New investment strategies vital for nonprofits

By Todd Cohen

As economic turmoil continues to stress the charitable marketplace, new investment strategies are emerging to support the social sector.

Foundations for many years, for example, have built on their traditional grantmaking through “program-related investments,” or loans, to nonprofits.

And more recently, a small but growing number of foundations have become more active investors in the capital markets, tying their investments in the capital markets to companies that are aligned with the foundations’ mission.

Over the past 10 to 15 years, “venture philanthropy” also has become a staple of many communities, with donors applying the strategies of venture-capital investing to their philanthropic investments in nonprofits, contributing time and know-how as well as funding.

More recently, private “benefit” or “B” corporations have emerged, charged with investing their assets not only in increasing shareholder value but also in producing a social benefit.

Another recent innovation are “social-impact bonds” that raise private investment capital to fund prevention and early-intervention social programs.

The bonds are backed by government, which agrees to repay investors only if the programs improve social outcomes.

According to a recent white paper prepared by Social Finance Inc. and supported by the Rockefeller Foundation, social-impact bonds can help nonprofits expand programs that have proved effective.

Because such programs should be “evidence-based,” the paper says, the bonds could spur better metrics and data-tracking on the part of nonprofits and government, and encourage government agencies to work more closely with one another.

Fueled by funds from traditional philanthropy, the capital markets and government, the social economy is becoming a vast and complex marketplace that nonprofits need to understand and operate in if they expect to survive and make a difference.

Nonprofits and philanthropic funders alike need to pay attention to emerging investment strategies, and develop relationships and partnerships across sectors that will that will put social capital to productive use in addressing our most urgent social and global problems.