High-risk, high-reward impact investments are paying off: Don Chen with Impact Alpha
Last month, Don Chen spoke with Dennis Price of Impact Alpha about the Surdna Foundation’s impact investing strategy. Below is an excerpt—Read the full conversation on Impact Alpha.
Surdna Foundation’s Don Chen: High-risk, high-reward impact investments are paying off (Q&A)
When Impact America Fund launched in 2014, the first-time fund manager with a focus on creating economic opportunities in marginalized communities was perceived as too risky by some traditional investors. Surdna Foundation saw an overlooked opportunity in the Black women-owned VC.
The New York-based foundation backed Impact America’s two funds with program-related investments, a type of philanthropic investment that emphasizes the impact potential of the strategy. Last year, when Impact America announced its $112 million third fund, Surdna was again a limited partner, this time via a ‘mission-related investment.’ With an MRI, as they are known, the foundation’s investment team was placing as much confidence in the fund’s financial prospects as in its impact.
The “graduation” of Impact America Fund from a PRI to an MRI is part of an intentional effort by the Surdna Foundation to dispel conventional perceptions of risk in high-impact investment strategies.
Impact funds led by women and people of color aren’t high risk, says Don Chen, who has led the foundation since 2018. They’re ”dramatically overlooked“ and “tremendous opportunities,” he told ImpactAlpha in a wide-ranging interview on the foundation’s evolving impact investment strategy.
Chen has the receipts. The foundation’s $100 million carveout for impact investments (split roughly 80/20 between MRIs and PRIs) has grown to $170 million when taking into consideration mission-aligned investments in public equities and other strategies from the broader endowment.
Along with Impact America, the portfolio includes investments in Founders First and Blackstar Stability Fund, as well as the first two funds from Illumen Capital, Vamos Ventures and Impact Engine.
The kicker: The impact portfolio, consisting largely of private market MRIs and PRIs, has outperformed Surdna’s broader endowment over a trailing five-year period, Chen revealed exclusively to ImpactAlpha.
Chen says the foundation is going “full steam ahead on our impact investing.”
ImpactAlpha: In an earlier interview with ImpactAlpha, you said the goal of Surdna’s impact investing mandate was to make high-risk, high-return investments. What has that strategy looked like?
Don Chen: I would unpack the notion of high-risk, high-return in the following way. We have really examined our approach to impact investing and try to be very thoughtful about it. When we say high-risk, we mean high-risk for most conventional investors. For example, we may be investing in people of color or women-led firms or fund managers, who are dramatically overlooked in the industry.
We have put a lot of assets under management with those types of managers. We also are willing to do some unconventional things with regard to track record, so, a second fund, for example, or sometimes even a first fund, we may consider. In conventional terms, these may be regarded as high-risk, but if you look at the evidence, there is a tremendous amount of evidence that shows that these, in fact, are not high-risk. They’re tremendous opportunities.