Financial Innovation Empowering Social Change
(This article was featured in the February 2022 issue of Franchise Journal)
By Rick Davis
Perhaps more than any other firm, at LOHAS, we work with a wide range of exciting impact investment funds addressing the issue of social inequity. We are honored to support ventures and private equity fund managers focused on minority wealth creation and closing the racial wealth gap.
Why is this issue of such critical importance? While there have been a variety of high-profile events that have drawn national attention to the issue of social justice in this country, on a purely economic basis, substantially improving the opportunity for economic growth and wealth creation within minority communities is essential to our nation’s future prosperity.
According to a study by the Kellogg Foundation on Racial Equity, the U.S. stands to realize an $8 trillion gain in GDP just by closing the U.S. racial equity gap. This is more than the current GDP of every country in the world except the U.S. and China. The size of the economic opportunity reflects the changing racial make-up of the country:
- The current U.S. minority population is 129 million (or 39% of the total population), and by the year 2045, is projected to be the majority.
- For youth under 18, minorities already outnumber whites; and beginning in the year 2033, minority workers in their prime working-age will outnumber their white counterparts.
The future of our economy depends upon a foundation of supporting and sustaining minority-owned businesses. There are over 10 million minority-owned businesses in this country. These businesses are growing the U.S. economy, strengthening local communities, training our next-generation workforce, contributing to job creation, and generating tax revenues. Failure to invest in them now will hamper our future workforce competitiveness, stifle innovation, and impact the economic prosperity of all American businesses.
What’s needed is financial investment in historically ignored minority-founded and managed enterprises with a goal of closing the racial wealth gap and supercharging the U.S. economy. This is not just a role for the government; it requires the full strength of the private investment and philanthropic sectors that recognize both the impact and financial opportunity of investing in these areas.
ONE INNOVATIVE SOLUTION
Let’s first acknowledge the reality that what we’ve been doing as a society, including through philanthropic channels, has not been successful. At LOHAS, because we are on the front lines of the impact investing revolution, we have identified (and are helping to enable) a new approach that we see as the “next generation of philanthropy” that combines charitable donation models with for-profit impact investing to deliver real, sustainable social change. The Endowment Commons is one of the leaders in this new drive to repurpose philanthropic funds to create minority wealth through strategic investments in minority-founded and led ventures.
For the first time there is a complete portfolio of private and public market strategies aimed at solving the racial wealth gap, and the Endowment Commons is leveraging those strategies to solve the issue of minority wealth creation in a largescale way.
What does a mission-aligned, complete portfolio solution look like? The idea is not just to invest in venture or private equity but rather to include all segments of a well-balanced portfolio that are hand-selected as best-in-class to address minority wealth creation. Capital is provided to racially diverse managers and strategies that are all professionally managed and ESG focused.
The Endowment Commons creates a sustainable marriage between finance and social impact by delivering a one-stop shop to advance minority wealth creation. Notably, the Endowment Commons model uniquely aligns both the programming and investment sides of the house around this mission. Donations either go towards the mission-aligned programs of minority-driven associations or into mission-focused funds that grow the asset pool funding the programs (creating a sustainable model of support). Every dollar contributed is directed towards the mission.
How is the Endowment Commons approach revolutionary? Setting aside the organization’s enormous vision (targeting largescale donors) and its complete investment portfolio approach (which is also unmatched), the critical difference is that the investments that the Endowment Commons is making “are the impact”. This turns the traditional model of philanthropy on its head, recognizing that directly investing in minority-owned or managed enterprises is more likely to deliver real, sustainable minority wealth creation than traditional, donation-based nonprofit models.
It is also groundbreaking to invest in a nonprofit in which fund deployment is 100% mission-aligned. How is that different than most nonprofit models? Without getting into the ugly, behind-the-scenes details of traditional nonprofits’ investment strategies, let’s just say that most nonprofit endowment investments are not “mission-aligned” and, in fact, may be contrary to that mission (e.g., a climate-focused foundation that invests in fossil fuel companies). How much better would the results be if the investments of the organization to which you’re contributing are not working against the mission but, in fact, are specifically geared towards supporting the mission?
At LOHAS, this is what we mean by the “next generation of philanthropy.” The Endowment Commons delivers maximum tax deductions to donating parties but utilizes a model that is both impactful and sustainable, and which is also designed to help finance best-of-breed programs from leading minority-focused organizations (e.g., the Black Chamber of Commerce) that are having a meaningful impact on minority wealth creation and closing the racial equity gap.
The Endowment Commons is part of a growing group of diversity-focused organizations embracing this new philanthropic model. Other impact investment funds supported by nonprofit organizations working to solve social equity issues include Ally Capital Collab (AllyCollab.com), New Community Transformation Fund (NewCommunityFund.com), AI8 Ventures (AI8ventures.com), and FVLCRUM (fvlcrum.com).
These funds are all positioned to receive investment capital from mission-aligned nonprofit organizations which recognize that “the investments are the impact”. Ally Capital Collab, for example, supports a collection of four amazing venture capital funds managed by women of color investing in companies with diverse founders/leaders; New Community Transformation Fund invests in companies owned or operated by minority business leaders in Western Michigan utilizing a place-based fund model being replicated throughout the country; AI8 Ventures has a similar diversity investment thesis with a heavy focus on the Latin American entrepreneurial community; and FVLCRUM invests in lower middle-market, minority-owned businesses to reduce the racial wealth gap and provide opportunity in underserved communities.
The widening racial wealth gap disadvantages minority families, individuals, and communities and limits their economic power and prospects; and the effects are cyclical. Focusing on solutions that create minority wealth is key to closing the racial wealth gap and catalyzing the U.S. economy in the future. At LOHAS, we believe that unleashing the unrealized potential of the minority economy will reinvigorate the U.S. and global economic systems, setting the U.S. on a trajectory to lead the global transition into a more innovative, inclusive, and sustainable future.
And while the racial wealth gap is real and counterproductive to our society, for the first time there are organizations that are taking new approaches to solve the problem by leveraging innovative financial solutions to invest directly in minority-owned and managed enterprises with the goal of generating inter-generational wealth within the minority community. Moreover, now there are ways both to invest (with financial returns) and donate (offsetting tax bills) into entities that ultimately support the same mission. We welcome these new approaches to tackling our society’s most pressing challenges by marrying the worlds of impact investment and philanthropy.
About the Author:
Rick Davis is the Managing Partner at LOHAS (LOHAS.org)