The Evolution of Heron: Enterprise

Founded in 1992 with the mission of helping people and communities to help themselves, the F.B. Heron Foundation came into being during one of the greatest economic booms in U.S. history. The strong financial markets of the 1990s not only resulted in the rapid growth of Heron’s asset base but also served to reinforce its then focus on asset building and community economic development — as so many Americans did not benefit from the economy’s generation of wealth.

1996: The Tipping Point

Faced with the challenges of making effective grants and managing a growing endowment, Heron’s board of directors understood all too well that the scope of the social problems it sought to address required more significant resources than its mandated 5 percent payout. At a regularly scheduled meeting in 1996, Heron’s board reviewed a particular investment manager’s performance for what seemed like hours, leaving little time for program matters. This imbalance caused the board to step back and evaluate the effectiveness of the foundation. After much discussion, the board put forth the suggestion that because of Heron’s social mission and tax-exempt status, the foundation should be more than a private investment company that uses its excess cash flow for charitable purposes. Without changes, in the board’s view, there could be very little to distinguish the foundation from a conventional investment manager. The board began to view the 5 percent payout requirement as the narrowest expression of the foundation’s philanthropic goals. By looking to the other 95 percent of assets, the “corpus,” the board could conceive a broader philanthropic “toolbox” capable of generating greater social impact than by grant-making alone. Spurred by this “tipping point,” the board encouraged staff to explore ways in which Heron could engage more of its assets through a combination of grant-making and “mission-related” investment strategies. The board made a deliberate decision to find ways to leverage an increasing number of Heron’s resources in pursuit of its mission and therefore maximize the foundation’s impact in low-income communities.

Guiding Principles: Progressing Incrementally and Learning by Doing

Developing a mission-related investment strategy did not happen overnight. Heron invested time refining its mission and determining how that mission could be enhanced through a proactive investment strategy. Initially, there was some uncertainty as to how far and how fast the foundation could move and therefore a reluctance to establish specific mission-related investment targets. By adopting an incremental philosophy, the foundation was able to test the concept without making any major missteps. Staff was encouraged to explore opportunities in core program areas that would build on existing networks and expertise, as well as to share lessons learned along the way. As the field became more robust, Heron started to encounter intermediaries who could engage in mission-related investing on its behalf. Heron proceeded to invest with some of these fund managers, many of whom were creating jobs for people who were otherwise being waylaid by globalization, mechanization, and disintermediation. Within a decade, Heron’s mission-related activity had grown to comprise approximately 40 percent of its overall endowment and included everything from taxable municipal bonds to private equity.

The World Has Changed

In 2012, Heron underwent a strategic review and decided to increase this activity even further — investing not just 40 percent of the endowment but all of its assets for mission. The 20-year-old foundation announced the change in strategy, citing:

We have come to conclude that unfortunately, our comfortable habit appears to have outlasted the accuracy of the premises on which it was founded, and in the process has grown less useful year by year. The world has changed, and so must we. It’s time for a new approach.

 

 Heron spent the next few years looking for managers who could help it invest 100 percent of its assets for mission. Unfortunately, the foundation discovered that there were relatively few truly mission-aligned, poverty-oriented investment managers in the market. But there were a growing number of impact-screened opportunities in which Heron could engage. Accepting that impact-screened vehicles were at least more mission-aligned than its preexisting portfolio, Heron spent the next few years working with managers to move over $150 million to impact-screened products. The initial rotation culminated on December 21, 2016, when Heron moved the last unscreened piece of its corpus to a slate of impact-screened ETFs. Appreciating how far it has come, Heron is committed to further rotating and optimizing the portfolio in better alignment with its mission. 

For now, Heron is poised to leverage the lessons it has learned over the past 25 years — both on the ground in communities and within the capital markets. By operating more deliberately at the intersection of communities and capital, Heron will be better positioned to help people and communities help themselves out of poverty.

 

Much of this history was well captured by Michael Swack in his January 2009 piece, Expanding Philanthropy: Mission-Related Investing At The F.B. Heron Foundation, published by the School of Community Economic Development at Southern New Hampshire University.