A Quick Guide to Place-Based Investing

Heron’s mission is to help people and communities help themselves out of poverty. And in service to that mission, we sometimes find ourselves trying to invest within specific geographic communities.

Heron is not unique in that regard — place-based investing is an increasingly common practice in the philanthropic space. But many of the foundations, investors, and high-net-worth individuals with whom we work say they are struggling to find local investment managers and place-based opportunities. And when asset owners feel enough frustration, they sometimes attempt to build their own community-based funds, only to face another set of obstacles.

We at Heron have experienced many of those same disappointments and difficulties as we struggle to find mission-driven investments within specific places. But, in learning from where we stumbled, we have started to draft a spectrum of incremental steps that any asset owner can take to start to localize their investments.

Option #1: Take Inventory of Your Current Assets

When we decide, from a strategic perspective, that we want to make place-based investments, we are sometimes pleasantly surprised to find that there are already investments in our preexisting holdings that fit within the given geography. Those investments can take many forms, including but not limited to mortgages, municipal bonds, small business loans, or equity in local companies.

We believe the first step in localizing investment is to know what’s knowable about the preexisting portfolio. Taking inventory of current assets can provide important insights about the impact a portfolio is already having, which provides a launching point for how it can be improved to be more mission-aligned.

Option #2: Ask Your Managers to Signal Best Efforts

Many investors assume that mission-aligned investing requires changing investment managers (or at least changing investment mandates). And that can be true. But before we proceed with any paperwork whatsoever, we try to first talk to our preexisting investment managers about the places in which we are trying to invest. By signaling to them that we are looking for investments in particular geographies, we find that they can sometimes honor those requests within our preexisting investment mandates.

Option #3: Draft a Letter of Intent with Your Managers

When we signal to our managers that we want to make shifts with the portfolio, they often ask us to clarify our thoughts in writing without making any actual mandate shifts. That write-up typically takes the form of a Letter of Intent, which is designed to establish clearer guidelines and expectations that ultimately result in better investment decisions. Having clear communication about our mission, values, and goals is key to establishing constructive relationships with managers.

Option #4: Adjust Your Managers’ Mandate(s)

If you feel strongly about investing in specific geographies and you don’t expect those priorities to change, then it might be appropriate to codify that desire in your investment mandate. Heron’s mandates rarely have specific geographic allocations, but they do tend to offer broad guidance for the types of communities in which Heron would like to invest.

Option #5: Change Your Managers

Despite best efforts and collaboration, sometimes preexisting managers are not the best fit for an investor’s needs. In that case, changing managers may be the best solution. Your Registered Investment Advisor should be able to help you identify managers that might be a better fit. Otherwise, there are growing databases of managers in the market (including, for example, the ImpactAssets50) that allow you to sort by geography.

Option #6: Work with New Managers to Source in New Places

Depending on the place in which you want to invest, there might not be a preexisting investment manager who is placing capital in the area. One of Heron’s peer foundations recently had that problem, so they identified an impact-oriented private equity fund with a strong track record and provided a grant to incentivize that fund to place an investment professional in the designated geography. That professional was tasked with sourcing and structuring local investments without requiring them to build a new fund from scratch.

Option #7: Build a Place-Based Investment Vehicle

This is often the option that investors immediately gravitate to, despite the fact that it is typically the most challenging to execute. But if a coalition of investors is dedicated to investing in a particular geography and preexisting infrastructure does not exist (and cannot be leveraged) to facilitate those investments, it might make sense to build a new place-based investment vehicle.

Setting up any new vehicle can be risky from both a financial and social perspective, and it can often be difficult to find the right talent to staff such a vehicle appropriately. But when successful, new place-based vehicles can mobilize local wealth and invest it directly in a designated community.