Social impact investing has gained a lot of traction in recent years, with a sustainable global investment market estimated to exceed $13 trillion in 2014. And the market’s participants vary widely.
Not surprisingly, they include investment giants such as Goldman Sachs, JP Morgan, and BlackRock. These businesses have established social impact investing units, serving clients from the largest foundations (the pioneers in new impact investment tools and approaches to grant making) to small family offices that are just beginning to explore best practices.
But NGOs and other nonprofits are also fueling the trend, with notable success. Many have provided micro loans and multiple other forms of capital to small or startup entrepreneurs, and some have supported new enterprises with capacity building, talent recruitment, links to private investors, and access to markets. Mercy Corps, for example, launched a social venture fund in 2015 to address early-stage financing gaps; PSI, in 2012, established a not-for-profit social enterprise in South Africa for more effective social marketing impact; CARE, in collaboration with Danone Communities, established a separate business entity, JITA, to develop a distribution network for products in rural Bangladesh and scale it throughout the country in 2011; and the Cystic Fibrosis Foundation, in lieu of providing grants to academic labs, has funded multiple commercial companies to develop cystic fibrosis treatments since 1999, resulting in $3.3 billion in royalties for the organization.
Clearly, NGO social impact investors are important actors in this area. But distilling “best practice” can be difficult; each NGO journey is so different from the next.
Family Health International’s Experience
As the retired CEO of Family Health International (now FHI 360), I think I can offer some insights into the secret to NGO success in social impact investing, in a way that may prove useful for other NGOs engaging in these activities. But first, it’s important to understand our story:
FHI was established in 1971 as the International Fertility Research Program at the University of North Carolina at Chapel Hill. Its goal was to meet the family planning needs of underserved populations globally through clinical studies, product development, and education. But in the early ’80s, FHI’s board and leadership team faced the daunting challenge of assuring long-term organizational sustainability in light of potentially changing United States Agency for International Development (USAID) funding, which represented the majority of FHI’s revenue at the time.
The board explored a variety of solutions, and then, in 1986, became convinced that FHI had the potential to conduct clinical trials for other sponsors based on two factors: its longstanding contraceptive clinical studies experience and its faith in the organization’s managers, who were championing the unconventional vision.
That vision rested on the recognition that in the early- to mid-’80s pharmaceutical companies had begun outsourcing the management of some of the clinical trials of their products to reduce development costs and time to FDA approval. Being aware of the potential business advantage of early entry into the clinical trials services market, and encouraged by management’s discussions with Merck regarding FHI’s capacity to implement a large-scale clinical trial of the first “statin” drug in the United States, the board supported pursuit of the opportunity.
However, seeking a service contract with Merck, a commercial company, was not automatic for FHI. Board members, leadership, and staff were concerned that such a business relationship might put FHI’s reputation for independent scientific excellence at risk, not to mention its nonprofit status. The commercial contract would mean accepting a large amount of private funding. Furthermore, we wondered, would engaging with a private sector entity create insurmountable internal tensions?
Ultimately FHI’s board and leadership team saw the risks as manageable and well worth taking. But we also took action to protect FHI’s nonprofit status and further mitigate perceived risks. Specifically, the board approved the formation of a commercial affiliate, Clinical Research International (CRI), and an initial investment of $240,000 for 79 percent of the common stock of CRI.
CRI and Merck signed the first service contract in December 1986, and the new company flourished. Within the first year of operation, CRI gained additional clients and began paying dividends to FHI, which it used to help build FHI’s expertise and capacities in HIV/AIDS.
Four years later, in 1990, the FHI Board, having received offers to purchase CRI for approximately 80 times the initial investment, decided to sell the company to lock-in gains that surpassed all expectations. The sale yielded nearly $20 million for FHI. The FHI board, seeking to manage these proceeds for the long-term support of FHI’s mission, established the FHI Foundation. Initially, the foundation’s funds were managed professionally for market rates of return. But in 1999, with the goal of growing the endowment substantially and further strengthening FHI’s work, the foundation acquired Novella Clinical (previously PharmaLink), an Internet-based startup focused on high-efficiency clinical research. That company, in turn, developed into a specialist in the conduct of oncology and medical device clinical trials, and was acquired by Quintiles Inc. in 2013, increasing the FHI Foundation’s assets to more than $150 million.
The Resulting Catalytic Social Impact
Clearly, these activities resulted in strong financial returns. But the social impact far exceeded expectations as well. By building expertise and capacities in HIV/AIDS prevention, care, and support with the dividends from the investment in CRI, FHI attracted substantial donor funding and improved the lives of millions living with HIV.
Consider: In 2001, the FHI Foundation gave a $1 million grant to FHI to demonstrate the feasibility of introducing antiretroviral therapy (ART) in public health systems in Kenya, Ghana, and Rwanda. These projects provided the critical evidence that USAID needed at the time to expand and rapidly scale-up its HIV treatment programs in countries devastated by the HIV/AIDS epidemic.
And by 2006, FHI was implementing comprehensive HIV/AIDS prevention, care, and treatment programs in 40 countries. As of September 30, 2015, US government funding through multiple partners and agencies was supporting life-saving ART for 9.5 million people. And with the financial support of multiple other governments, foundations, and the Global Fund, 17 million people were accessing therapy globally in December 2015.
What’s more, in 2011, the FHI Foundation provided growth capital to FHI to enhance its global development capabilities by acquiring the assets of the Academy for Educational Development. Under the new name of FHI 360, the expanded organization is now able to bring a holistic perspective to human development challenges in the United States and around the world, and further maximize its impact.
Lessons from Our Experience
Three elements were central to our success:
- Our board was open-minded and willing to support an unconventional vision (with appropriate due diligence).
- We responded to market opportunity early and took informed risks.
- We deployed creative structures to manage and reinvest financial returns.
The FHI 360 and the FHI Foundation experience reflects and reveals a time-tested model for the private sector, nonprofits, foundations, philanthropists, and individual investors to consider as they aim to achieve social and financial impact. Additionally, it demonstrates that small amounts of strategically deployed capital can generate catalytic social benefits over time and that the nonprofit5 sector can play a critically important role in achieving the intended social gains from social impact investing. I hope others agree, and continue to pursue this type of investing with optimism and conviction.