GIIN: Please outline Annie E. Casey Foundation's impact investment approach.

CV: The Casey Foundation allocates a portion of its endowment to make social investments. We started at $20 million and increased to $100 million in 2004, and just a few months ago, increased to $125 million, which correlates with about five percent of the total endowment. This investment allocation is separate from the five percent of the endowment that is given as grants each year. Out of our social investment allocation, we can make both program-related investments as well as mission-related investments. Today, we manage about two dozen investments, and this will be growing over the next few years to around 40 investments. These investments can be in just about any asset class. Generally, we make debt and equity investments. We also have a small mission-related cash deposits program.

GIIN: What are program-related and mission-related investments?

CV: At the Casey Foundation, they are in many ways the same. The criteria are the same, the social expectations are the same. The only difference is the expectation for financial return.

Program-related investment (PRI) is a designation from the Internal Revenue Service (IRS) that applies only to private foundations, and allows us to make investments where financial return is not the primary purpose of making the investment. So, on a risk-adjusted basis, PRIs tend to be below market rate for their asset class. With PRIs, we have to show that they're being used for a charitable purpose, that the charitable purpose is the primary reason for making them, and that the financial return is not a primary motivation.

Mission-related investment (MRI) is not legally defined. At the Casey Foundation, we expect MRIs to earn market-rate return based on asset class, and to meet social expectations. In the case of MRIs, the financial and the social returns are equal in our decision to make the investment.

GIIN: Do the social goals of your investments overlap with the goals of the Foundation's grant-making programs?

CV: Yes. All of our social investments require a sponsoring program officer. The program officer, who is also responsible for grant making in a particular area, identifies an approach or sometimes a specific project that would benefit from investment capital. We rely on the program officer to provide the rationale for how a social investment will further that particular grant-making strategy. So, regardless of whether the investment will be below-market or market rate, we have to see a very clear link to our grant-making programs in order to consider the investment.

GIIN: What criteria do you evaluate to determine whether a project is a good candidate for investment?

CV: That's pretty clear for us. First, we have to have the program fit - that's key. Second, we look at whether there is a revenue stream to repay investment. The Casey Foundation's mission is to improve outcomes for vulnerable kids and families. Some of the work that we do - like supporting public policy, advocacy, or community organizing - is not particularly suited to investment because it doesn't generate revenue. Other aspects of our mission are actually quite suited for investment. For example, affordable housing development has a revenue stream when homes are sold or rented. Similarly, companies that create jobs as they grow can repay an investment through profits.

We also look at everything a traditional investor would, including the management team, track record, business plan, financial projections, etc.

GIIN: How much larger are your social investments than your grants, and why?

CV: Our average grant size is $72,000 and our average social investment is about $1 million. This is because the investment process requires more work than grant making. We underwrite both grants and investments programmatically. But for investments, we also look at the business and financial aspects as well. That's a much longer process, and it requires legal documentation beyond our standard grant letter. Because of these transaction costs, we have a minimum investment size of $250,000.

GIIN: Does the Casey Foundation do any social investing that falls outside of the Foundation's specific program areas?

CV: Yes, we make investments out of the rest of the endowment - not from the $125 million social investments budget - that have positive social values but fall outside of the Casey Foundation's specific mission. For example, the Foundation invests with Generation Global Equity and Climate Solutions that focus on environmental sustainability.

Here's another interesting example. We made an investment out of the social investment allocation in an equity fund that was creating jobs in the San Francisco Bay area, which was aligned with our grant-making programs that support families in Oakland. The fund has done very well. But, when they started to raise a second fund to create jobs throughout California statewide, the second fund was not related closely enough to the Casey Foundation's programs to justify a social investment. Instead, the trustees decided to invest in the second fund out of the non-social part of the endowment. Though we don't have a formally designed program, I think we're going to see a lot more of these opportunities.

GIIN: How do you measure the success of your investments?

CV: With our social investments, we look to achieve impact, influence, and leverage, just as we do with our grants. We rely on our program staff to identify the social outcomes that we ask our investee organizations to report. These may be things like a particular number of charter school desks financed, a number of jobs created, a percentage of those new jobs that are entry-level, or what kinds of benefits the portfolio company offers. We also track the leverage and co-investment that result from our deals. To date, the $62 million we have committed has leveraged $325 million in co-investment. We have also made three loan guarantees that have generated $114 million in loans from other investors.

GIIN: Have your investments met your financial expectations?

CV: We have had a very strong performance. Our financial returns are in the low single digits, but they have been consistent with very little volatility. Even when everything else lost significant value in 2008, our investments had a positive return.

GIIN: Do you think these financial gains are related to the investments' social mission?

CV: I do think they have done well because of their social mission. We invest mainly in Community Development Financial Institutions (CDFIs), which were created for the social purpose of filling financial gaps that aren't reached by mainstream capital markets. They make the challenging investments that others won't and provide the hands-on technical assistance necessary for projects to be successful. Project success means that communities are well-served and that investors get repaid. I think their strong performance is a function of what these organizations do. While no one was immune from the recession, our CDFI investees all managed their organizations well, and they're all coming out of it in good shape.

GIIN: How have your investments performed socially?

CV: Overall, performance has been good. We have increased our commitment on some investments and extended the period of time for others so that the CDFIs could continue to recycle the funds and deploy more capital. We also have a few investments that have struggled deploying capital. This isn't necessarily due to poor performance and often reflects capacity limitations among potential end-users, or changes in local policies or economic trends that make it more difficult to deploy capital on the ground.

GIIN: What challenges do you face as an impact investor at a foundation?

CV: In line with the Casey Foundation's mission, our social investments must have very direct benefits to certain populations of kids and families in the U.S. Sometimes it is hard to find investment opportunities that are a programmatic bull's eye, particularly on the market-rate side. Social investors perhaps need to be a little more flexible on social goals they consider for investment. For example, two foundations may both care about inner-city communities but have different targeted geographies; are we going to be flexible enough to invest in each other's projects, or are we going to be so fixated on our own programs that we'll never find co-investment opportunities that can leverage even more capital?

Also, because we are often creating and customizing our own investments, every deal is a one-off transaction, which means we get no benefits of scale. Each deal has different partners, different expected use of proceeds, and different programmatic goals. That makes it more difficult than traditional investing.

GIIN: What role do you see as most important for foundations to play in the growing the impact investing industry?

CV: We make investments to help make markets work, and to show the traditional capital markets that you can invest in East Baltimore, or in low-income communities in San Antonio, for example. In the beginning, the role for foundations is to build credibility and help prove concepts. The next stage might be to offer enhancements for mainstream investors who otherwise wouldn't make these investments. We try to get investors involved who wouldn't normally come in to these transactions, and then prove that mainstream markets can work in these areas. Foundations can also play an important role by maintaining the focus on the social return throughout.