Investing Billions - E48: The Ford Foundation on Returning 28% CAGR While Improving Society

Starting point is 00:00:00 I've been talking about a concept called patriotic capitalism. I spent a lot of time talking with Professor Bob Eccles, who's just a brilliant man who's been a tenured Harvard Business School professor. He's now a professor at Oxford. He just published a few interviews. And the point of patriotic capitalism is the idea that investing in a way that prioritizes country, democracy, and the common good is the way to advance the human welfare through shared prosperity. And I can't repeat enough that being more fair in a capitalist system is good for everyone. There will be winners and losers, but the point is fair access to opportunity.

Starting point is 00:00:47 For more ideas on how to raise venture capital in this market, make sure to subscribe below. Well, Roy Swan and Christine Looney, I've been very excited to chat ever since our friend Akar from Fairview made the introduction. Welcome to the 10X Capital Podcast. Roy and Christine, you work on the Ford Foundation's Mission Investments team,

Starting point is 00:01:02 which was created by your president, Darren Walker, back in 2017. Christine, tell me about the mandate of the mission investments team. Yeah, no, I'll be happy to. And we're very excited to be here, David, and congratulations for being the number one show for LPs. That's amazing. And Roy and I will kind of tag team. We're not in the same room, but work together very closely. To start, Ford is a global philanthropy. We're focused on a very ambitious goal of reducing inequality. And we have the very lucky roles, not only to work at Ford, but also to work on the mission investments team, which is really thinking about the role investment capital can play in contributing to Ford's mission.

Starting point is 00:01:39 We do that through investing off of our balance sheet, but also as field builders, really trying to encourage others to invest more responsibly and businesses to operate more responsibly. You guys are, for lack of a better word, the Sequoia Foundations. I know you also have a history with Sequoia, the firm itself, but can you break down the themes? How do you classify your investments versus impact versus not? Our team is really looking to accomplish both.

Starting point is 00:02:04 We want to accomplish impact and we want financial returns. And we designed strategies based on, I'd say, large social issues or problems that we're trying to address with the investment capital, but also where we think we can generate strong returns on a risk-adjusted basis. We have about five themes we invest in. Three focus on the U.S. market, two outside of the U.S. in the global south, which for us means Africa, South and Southeast Asia and Latin America.

Starting point is 00:02:34 Themes include affordable housing, where our strategy is focused on the preservation of multifamily affordable rental housing, really responding to the fact that millions of people in the U.S. lack access to safe and affordable housing. We have a focus on supporting diverse fund managers where we are responding to the inequality that exists in the market, where women and people of color really only represent 1.4% of the over 80 trillion in assets under management. And so there we are seeking diversity in terms of the management teams we are backing.

Starting point is 00:03:09 We have a strategy focused on improving job conditions for workers in the United States. Worker job quality is declining and has been over the last several decades. And our strategy is to work with fund managers to invest in companies where we're both investing in employee as well as generating really strong operational efficiency. So it's a win-win in terms of employee benefits and bottom line improvements. And then we have two strategies focused outside of the United States. One focused on financial inclusion. This is largely looking at the role technology can play in improving access to financial services for low-income consumers. And then we have a strategy focused on supporting global health, also largely focused on the role technology can play.

Starting point is 00:03:54 You're about six years into your 10-year mandate. Your president wrote a few years back that the strategy was achieving compound interest rate of 28%. I think that would be top quartile, if not top decile venture, while also making a lot of impact. How do you quantify your impact? Let me first, with all due humility, say that the 28% figure, that's not an apples and apples comparison

Starting point is 00:04:18 with other endowments. It's mostly because we are, I guess, roughly 99% private markets. We don't have the responsibility to manage liquidity, which is managed by our traditional endowments. Impact measurements, it's kind of a cottage the problem and how is our capital addressing the problem in a way that also generates the appropriate risk-adjusted rates of return. So this example is in the multifamily affordable rental housing. That is a theme that addresses the enormous mismatch between supply and demand for affordable housing units.

Starting point is 00:05:08 Depending upon what source you use, there's anywhere from 7 million to as many as 15 million units shortage. So our impact metric is how many units of housing are we preserving or developing with our capital. In the world of diverse fund managers, as Christine mentioned that statistic, 1.4% of all assets under management in the U.S., $80 trillion, 1.4% of that controlled by a group of people who represent 70% of the population. In my personal opinion, all social problems faced, particularly among racial groups, Black folks, is due to that lack of access to capital. Because there's a domino effect. Not only do white men have the majority of capital, well, 98.6% of it, statistics also show that they have a tendency to invest in other white men.

Starting point is 00:06:03 This is not opinion. This is literal statistics. Our portfolio is 65% women and people of color allocation. So it's 1.4% versus 65%. Is that your form of leverage, basically, by backing diverse managers? They almost naturally are, by de facto, back diverse founders. It's a both-and. So again, the problem that we're addressing

Starting point is 00:06:26 is the destructive imbalance of capital, which by the way, is hurting not just black people, not just, it's hurting the whole country. There's all these statistics. One is since 1990, the US economy has lost $50 trillion because of the cost of maintaining the barriers to access to capital and the opportunity that has not been unleashed because there's no capital. There's research that shows that in just five years, trillions could be unleashed in the U.S. economy from the U.S. Small Business Administration, which has a very large private equity portfolio. So their statistics show that if you were to define fairness by how diverse your investment decisions are, Black fund managers are the fairest because they have the most diverse portfolios. It's more likely that

Starting point is 00:07:26 a Black investor will invest in white men, white women, women of color, Black men, Latinx, Asian. So we find that really compelling given our mandate is to address the root causes and consequences of inequality in all its forms. We'll continue our interview in a moment after a word from our sponsor. Most businesses use up to 16 tools to hire, manage, and pay their workforce. But there's one platform that's replaced them all. That's Deal, D-E-E-L.

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Starting point is 00:08:20 Click the link in the show notes below to book a free no strings attached demo with deal today. And Christine, I think we spoke offline. Your goal is not only to back diverse managers who are backing diverse founders and representative of the entire population. You're also hoping to be an example for other foundations. You're seen as a leader of foundations. Tell me a little bit about that. We benefited when we received our board approval to allocate this billion dollars from several other foundations who were out in front on using their endowment for impact before us.

Starting point is 00:08:54 So I need to kind of recognize them. I'll shout out a couple, but I'm missing many, but I'll say Karen was by far the first out and has done- We've got to call out Clara Miller specifically, don't we? We've got to give Clara the shout out. And in breaking news, the California endowment this week just announced that it's going 100% with its endowment. So we're incredibly excited for them and to have a partner kind of foundation on this journey with us. So yeah,

Starting point is 00:09:26 we are actively allocating. Nathan Cummings, right? Nathan Cummings. You got to give Ray Ramsey a shout out there. McKnight. There's so many. Yeah, there are many, but we want there to be more. And I think amazing network organizations like the Mission Investors Exchange, the Global Impact Investing Network, both of which are grantees of the Ford Foundation, are also actively working to educate the market and help others kind of come in and start doing this at a greater scale. How do you make the tradeoff between the incremental amount of financial return versus the incremental amount of impact? How do you balance those two factors? In a perfect world, our strategies are reinforcing each other. So the greater financial return is matched with the greater social impact. Roy was sharing a little bit about affordable housing, but I think it's a nice example to share on how these two things work. So we've got a big

Starting point is 00:10:21 problem in the U.S. market. Over about half of U.S. renters are rent burdened. And the supply of housing for these rent burdened families is de minimis and shrinking. So we have a major supply demand mismatch, which is good from an investment perspective, but bad from the impact perspective. So our strategy is really around preservation of the affordable housing stock that exists. Because there's such a demand supply mismatch, these buildings, these properties have very, very high occupancy rates. There's quite a bit of subsidy in place, which provides some stability from a revenue perspective in terms of the rental income that comes in.

Starting point is 00:11:00 And because of the market dynamics, it's a kind of pro and counter cyclical strategy where even in down markets and nothing's recession resistant. My family came to the U.S. when I was four years old. We were refugees from Russia. So we spent a couple of years in Section 8 housing, not the brightest years of my childhood. So I totally understand the pain there. Roy, congrats, by the way, being named as advisory board to Church of England. That's pretty wild. Tell me about that initiative and how are you helping the Church of England? It's another example of how the Ford Foundation, because of our long history, we come to the attention of many people.

Starting point is 00:11:37 We're also, we do our best to be very transparent. Christine and I have spoken with hundreds of people, spending as much time as we possibly can, sharing our successes and failures. I'm just trying to give good advice. I mean, we've spoken with everyone from out of the Temasek to family offices in the U.S., public pension funds, et cetera. And that's how I think the church commissioners for England came across the Ford Foundation in my name. I was stunned when I heard about the initiative that they had undertaken. The Church of England decided that after hundreds of years, it was time to throw off the yoke of sin and immorality that it had been carrying as a result of its initial sponsorship of the transatlantic chattel slave trade.

Starting point is 00:12:33 They went through a deep forensic accounting exercise. They figured out ship investment transactions, investment in South Sea Company, slave trading transactions, and decided that they needed to acknowledge their role and the brutality and dehumanization. They apologized and they've created a symbolic, what I call a symbolic pool of capital. It's a hundred million British pounds, which is a small drop in the bucket compared with the costs to humanity and the wealth extracted over the centuries. But I'm not criticizing that. I am applauding and I'm grateful for the willingness to acknowledge, embrace, accept opportunity and to realize that the passage of time, rather than give a reason to or excuse to

Starting point is 00:13:20 forget, it's had a negative compounding effect on those, the Black descendants whose wealth was stripped. And it goes a long way to explaining the massive Black-white wealth inequality. In the U.S. alone, there's a $15 trillion difference in wealth between White and Black average family. It was a great opportunity to engage with 14 other members of the oversight group. And we were given the mandate to tell the church commissioners for England how to deploy this capital. It'll be both grant money. It'll look sort of like a foundation. The goal is to be perpetual. And as far as I'm concerned, the most important element of this is to encourage others to join. And so very excited about this.

Starting point is 00:14:08 I consider this to be the most important project of my life because I see the great benefits it can bring to the world, not just to the Black community. This is about unleashing economic value, stability to the world. There is return on investment that's possible here. So that's the story. Couldn't be prouder. Let's say we made you CEO of the United States of America or the president, if the president had more power, what would you do as a president of the United States in order to help with inequality and bring more prosperity into the country? And I've been talking about a concept called

Starting point is 00:14:39 patriotic capitalism. I spent a lot of time talking with Professor Bob Eccles, who's just a brilliant man who's been a tenured Harvard Business School professor. He's now a professor at Oxford. He just published a few interviews. And the point of patriotic capitalism is the idea that investing in a way that prioritizes country, democracy, and the common good is the way to advance the human welfare through shared prosperity. And I can't repeat enough that being more fair in a capitalist system is good for everyone. There will be winners and losers, but the point is fair access to opportunity, which, by the way, is in the spirit of the person that we consider to be the god of capitalism. That's Adam Smith. If you read Adam Smith's works, he talked about

Starting point is 00:15:31 the necessity of morality, appropriate taxation, appropriate regulation as being critical to the sustainability of any healthy economy. And also critical for sustained democracy as well. Roy and Christine, thank you for taking the time to jump on the podcast. What would you like our listenerships? We have LPs, we have general partners, we have a very influential listenership. What would you like them to know about yourself or about Ford Foundation or anything else you'd like to shine a light on? I would like people to explore the notion of unconventional thinking and to second guess their initial assumptions. One thing we've learned is that there are many who come to the automatic conclusion

Starting point is 00:16:16 that the word impact means less than. So there's no way to make market rate returns if you're also trying to achieve positive impact. We disagree with that. We think it might be harder because whenever you do something that's unconventional, not only are you battling against the idea to go along with the herd, but you also have a narrower universe of investment possibilities. That's harder, but we believe it's worth the time.

Starting point is 00:16:44 We would just hope that people would start to question some of their automatic assumptions. We'll get right back to the interview, but first to stay updated on all things emerging managers and limited partners, including the very latest data on venture returns and insights on how to raise capital from limited partners, subscribe to our free newsletter

Starting point is 00:17:02 at 10xcapitalpodcast.com. That's www.10xcapitalpodcast.com. That's www.10xcapitalpodcast.com. Does that help you in recruiting? You get the right people for the Ford Foundation. Talk to me a little bit about recruiting for the Ford Foundation. We have a current job posting on our team. We received like in a very short period of time, over 500 like applications. We're incredibly lucky to have people who really want to do this work, who are incredibly values aligned, really passionate, really curious, and want to be part of this movement and opportunity. I think it's not a talent issue. We see tons of people. Roy

Starting point is 00:17:38 and I have both been in this market for a while. I think what's been incredibly exciting is the amount of new roles that are opening for people really interested in this. We're moving from traditional finance into a more values aligned investment strategy. Well, Roy and Christine, you guys are on the spear of an important movement. I really appreciate you taking the time. I know you guys are in New York City, so there's no excuse not to meet up and grab coffee or lunch very soon. Thanks for jumping on the podcast and hope to see you soon. Thanks for having us.

Investing Billions - E48: The Ford Foundation on Returning 28% CAGR While Improving Society

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