Alternative Investment Strategies
Alternative Investment Strategies
Are there complementary sources of investment capital that you can access to empower your enterprise, fund, project, or production?
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Uncovering 
Buried Treasure

Fundraising for traditional enterprises is trying under the best of circumstances. The degree of difficulty for social and environmental impact ventures seeking investment during challenging times is far more arduous. Nonetheless, there are less traveled paths to investment that may be better suited for impactful endeavors than venture capitalists and institutional investors.

Innovative Paths to Investment

These sources of capital fall on a spectrum from commonplace (though hard to access) to unorthodox and virtually never utilized. We explore a few options below, including:

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Donor-Advised Funds

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Strategic Alliances

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Family Offices

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Community Reinvestment Act

Donor-Advised Funds

For those not already familiar, donor-advised funds (“DAFs”) are philanthropic and social impact investment tools that allow donors (individuals, families, corporations, etc.) to fund special accounts through DAF “sponsor” organizations. Donors receive immediate U.S. income tax deductions and maintain allocation privileges over the fund’s distribution.

While adoption of DAFs started slowly, capital is aggregating quickly, and DAFs have become a leading tool for donation and investment in the social and environmental impact sectors. According to the 2019 Donor-Advised Fund Report of the National Philanthropic Trust, assets in DAFs now total over $121 billion, with over $37 billion in new DAF contributions in 2018 alone.

0
0
0
0
0

Total Assets in Donor-Advised Funds ($B)

Total Assets in Donor-Advised Funds ($B)

Total Assets in Donor-Advised Funds ($B)

$70.05

$70.05

$70.05

$77.18

$77.18

$77.18

$86.45

$86.45

$86.45

$112.10

$112.10

$112.10

$121.42

$121.42

$121.42

2014

2014

2014

2016

2016

2016

2017

2017

2017

2018

2018

2018

2015

2015

2015

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0
0
0
0
0

Total Value of Contributions to
Donor-Advised Funds ($B)

Total Value of Contributions to
Donor-Advised Funds ($B)

Total Value of Contributions to
Donor-Advised Funds ($B)

$19.91

$19.91

$19.91

$21.42

$21.42

$21.42

$25.06

$25.06

$25.06

$30.90

$30.90

$30.90

$37.12

$37.12

$37.12

2014

2014

2014

2016

2016

2016

2017

2017

2017

2018

2018

2018

2015

2015

2015

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Notably, there are now over 728,000 individual DAFs across the U.S., and the number of DAFs grew an astonishing 55% from 2017 to 2018. Contributions to DAFs have also continued to increase as a percent of total individual giving over the last decade.

*Source: 2019 Donor-Advised Fund Report, National Philanthropic Trust
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0
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Total Number of Donor-Advised Funds

Total Number of Donor-Advised Funds

Total Number of Donor-Advised Funds

241,507

241,507

241,507

272,845

272,845

272,845

289,478

289,478

289,478

463,622

463,622

463,622

2014

2014

2014

2016

2016

2016

2017

2017

2017

2018

2018

2018

2015

2015

2015

0
0

728,563

728,563

728,563

0
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Source: 2019 Donor-Advised Fund Report, National Philanthropic Trust

Donated Funds as Investment Capital

While DAFs have typically been used for charitable donations and philanthropic grant-making, astute donors recognize that by directly investing DAF capital in for-profit companies, funds, projects, or productions, DAFs can become extraordinary vehicles for achieving meaningful social and environmental impact while also generating attractive returns. In fact, if managed correctly, DAFs can become impact investing venture capital funds for donors, serving as either their first steps into the impact investing world or enhancing the work they are already doing with their traditional portfolios. 

DAFs are an ideal impact investment tool because they are completely risk-free – the funds have already been donated so no financial returns to the donor are expected – but investments from a DAF that generate real financial returns can flow back into the DAF so that (like with a traditional investment portfolio) that capital is available for the donor to direct towards the next socially or environmentally impactful venture.

Unfortunately, most DAF operators do not currently allow their donors to use their DAFs as (for-profit) impact investing mechanisms, and those that do often offer only a limited selection of investment options for donors. However, some DAF sponsors are showing greater flexibility, and DAFs can be easily transferred to other sponsors that better support donors’ impact investing goals. At LOHAS we work with our clients to position their investment opportunities optimally for the engagement of donors and the receipt of DAF funds.

Strategic Alliances

Seeking capital from “strategic investors” has always been a sound strategy for enterprises with offerings that may enhance the existing business of an investor. Within the impact investing world, these types of relationships often take different forms, and direct investment may not be the goal.

For example, a social enterprise may seek a strategic partnership with a foundation or other nonprofit organization that shares the same underlying cause. That relationship could be as simple as the nonprofit promoting the social venture’s business to an alliance through which the charity leverages its donor list for investors (either through direct investment or a DAF) with the expectation of a backend revenue share.

Seeking capital from “strategic investors” has always been a sound strategy for enterprises with offerings that may enhance the existing business of an investor. Within the impact investing world, these types of relationships often take different forms, and direct investment may not be the goal.

For example, a social enterprise may seek a strategic partnership with a foundation or other nonprofit organization that shares the same underlying cause. That relationship could be as simple as the nonprofit promoting the social venture’s business to an alliance through which the charity leverages its donor list for investors (either through direct investment or a DAF) with the expectation of a backend revenue share.

In a similar vein, cause-based organizations may serve as a conduit for investment into a variety of for-profit ventures, including funds that would, in turn, invest capital into businesses addressing the shared cause. The mechanism for absorbing that investment can also be a DAF that the iconic organization sets up to support its own operations while also directing investment capital to align ventures.

In a similar vein, cause-based organizations may serve as a conduit for investment into a variety of for-profit ventures, including funds that would, in turn, invest capital into businesses addressing the shared cause. The mechanism for absorbing that investment can also be a DAF that the iconic organization sets up to support its own operations while also directing investment capital to align ventures.

Creative Collaboration

At LOHAS we even see this structure in the social impact entertainment sector in which studios or productions seek alliances with nonprofit organizations that are well-known for the cause championed in a particular production or slate. Not only can the charitable organization invest directly in the project(s) through their own foundation allocations (or DAF) or serve as a conduit for other investors (that are excited about the power of film or television to generate greater awareness of the cause) but also the foundation or nonprofit may be positioned as the beneficiary of the “action” that is inspired through the production (while serving as an ideal social impact measurement and tracking mechanism for the SIE studio).

Finally, in the mold of traditional strategic investors, select corporations may have publicly expressed support for the same purpose of your social enterprise. While they may not have the flexibility to invest directly out of their corporate venture capital arm, the corporation may be anxious to demonstrate their commitment to the cause by investing via their corporate DAF or donating funds to an aligned nonprofit that can serve as that conduit to investment (per the above).

In each of these scenarios, the key is finding the right organizations and structuring an attractive relationship that benefits both parties. Because LOHAS crafts strategies while also supporting execution, we are able to help our clients not only identify the strategic alliances that might best serve their needs but also help build those relationships and create structures (directly or through third parties such as select DAF sponsors) that serve everyone’s needs, including those of the underlying cause.

Family Offices

While a key source of investment capital, family offices are often hard to access and can be even more challenging to navigate to a successful investment once an audience is obtained. Despite these difficulties, they remain an ideal path to investment (and ongoing support) if the right relationship can be structured.

Some notable characteristics of this investor class include:

Highly segmented (with specific investment interests and parameters)

Interested in social impact investing but lacking in knowledge on how to execute

Managing over $4 trillion in investments (including $1.7 trillion in the U.S.)

Driven by wealth preservation, wealth creation, philanthropy, and tax efficiency

Engaged most effectively through a trust circle of relationships and often co-invest

Going through a generational paradigm shift of priorities and interests

Can execute relatively quickly on deals that fit their interest and investment profile

We recognize the challenges and opportunities associated with this group of investors, and the LOHAS team leverages relationships within the impact investment and family office communities to support select client fundraising efforts while ensuring that the message also reaches key influencers that could further enhance investor participation.

Community Reinvestment Act

Perhaps the least utilized strategy within the world of impact investing, the Community Reinvestment Act (“CRA”) can be a tool for select social impact ventures to seek investment from banks. Among the many regulatory requirements for banks in the U.S., CRA obligations ensure that banks participate positively in their communities, including lending to underserved populations or businesses in the areas that the bank serves. Not meeting CRA benchmarks can lead regulators to impede certain bank activities (like acquisitions).

Innovative Offering for Banks

While CRA requirements are typically met through traditional loans, social impact venture or private equity funds that invest in solving similar societal challenges can become “CRA certified” which opens the door (through a specialized third-party structure) to accepting investment directly from banks that can come either in the form of loans or direct equity investment and which both satisfy the bank’s CRA obligations (while positioning the bank to make attractive investment returns).

Most banks are unaware of these types of innovative solutions to their CRA requirements, but LOHAS works with its client ventures to develop and structure these types of offerings and support the ensuing discussions and deal arrangements with target banks.

How LOHAS Helps

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Identification of sources of alternative investment

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Repositioning of investment to be acceptable to new investors

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Strategies to appeal to identified investors or partners

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Outreach to engage targeted investors or strategic partners

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Ongoing management of requirements of impact investors

New Avenues to Investment

At LOHAS we help our clients think outside the traditional investment box to explore alternative fundraising strategies that complement current activities and serve as sources of capital to empower impact enterprises, funds, projects, and productions.

The data is irrefutable that impact investing is not merely a “trend” but rather an irreversible change in perspectives that is encompassing investors of every age, gender, and nationality. LOHAS helps its clients tap into this growing investor desire to support people and planet when seeking profit.

From strategic direction to optimal messaging and positioning to deal preparation to campaign development to market building and (if needed) to fundraising, LOHAS helps guide its impact clients along their paths to success.

LOHAS works with a variety of clients on activities most relevant to them, customizing each engagement to meet their needs; but we also focus heavily on key areas and strategies that reflect our team’s expertise and more effectively enable our clients’ aspirations.

There a growing variety of parties delivering both profit and impact – from companies to funds to projects and productions – and LOHAS works with each to support their specific needs, developing customized campaign strategies and providing hands-on implementation.

Whether keynoting or moderating family office, impact investing, or social impact entertainment conferences, contributing to leading publications, or delivering or participating in webinars or podcasts or providing interviews on key industry topics, the LOHAS team helps drive public discourse on investment delivering both profit and impact.

LOHAS’ deep industry knowledge and relationships expand investment options and help build supportive partner relationships that increase the efficacy and benefits of your venture to investors.