Foundations, philanthropists, and impact investors have crucial roles to play in responding to the COVID-19 emergency and helping to build resiliency for communities across our country and around the world. The Arabella team has already shared guidance on moving forward together and essential questions funders should be asking now. We believe there are also important opportunities to adjust and increase impact investment activity, both to complement purely philanthropic initiatives and to respond to the needs of communities most acutely impacted by this pandemic.
At this time of uncertainty and worry, investors, foundations, and philanthropists should squarely focus their efforts to accomplish three goals: maximizing the impact of their investment portfolios to mitigate what could be a severely economically distressed period; achieving significant financial and impact returns; and laying the groundwork for a resilient, equitable future economy. Emerging best practices in philanthropy for responding to COVID-19 suggest that donors should reallocate grant funds to general operating support, be flexible with grantees on reporting requirements, and increase giving quickly to meet the growing and evolving needs of their nonprofit partners. Many traditional fundamentals of a strong impact investing program—such as conducting thorough due diligence, developing a comprehensive understanding of risk, and setting clear expectations for returns—would appear to run counter to this guidance. As impact investors consider how to respond to the COVID-19 crisis, we suggest a balance between the traditional strategy and the new, no-holds-barred approach: we see opportunities to leverage existing due diligence and established intermediaries while quickly meeting urgent capital needs through flexible investment structures and streamlined processes.
As the COVID-19 crisis has evolved, we have been in touch with clients and partners—including an engaging discussion with the Mission Investors Exchange on Twitter—about how impact investors can be responsive to emerging field needs while maintaining and expanding support for existing investees, all with an eye toward creating more sustainable social and economic systems in the future. Our insights suggest impact investors should do the following.
Assess how you can best support your investees. If you haven’t done so already, get in touch with the companies and/or investments in your portfolio to better understand how the evolving situation impacts their businesses. Reassure investees that you will continue to be a source of patient and flexible capital and are open to adjusting investment terms and deploying new resources to help them manage in uncertain market conditions. For example, you can:
- Delay interest payments and postpone loan maturities. For debt investments, extend loan periods or temporarily waive interest payments to help investees manage cash flow and build reserves for short-term challenges.
- Help investees access capital through guarantees. Investor guarantees can strengthen investee balance sheets, improving an organization’s risk profile to unlock commercial capital.
- Provide capital through bridge loans. On top of existing debt and equity investments, bridge loans can help investees maintain operational processes such as by purchasing inventory and making payroll during difficult times.
As a first step, complete this survey for mapping response funders, which was created by Acumen, Open Road Alliance, and USAID, to share your plans for providing flexible, responsive funding.
Look for new opportunities. Times of uncertainty and crisis also create new opportunities for investors to make an impact with their capital. The necessity of finding solutions to a crisis (in this case, developing a vaccine, creating continuous access to healthy food in under-resourced communities, or strengthening capital supports for small businesses) can be a catalyst for change in your investment strategy. Institutional investors may be pulling back from capital markets due to economic uncertainty, opening the door for impact investors to meet urgent and growing capital needs. For example, you could:
- Invest in experience. Investors can provide critical resources to reliable investment intermediaries such as Community Development Financial Institutions (CDFIs) and Community Development Loan Funds (CDLFs), which have experience quickly and effectively deploying capital for social good and economic development in communities across the country. Find the community development lenders working in your community through the Opportunity Finance Center’s CDFI locator tool here.
- Prepare to fund innovative businesses. The COVID-19 crisis is sure to spark innovative, entrepreneurial ideas for building sustainable infrastructure and scalable health services, and investors should be prepared to fuel this next generation of impact enterprises. Watch for accelerators and investment networks ready to launch and scale these solutions. SOCAP has compiled resources for social enterprises here, including early examples of ways to support startups tackling the coronavirus crisis, such as WeFunder’s Pandemic Fund.
Pay close attention to equitable practices. Under-resourced communities are those most in need right now, and even in normal times are less likely to attract investment capital. Pay attention to and track the demographics of investees—particularly women and people of color—and the communities they serve. Make sure you are funding a diverse set of entrepreneurs to help build an economy for all.
Emergency response to health care, food access, wage subsidy, and other immediate needs may be best addressed by rapid-response philanthropy, while flexible investments in community development and emerging innovation can bridge capital gaps now and help rebuild a sustainable economy over time. Impact investors have a variety of funding tools to put to work in different ways during and in the wake of the COVID-19 pandemic, and we believe many savvy impact investors will use both grants and investments in concert, adjusting their approaches for each to serve current field needs and achieve ongoing impact.
If you have other ideas or suggestions for impact investors engaging in COVID-19 response efforts, please contact us here.
About the Authors:
Alexandra LaForge is a director on Arabella’s Advisory team. Working out of the firm’s San Francisco office, Alexandra works with foundations, families, and individuals who are interested in creatively deploying capital to achieve social and environmental impact as well as financial return.
Cyrus Kharas is a director on Arabella’s Advisory team. He works across a broad range of Arabella’s individual, institutional, and corporate clients, and contributes to the firm’s analysis of trends and opportunities in the impact investing field.