Pioneer Watch: Heron's Big Shift to Investing Is Moving Along. Where's the Money Going?

The F.B. Heron Foundation is way out front on impact investing, with its goal of putting the foundation’s full endowment into social impact investments by 2017.

So how's it going? Well, we won't know the real answer to that question until the foundation has a fix on the returns from its investments, which may take years. 

But in terms of actually moving the money to impact investments, things are on track. Clara Miller, Heron's president, recently told Crain's that 63 percent of foundation funds would be in social investments by the end of the year and Heron should meet its goal of 100 percent within the next three years. Miller said she works with a team of consultants to invest in both public and private companies.

And although Heron technically operates under the legal and financial structure of a private foundation, it uniquely merged its investment and its grantmaking operations into a single Capital Deployment office.

"Public foundations have a duty to employ all their assets for their mission," said Miller.

So where are Heron's investments going? You can see the full list here, and it makes for interesting reading. While a few investments have taken the form of capital grants, many have gone to private equity firms investing in ventures with some kind of social good. The purpose of one investment, to SJF Ventures, is described this way:

Limited Partnership interest in community development venture fund seeking job creation opportunities for low-wealth individuals and communities, and a growth equity fund focused on US companies in clean technology and tech-enhanced service sectors

Heron has also deployed a fair amount of capital to lending institutions. For example, it's invested funds in the Rural Community Assistance Corporation which makes "loans to nonprofit housing development, rural water projects, as well as day care and health centers." Heron has put capital into other entities lending to low-income people starting businesses or buying homes. It's also put a lot of cash into nonprofit credit unions.

A common thread in these investments is the hope that Heron money can help stimulate economic growth and create jobs, which Miller sees as a key to reducing poverty. 

It will be interesting to see how all these investments pan out, and how returns will compare to Heron's earlier, more conventional investing strategy (which averaged out to 11 percent over the past five years, according to Miller.)

Scanning the kinds of investments Heron is making, some of which are quite long-term in nature, it would seem that one initial challenge for the foundation will be getting a clear fix on annual returns and budgeting for grantmaking. Over time, things will smooth out, but the early years of this new strategy could be financially murky. 

One thing is certain: Lots of people will be watching closely. If Heron's investments tank, that could be a setback for the impact investing movement—and vice versa if they soar.

The foundation has around $300 million in assets, so Clara Miller is playing with a sizeable stack of chips. And beyond fretting about her own bets, she must feel quite a burden of responsibility, given the larger stakes here as Heron switches gears.

Miller's boldness is particularly striking in comparison to the baby steps of other funders. For example, McKnight got a lot of attention recently when it announced it would commit 10 percent of its $2 billion endowment to impact investment strategies. This move instantly made McKnight a leader among large foundations; that demonstrates just how far ahead Heron is. 

Related - Go Big, But Go Slow: How McKnight is Approaching Impact Investing

But radical as Heron may seem now, our prediction is that one day, their strategy will seem perfectly normal, if not expected. As IP editor David Callahan wrote in the post on McKnight:

Years from now, we may shake our heads in wonder at foundations that didn’t bother to put their endowments to work to improve the world and instead invested in whatever would make them a steady buck, including companies doing bad stuff. Duh, we’ll think.

So, yes, today the reaction to Heron is "wow." Tomorrow the word may be "duh" with regard to those foundations that didn't get on board sooner with impact investing. 

I know, we're sounding awfully optimistic, given that even some climate funders still won't get rid of their fossil fuel stocks (including McKnight). But trends that make a ton of sense have a way of speeding up, and fast. Mark our words. 

Related - Falling Dominoes: Why More Large Foundations Will Divest From Fossil Fuels