitalism CEO Summit (Austin, TX) Responsible Investing
Oct 20-22 PopTech: Culture Clash (Camden, Maine)
Oct 24-26 Impact Convergence (Atlanta, GA) Impact Investing, Effective Philanthropy
Oct 27-28 Feedback Labs 2nd Annual Feedback Summit (DC) Effective Philanthropy
Nov 3-5  Net Impact (Philadelphia) Various
Nov 9-11  Sustainable, Responsible, Impact Investing (Denver) Responsible Investing
Nov 16-18 Independent Sector (DC) Philanthropy
Dec 7-8  Global Impact Investing Network (Amsterdam) Impact Investing
April 7, 2017 Wharton Social Impact Conference (Philadelphia) Impact Investing

That’s it for this week. Help me spread the word about #AllThingsImpact to your friends and colleagues, who can sign up to receive this newsletter at All Things Impact. Please also send me any job postings, items of note, upcoming events, or compelling links you discover in your own journeys across the web (even things like this bulldog puppy struggling to climb up a step). 

Until next time, thanks for reading!

Brian Walsh
Head of Impact at LiquidnetFull Bio. @brianwalsh