Minnesota foundations are at the forefront of a national philanthropic paradigm shift toward investing endowment dollars into diverse fund managers and startup founders, thereby marrying mission and market returns.
For years, foundations in Minnesota and across the country have granted charitable dollars to organizations that support entrepreneurs on the proven premise that inclusive entrepreneurship is a critical way to close the wealth gap between the haves and have nots in our communities when scaled up.
Now, leaders among these foundations are taking the next logical step. In addition to granting five percent of their endowment dollars to charitable endeavors—as required by law—foundations are also working to invest their enormous stockpile of endowment dollars into mission-aligned investment opportunities designed to yield market returns.
The total amount of money in U.S. foundation endowments is truly mammoth; endowments topped one trillion dollars in 2022. Five percent of one trillion is just $50 billion, meaning foundation investments pack a much bigger punch than grant dollars. For further comparison, venture capital deals in 2022 totaled just over $200 billion.
The point here is that foundation endowments control a massive amount of money. Behind the scenes of public-facing grant making activities, foundation investment officers work to ensure their endowments are protected and growing every day.
To keep endowments growing, foundations invest endowment dollars in an array of diversified asset classes, including private equity and venture capital. To date, though, foundations have largely entrusted endowment investments to private equity and venture capital firms led by a homogenous group of mostly white men.
Avoiding Groupthink Leads to Higher Returns
As Chief Investment Officer at Saint Paul & Minnesota Foundation (SPMF), Shannon O’Leary oversees the SPMF investments team as well as all aspects of SPMF’s $2 billion investment portfolio. O’Leary also oversees investment strategies for SPMF’s two partner foundations, F. R. Bigelow Foundation and Mardag Foundation.
“As an asset allocator, I have first-hand experience with managers demonstrating groupthink, resulting in both higher risk and materially-lower returns,” O’Leary said. “In every case, these managers were teams who looked like each other, went to similar schools, and grew up in similar communities.”
The data shows that investing only in funds led by a lookalike group of fund managers hurts financial performance. For example, the National Association of Investment Companies (NAIC), the largest network for diverse-owned alternative asset firms, reported in 2021 that diverse-owned firms outperformed their equivalent benchmarks in 83 percent of the periods measured.
“The data really clearly shows that investing in diverse-led teams is a way to generate excess alpha inside your institutional investment portfolio,” O’Leary said. “If you are not investing in diverse-led investment teams, you are actively harming your ability to earn top returns.”
Marrying Market Returns With Mission
Activating Minnesota’s philanthropic billions toward inclusive entrepreneurship and above-market returns is a clear win for our state. And we won’t be alone.
National industry leader Mercer’s 2022 report on the future of endowment investing includes a recommendation that “private markets, particularly venture capital” are great ways for foundations to generate both financial returns and positive social impact.
“We believe that an impact-oriented approach, when executed well, can generate returns competitive with broad markets alongside making a positive non-financial contribution to society,” the report stated.
The message to foundation investment officers is clear: You have the opportunity to drive financial returns for your organization while simultaneously unlocking a powerful driver of economic growth in our communities.
Your portfolio is waiting.