Fundacion Paraguaya – a beneficiary of the Cabrini Sisters' investments via Beneficial Returns
CASE STUDY:
CABRINI SISTERS
Part Two of our in depth case study of how the Missionary Sisters of the Sacred Heart of Jesus (known as the Cabrini Sisters) built an impact investing portfolio. In this article, the Sisters reflect on their key challenges and the lessons learned from their faith-consistent investing journey.
What challenges did we face?
First, we must acknowledge that there were critical areas where we did not face challenges. We did not have to convince our stakeholders that we should build an impact investment portfolio. Our governance structure allowed for the sisters themselves to make this decision and commit a portion of their investment portfolio to this effort.
And we did not have to worry whether the financial needs of our sisters would still be met with our investment returns as we have another separate pool of capital that comfortably meets those needs.
Now for the challenges – operational and strategic.
A beneficiary in Ecuador reached via MCE Social Capital. Photo: Harrison Pharamond
Operational challenges
Wanting to do everything. This is arguably a strategic challenge, but it quickly transformed to an operational challenge as we found ourselves flooded with inbound pipeline requests and were unable to effectively prioritise. Furthermore, we did not have the time and capacity to develop a deeper expertise in certain geographies or sectors, ultimately causing us to pause investing in certain areas until we could be certain our investments were positively improving the lives of those we sought to help.
Small team, limited back office support. We are a small team (one full-time plus a few part-time individuals for impact investing) without a large back office to support the accounting, IT, reporting, legal process, wiring of funds, receipt of funds, etc.
Finding outsourced partners that can meet these needs is itself a large undertaking and often required expertise we did not have. For example, it was challenging to vet an IT/software provider when no one on our team had a background to understand the nuances of certain technology solutions.
Additionally, it has been challenging for our external investment advisors to consolidate performance reporting and support in the administration of our impact investments, particularly our direct loans.
Legal support and legal risk tolerance. We have no internal General Counsel, thus we had to negotiate law firm engagement terms and also make judgment calls about how much legal risk we wanted to take for our transactions.
Lawyers often default to suggesting the most onerous legal language for our investment documents, but often this placed unequal and unfair restrictions on investees, particularly those that did not have a large corporate law firm supporting them in negotiations. As non-legal professionals, it has been difficult to strike a right balance between sufficiently protecting ourselves and approaching our investees from a place of partnership and trust.
Communication. As finance professionals, we have a specific vocabulary we use to describe an investment – risk-adjusted return, tenor, liquidity, lock-up, tranche, etc. For many of our internal stakeholders that are not finance professionals we often struggled to effectively communicate what we meant when we said an investment was “high risk” or required a blended structure.
Likewise, it was challenging for us to discern where to focus our limited bandwidth when our mandate was to broadly serve the most vulnerable members of society.
Strategic or philosophical challenges
We found ourselves wrestling with several strategic, philosophical, and operational questions, a few of which we will share below. Many of these we are still in the process of answering:
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What is a fair rate to charge considering anything paid to us is ultimately money leaving the communities we’re trying to serve?
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Given our focus on vulnerable populations, at what point are they too vulnerable and we would not be giving loans, but donations?
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How do we better incorporate the voices, perspectives and experiences of those communities we are trying to support?
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Do we seek depth or breadth of impact?
A beneficiary reached via Symbiotics REGMIFA Kenya. Photo: REGMIFA / Symbiotics
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How much do we value scale (often through traditional market rate financial returns) vs. deep transformational impact (often through below market rate financial returns)?
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Can we ever feel comfortable when a fund manager targets “high” financial returns that these financial goals won’t compete in a zero-sum way with better outcomes for the end beneficiaries?
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How do we balance the desire to enter into an equal partnership with our investees but also create a structure and legal contract that protects against certain risks?
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How do we share our learnings, diligence, pipeline, etc. to help grow the space, while ensuring it is not viewed as an investment recommendation?
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Is debt the most helpful kind of finance to our investees? Revenue share? Equity?
Where are we going next?
We now find ourselves at a natural pause and reflection point. This year we are taking the time to reflect and consider where we can focus and deepen the impact of our work. We are also considering how to improve our impact measurement, racial and gender equity lenses, and how to structure transactions that reflect better impact outcomes and a more equitable balance of power between us and the investee.
We are also considering how we can more effectively support and empower people on the move through our impact investments. Our challenge is how to serve those organisations that are too small, too early stage, too high risk to be funded by larger, more market-rate funds when we are a team with limited capacity.
We also are considering how we can free up capital that has even more flexible repayment terms so that we can offer catalytic capital – recoverable grants, first loss, etc. We hope to eventually be able to offer funding across the full capital stack, from grants to impact-first investments to market-rate investments and everything in between.
Finally, we are spending more time trying to catalyse others in the space to start or expand their impact investing portfolios by sharing what we have done. We are happy to catalyse both faith-based and secular asset owners, but we have a particular interest in helping fellow Catholic organisations do more in impact investing, thus we focus our sector building efforts primarily through the Catholic Impact Investing Collaborative (CIIC).
Experiments....
We have experimented with tying impact outcomes into the financial structure of our transactions.
For example, with NewBees, a social enterprise in the Netherlands that supports newcomers (refugees) the interest rate moves up or down depending on achievement of annual impact goals and outcomes.
With African Entrepreneur Collective we agreed to donate a portion of our interest back at the end of the loan if certain impact objectives are met.
We found our strategy, values and vision were often easier to articulate through discussing actual investment options as opposed to crafting a strategy without the context for such options.
...and inspiration
We are inspired by Morgan Simon’s book, Real Impact – The New Economics of Social Change, which presents simple, but powerful, guiding principles for impact investing:
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Engage communities in design, governance, and ownership;
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Add more value than you extract;
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Fairly balance risk and return between investors, entrepreneurs, and communities.
While these principles appear incontrovertible, unfortunately they are far too often absent from impact investment structures.
In our experience, fully embodying these principles requires a deliberate effort, one that includes constant reflection in how we, usually unintentionally and non-maliciously, replicate imbalanced power dynamics and extractive investment structures from the traditional finance world. We are guilty of this and intend to incorporate these principles more studiously in the next phase of our journey. We encourage all impact investors to read this book.
Lessons learned
While we certainly do not have all the answers, in reflecting on the last two years of our journey, we humbly share our lessons learned in hopes they may prove useful for those beginning their journey.
1. Be bold, be flexible, have faith. It is easy to feel overwhelmed by the desire to create policies, procedures, strategies, landscape surveys, and more, before you make any investments. However, our experience was that overplanning can be crippling and often lead to inaction.
We found that our strategy, values and vision were often easier to articulate through discussing actual investment options as opposed to crafting a strategy without context for such options. Throughout the process, our sisters continually encouraged us to be bold and have faith in our journey.
That said, it is important to balance boldness with a clear sense of mission goals and rigorous diligence.
Women beneficiaries in Myanmar reached via MCE Social Capital. Photo: Harrison Pharamond
We constantly reminded ourselves not to let perfect be the enemy of good. For example, our impact theory of change has been a continual work in progress. However, we needed a quantifiable way to score and compare impact across transactions, so we made a functional, but not
perfect, impact scoring tool to get us started. It has been updated and adapted along the way. Had we waited to perfect it before making an investment, we would stil be waiting to invest some money!
2. Start small, start with what you know. Our team’s background is in debt and financial inclusion; thus, we started our portfolio with community development finance institutions (CDFIs) and international loan funds. While we have capacity to invest across all asset classes and structures, we prioritised debt given the shorter tenor, lower risk profile and familiarity of the asset class to our team. Furthermore, many international financial inclusion funds have blended finance structures where there is a first loss tranche, or partial guaranty, that mitigates risk, making for an easier first step into impact investments.
These investments were low-hanging fruit that we could add to the portfolio early on. For example, we provided senior debt to the REGMIFA fund, managed by Symbiotics and focused on Africa, which is protected by a layer of subordinate capital from the development financial institutions (DFIs). Many loan funds (Blue Orchard, MicroVest, Triodos) offer monthly or quarterly liquidity which may also provide comfort as you build your portfolio.
Starting with what you know can be a double-edged sword as it mitigates risk but also excludes many promising fund managers and entrepreneurs who may not be well connected in the sector. We try to strike a balance in sourcing from our trusted networks but trying to broaden those networks to be more inclusive in our deal sourcing.
While we moved boldly, we offset this boldness by starting with a small portion of our investment portfolio. To date, no single impact investment represents more than 0.5% of our total investment portfolio. Where an investment has a higher risk profile, we mitigate risk through smaller ticket sizes and also require a high impact rating score.
We believe that while there is a need for scale and large dollar amounts, it is possible to create more transformative impact with smaller, higher risk-tolerant investments that have flexible and fair terms for the investee.
3. Build a community, reference checks are critical. Spend the time to network with other like-minded impact investors. It is incredible how helpful they will be in sharing tools, resources, deal flow, reference checks and more. Join networks such as Catholic Impact investing Collaborative (CIIC), FaithInvest, and ICCR.
We favoured investment opportunities where we saw potential for the fund manager to become a long-term trusted partner – almost an extension of our small investment team, going to them for reference checks, input on our strategy, insights on the sector, and more. Beneficial Returns, Mission Driven Finance, Religious Communities Impact Fund, and MCE Social Capital deserve much credit for their continued partnership with us.
Through our networking, we were invited to join two terrific groups of women impact investors: Women in Africa Investments (WAI) and WeInvest (focused on Latin America). Both have been tremendous for reference checks, networking, pipeline development, and crowd-sourcing knowledge on many issues. We also participate in a small group of women working at Catholic organisations and meet monthly to discuss pipeline, strategy, and challenges we face.
4. Reflect, read, discern on your contribution to systemic change. Give yourself the time to pause and think holistically about the systemic change your investments can make in contributing to a more equitable and just form of capitalism. As many of us in the impact sector come from traditional finance backgrounds, we bring an inherent finance-first framework that often unintentionally perpetuates inequality, injustice and unequal power balances between investors and beneficiaries.
We recognise we are in a privileged position of power to steward such resources and we must act in a way that does not entrench this power imbalance but instead contributes to fundamentally changing the way the economy works.
Thus, we try continuously to challenge our own biases and ingrained ways of thinking with the goal of supporting more equitable financing terms (fair rates, flexible covenants), more equitable forms of ownership (coops, ESOPs), impact-linked financial returns, and more democractic forms of decision making in allocating our capital.
We still have much to learn but remain inspired by the work of many groups, including:
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All the entrepreneurial woman religious, especially our own sisters, the Missionary Sisters of the Sacred Heart, that continue to operate what are in effect the original social enterprises – schools, health care organisations, immigration service centres, and more
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All the pioneering women religious congregations who helped build the impact investing sector, such as the Adrian Dominicans and Sr. Corinne Florek, Mercy Investment Services, Franciscan Sisters of Mary, the Sisters of Charity of Cincinnati, and many more
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Emerging leaders like Felipe Witchger and Elizabeth Garlow, who run a workshop on Liveable Futures and incorporating Catholic Social Teachings into investment portfolios
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Leaders such as Rodney Fox’s commentary on the fallacies of impact investing and SSIR’s article on how to break the shackles of extractive thinking.
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Morgan Simon’s book, Real Impact, outlining guiding principles for more transformative impact investments.
Finally...
Faced with the urgent and pressing challenges of our times – climate change, mass displacement, rising inequality – we also take great inspiration from the rallying words of Pope Francis in a 2020 speech to the Economy of Francesco (we encourage you to read the full transcript):
“The future will thus prove an exciting time that summons us to acknowledge the urgency and the beauty of the challenges lying before us. A time that reminds us that we are not condemned to economic models whose immediate interest is limited to profit and promoting favourable public policies, unconcerned with their human, social and environmental cost.”
– Pope Francis
While understandably not all organisations are at a point where they can step boldly into the complex world of impact investing, at the very least, we can all reflect upon how each individual decision we make – where we allocate capital, what rate we charge, what terms we set, whose voices we invite to the decision-making table – shapes our financial and economic system.
Pope Francis. Photo: Ashwin Vaswani
Let us all imagine what small decisions we might take in the stewardship of our resources to contribute to a more equitable and just economic system that promotes the wellbeing of our planet and society.
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