Soundbites: ‘The Capital We Get to Work for Good’

Cambridge Associates’ Tom Mitchell discusses Sandra Urie’s transition from CEO and movement into impact investing as well as lessons learned from his years of work.

This is Toni Johnson with Soundbites. I’m here today with Tom Mitchell of Cambridge Associates to talk about impact investing and the future of the market. Hey Tom. 

Hey Toni

Let’s just talk about a bomb you’ve dropped earlier, which is that Sandy Urie, your CEO, is stepping back from her role and focusing on impact investing. Can you talk a little bit about what that means for Cambridge and how this came about?

Sandy has been with the firm, she’s had a wonderful career, close to 30 years at Cambridge Associates and has been our CEO for many years of those. Over the last two plus years the firm has really been thinking a lot about generational transfer of leadership and getting the right people in place and making sure that we’re ready for what’s next. And so I should be clear that Sandy is not leaving, she will always and forever be revered and celebrated as part of Cambridge and a great leader. But as effective July 1 she’s stepping down from being CEO and chairman of the board and will remain on the board in a chairman emeritus role.

The two big priorities for her, for what’s next, are focusing on both continuing to work with our clients, alongside with devoting a lot of time to things she’s very personally passionate about which are impact investing. And that’s reflected in some of her current board memberships and I think she’s looking to expand that and do more direct works.

There’s a lot I look forward to learning about what she’s going to do there but I thought that was a very wonderful, and warming part of the announcement from someone who’s been a fantastic leader for us. And who really helped build us as being quite unique in financial services by say, having about half our leadership be women. So what I think she’s leaving behind was a really strong group of leaders who have been carefully selected over the last few years and put in place and who have already been effectively operating the firm. And so out of that the signals are quite positive for impact.

We’ve gone from being five and six people eight years ago who were really focused on how to build a mission-related investing group within Cambridge, to 35 people globally now. And we could not have done that without the support and resources from the top down. I mean there’s a clear strategic vision around, this is what our clients are asking about more and more globally. And this is something that you not only have to be responsive to, and reactive to but proactive in providing solutions. So that’s the big turn. I think it sends a strong signal to both our clients and my colleagues alike for how she says she wants to spend her time. 

This is an interesting sort of market signal. Sandy is joining Deborah Winshel who’s gone over from the Robin Hood Foundation to head BlackRock‘s impact investing practice. You have former Massachusetts governor, Deval Patrick going to Bain to head up their impact investing practice. So there seems to be something happening in the market. Can you talk a little bit about the significance of these larger institutional managers and advisors getting into the space, and what we can expect going forward and what we might want to be watching out for? 

It’s fascinating to see BlackRock moving in, and Goldman Sachs has acquired Imprint. And all the big banks basically have been in on impact for a while and they’re trying to figure out how to sell it and what to do. I don’t think that’s an entirely negative thing by saying that by any means. I think what we’ll see are increased capital flows coming in towards ideas and investments. And I think what will be interesting for people that were in impact 1.0 or 2.0 or whatever point o designation you want to assign to it, [is] how they start collaborating with these folks. Because BlackRock is the biggest asset manager in the world, and all of these banks control huge amounts of capital and have a lot of influence, particularly with high net worth clients who are saying we want impact. They can just push a platform on them and people will invest in without a lot of debate, which could be good or bad. 

So what will the impact be? I think that on the positive side there’ll be continual awareness and deepening of knowledge amongst people that aren’t necessarily at the highest levels of high finance or big philanthropy. Knowledge will disseminate and come down from the mountain top, if you will. There will be some more opportunities, they will create products, they’ll create vehicles and platforms which people can invest with. I just happen to work in a place where we don’t really invest with banks and big mass market products but look for typically more customized solutions. But we’re certainly looking at everything that’s coming out of BlackRock now, we want to understand that. They’re largely quantitative equity products. Where I think there will be interesting challenges is that there are some investments right now, particularly if you think of a Bain coming in around the private markets or of Goldman putting together fund of funds or things like that like they are. There are some really good proven impact investment fund managers that will be coming back to market, and will certainly raise money or be very interested in raising money from these groups because they’re scaled to that. You know fundraising is hard, so if they can go to one place and get a lot money that’d be good.

It’s just kind of common sense. If they’re focused on impact, in this case gainful jobs and employment, and they’re providing good quality employment they have less turnover of their employees. They keep their employees longer, their skills evolve there at the firm and they’re able to do a better job in delivering high quality products and services to the company. 

There’s a question I’ve always had on my mind of the ability of capital absorption for particular manager or types of deals. There’s no doubt that we have a lot of need in the world and we need both financial and intellectual capital focusing on some of these challenges but, some of these markets have yet to be proven. So if they get flooded with capital too quickly we just need to be aware of that. Because that will lead to bad results, and then that will lead to skeptics saying they were right. So I think we just need to be careful about both that these big institutions need to be positive stewards, who recognize what they’re getting into instead of just seeing it as a short term opportunity. And I haven’t seen anything to suggest they aren’t thinking of it as long term, to be fair. But they need to be aware of this and at the same time it should create some avenues for people who are more risk averse if you will, to feel more comfortable about a future in impact investing. 

We were talking a little bit earlier about the meeting that you had, and frankly my colleague Dana was also at this meeting with one our investees, Huntington Capital. Can you talk a little bit about the role of having a private equity manger think about employment and other types of impacts, particularly those that are people focused over the long-term? Are there any lessons that we should have our listeners think about the next time they engage with a private equity manager?

I’d say what’s great about Huntington, just to describe them a little bit. They’re based out of California, southern California, and they work and provide, largely debt, and some equity in a private equity structure to smaller enterprises. Lower middle market as they call it in the private equity landscape. So looking at groups that have anywhere between $5 and $25 million in EBITDA earnings and revenues to their companies. They’ll look to make $2 to $ 5 million dollar deals. Whereas if you’re a company that has half a billion dollars in earnings you have no problem getting credit, any bank will bank you, anyone on Wall St. will back you and want to transact with you financially.

Huntington is working with enterprises that don’t have that same access to capital. They might get some from big banks, regional banks in California et cetera. But there’s a sweet spot, and they’re looking to do things at a deal size typically other private equity firms aren’t looking at deals that small. So focusing on impact is very important for them, because they’re fishing in a pond if you will, where there are not a lot of other fisherman or hooks. So you will invariably see some things that are not good deals, not attractive enterprises, so they all have to do their own financial diligence on this anyway.

But I think what I took away from conversations with Huntington over the last several years, and particularly through this most recent meeting is that. By focusing on the impact angle and what the attitude and approach toward impact, and particularly in this case gainful jobs, is a sign of quality in a company as well. So if there’s someone they want to do business with and want to lend money to, having some philosophical alignment around that I think is strong and helps someone stand out as a cut above the rest.

Particularly as we’re in a later stage of a credit expansion right now, so some of the people coming over in front of them that they might consider to look to as a potential investment, might not be as high a quality as those they were seeing a few years ago.

Having that impact lens can be a real differentiator from a risk management standpoint. I think people often overlook that, they talk about the positive things they can do at world. So when you’re looking at some of these enterprises which can be in light manufacturing, not really doing a lot of tech driven, Silicon Valley stuff by any means.They’re looking at where companies are located, where poor people frankly are living and can get good jobs.

It’s just kind of common sense. If they’re focused on impact, in this case gainful jobs and employment, and they’re providing good quality employment they have less turnover of their employees. They keep their employees longer, their skills evolve there at the firm and they’re able to do a better job in delivering high quality products and services to the company. And they take greater pride and ownership in their work because they have a stake in the company too. I think these are all virtuous things all of us think of as, yeah of course, MBA 101 stuff right?

But they’re recognizing that when they do their diligence and go through and look at the deal flow, and if they find really good companies they’d like to lend more money to or continue to be a business partner with, which can be beneficial towards investors like Heron and others. They want to help these companies get better at that. They’ll say, here’s where you are, here’s a base line, and where could you be in three or five years with a strategic view. If you really focus on employment or quality of employment where that might get you? And the companies that follow that path are also the ones that will be likely, even as they grow and could be banked by others, will still be looking to partner with someone like a Huntington, because of good philosophical alignment.

You mentioned light manufacturing, there was an article in the New York Times recently that talked about some of the campaign promises around bringing back manufacturing jobs. Some of the work that  we’ve done here at Heron sort of shows that even if the companies do re-shore jobs that they’re not necessarily as many jobs or as profitable jobs. And this is all tied up with questions about trade deals. Thinking about jobs and working class and middle class folks, how can we provide some kind of climate that leads to greater stability for Americans? Tough question.

It’s a huge challenge and I recall when I was in graduate school and I was looking at labor data in the state of North Carolina, it was at the planning school at UNC and studying business at Duke. In the state of North Carolina you had a long, slow decline of a furniture industry, of a textile industry with things going off shore and tobacco. In these industries, despite knowing for decades that they’re declining and moving off shore you still have a ton of people dislocated by trade. And they passed the Central American Free Trade Agreement back in the mid 2000s and that was not well received in North Carolina, just like the nail on the coffin on textiles there. So I think, I give you that background, as I looked at this and I said there’s a generation of people being written off.

So we can’t remove ourselves as United States from engaging with the world, but I think we can do a better job of creating healthier, better local jobs because we’re not just going to move into being a bunch of consultants and retail workers that buy all of our stuff from oversees.

So I could see where the social tensions come, people that are squeezed at the bottom always then start fighting each other, and that’s what I think is happening in our election right now and it’s terrible. So as investors, when we say we want to bring manufacturing, you have to be honest about, in what? Manufacturing in itself just creates supply, where’s the demand it’s meeting. In North Carolina, we might have made socks in a textile mill and we could employ say 500 people making your standard, where you can buy a three pack of Hanes tennis socks or whatever for $10 dollars. That’s a really hard job to bring back. But if you say, well what we still have, we have highly skilled labor, we have great capital and technology that people can now make socks. They don’t require 500 people but you can make socks that someone that likes to go weekend riding, getting out of Manhattan to go bike riding around is willing to pay $20 for some super padded pair of socks that fits in their biking shoes. That’s a higher value added product which the margins can be distributed back to the employees.

When you think about manufacturing and light manufacturing, what’s the addressable market? Where’s the demand? And so when you’re investing in those, there are jobs you can bring back. We have to work that much harder as investors in understanding this. It’s not just saying we’re pushing money out the door and it’s going somewhere into the market, whatever that is. The challenge for investors now is to say, well what market, and how, and with whom and to do what? And then can we dig even deeper? And this is where a foundation, particularly if they drop divisions between an investment side of the house and the programs side of the house, can merge the tremendous knowledge that both have to say where’s our capital best deployed?

I know this is something you guys think a lot about, could this be philanthropic equity into a situation which could spur and build a base of potential employees who are then going to go work down here in a value chain where we could put financial, you know, more investment capital to work. So we can’t remove ourselves as United States from engaging with the world, but I think we can do a better job of creating healthier, better local jobs because we’re not just going to move into being a bunch of consultants and retail workers that buy all of our stuff from oversees. That’s just not going to work either, that’s too extreme the other way.

Do you have any final thoughts? We’ve been talking for quite some time and I just wanted to know if anything was top of mind for you?

I think, if people can take away from conversations like this and learn about their own journey, that it is important to learn from others and try not to repeat the same mistakes. [That is] be it emerging countries burning fossil fuels and cutting down forests. But also know is in the impact investing world as impact investors there’s a lot that you’ve done here at Heron for decades now that people can learn from and build on so they don’t have to repeat your learnings. And I find what I love, and there’s so much I love about what I get to do, it’s the people I get to talk with, it’s the capital we get to put to work for good. But it’s also knowing that, it’s balancing this duality between having a long-term view on what does success looks like for an organization, and also the world that they’re trying to make better? And recognizing that we’re in a very highly iterative space.

Impact investing just keeps changing so much, I mean we’re really at a place where it seems like every few months there’s new big news or next big evolution or big entrance in the market place or more capital flowing or a measurement or what have you, all the things we talked about. I think people need to really work hard to understand what’s their long-term keel, what balances them and helps drive them forward that they can anchor on. But really explore with the iteration, and really study and learn what’s out there and what makes sense for them. My final thought is more of an encouragement to everyone else to keep on keeping on. 

Well thank you Tom. For this is Toni Johnson.

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