Welcome to another episode of the Bonfires of Social Enterprise. This is Romy and today we head over to the Impact Investing Inglenook to chat with Douglas Bitonti Stewart about his recent article titled ‘Impact Investing and the Development Professional: Learning to Ride the Wave’. You can find this published article in the Fall 2017 Issue of Advancing Philanthropy Magazine. By the way, we have a lot of links in our show notes for this episode if you want to learn more, which, I am certain, you will after hearing from our guest. Doug shares his very unique perspective on fundraising in the philanthropic space and how that relates to impact investing. Stay tuned until the very end for a special song from a Detroit artist.
Let’s jump right in to the conversation with Doug.

Romy: Well, welcome to the podcast. We're going to talk today about the article you wrote, Impact Investing and the Development Professional. I love that we're going to talk about this from the framing of a development professional because it's rarely discussed, and you have a lot of experience with it. So we'll give links at the end of where this article can be found, and so let's dive right in and talk about the overview of the article first.

Douglas Stewart: Sure. So thank you for thinking enough of the article to have a podcast about it. I love your podcast, and I think everybody should be listening to this, and I'm also really hopeful that development officers will start listening to your podcast because this is really important stuff.

To start with the why that I felt this article was even necessary. For me, having spent 20 years as a development guy, working for mostly children's hospitals, I loved that work. And after doing that for 20 years, I was just lucky enough to be asked by a family to help run their family foundation.

I never thought I was going to do that. Didn't design my career for that but was found myself ... When you've done development long enough, you start to see your role not as raising money, but you see yourself as helping people change the world. And some people do that by contributing money. Other people do that by contributing their careers.

And so I had a chance to work up alongside a family, and so, I ended up becoming a foundation person, but not because that was my goal. So in my role as a foundation person, I was seeing donors, foundation staff all learning about impact investing. And it was really exciting, and then when I looked back at my peers in the fundraising field, I looked at their training sessions, and I didn't see anything there.

And there was one article in this publication of the Association of Fundraising Professionals a couple of summers ago. It was a cover article, and it talked about impact investing, but there hasn't been anything in there since or before. And I felt like, "Okay, I'm going to pull the curtain back about what foundations are learning and put it in the context of a development officer so that they can start learning about this because there's opportunities here."

Romy: And, Doug, just for our listeners in case they don't know the terminology, how do you define a development officer?

Douglas Stewart: Sure, so for me, and when I think about that, I think of someone who is engaged in raising money for a for-impact organization, and I'll tell you why I use the for-impact and not non-profit. But for-impact organizations that are 501(c)(3)s, and their job is to help raise money for that.

Now look, that could be the executive director, that they don't have a development officer or a development person. It could be a volunteer that does that but doesn't get paid and so forth, and so it's really anybody engaged in the fundraising enterprise. And just to harken back to what I said a minute ago, so it's anybody who helps people change the world through investing or giving their resources away, whether that's time, talent or treasure.

But the classic definition is a full-time fundraising; this is what I do, this is what I get paid for. That's what this article was really, who that was written for. It was a full-time fundraiser, a profession fundraiser.

Romy: And where would normally a full-time professional fundraiser or a development officer go to learn about things like this?

Douglas Stewart: So there are national conferences like for the Association of Fundraising Professional, there's local chapters, and so they have monthly meetings. There's even another organization called the Association of Healthcare Philanthropy, which is another sort of subset of development officers that come together.

Where universities play a role, we have a university that's not too far from here that actually has 450 full-time development professionals. So for them, instead of buying their training, they make it. So they'll have a training department, and that team and different components would meet every month, and they would go deep on some kind of topic.

But I'm hopeful that a couple of things happen because of this article and because of this podcast and your attention to it, that development officers will start reading the things donors are reading. Start reading the things the foundations are reading. There's a publication called the Foundation ... Oh, my friend's going to kill me for not knowing this. It's called the Foundation Review, the Foundation Review by Grand Valley and the Johnson Center for Philanthropy at Grand Valley, Foundation Review.

It's a peer-reviewed journal. All the foundation folks are reading it, and I think all the development officers should read it. GrantCraft is an online system that the Ford Foundation created, and foundation folks read it. But I don't think develop ... I didn't. I should just own it. I didn't know when I was a development officer. I didn't read these things. So they need to start reading the things that donors are reading.

Douglas Stewart: You and I have talked about that before and the for-impact. When the development professionals grab hold of this, the good news is, is that there are a lot of resources for them to find that will already talk about all these tools. The Mission Investors Exchange, it's a great example. There's a number of, and we can talk about those other resources in a bit, and they're in the article too.

Thankfully, they won't need to see another article from me because there's so much out there that's being written for individual investors and the program folks in foundations and so on. So what I'm hoping is that the development professional will look at this and, as they did, to planned giving way back when.

That they'll grab hold of this tool, and all of a sudden, it will be one of the tools that they utilize. Program-related investments were born the year I was born. Well, I should say, they were codified in the tax code the year I was born, 1969. But they were actually created before that. The tax code was just mirroring what people were doing, and I'd be happy to give you an example of one that was even before the tax code hit if you want it.

Romy: Yeah, let's do it.

Douglas Stewart: You want it?

Romy: Yeah.

Douglas Stewart: This is a little bit self-serving. It obviously wasn't me because I wasn't born before 1969, but in 1965, Max Fisher, the namesake of the foundation that I'm very, very lucky to serve, he and a group of leaders in the Jewish Community organized a $55 million, actually it was $50 million, $50-million loan to the Jewish Agency for Israel. Now, think about this. 1965, a really important time for the state of Israel.

Romy: Oh, yeah.

Douglas Stewart: So lots of immigrants coming in, all sorts of things going on. The state of Israel is just getting its legs under it and starting to move and so forth. So they didn't have as much as certainly what we have right now in terms of health and human services departments and all of that. So the Jewish Agency is, even today, is a quasi-governmental agency-

Romy: [cross-talk 00:08:10].

Douglas Stewart: ... but it's a for-impact or what they would have called then an NGO, a non-governmental, but it was almost quasi. So that money came from 11 U.S.-based insurance companies. They collectively lent the Jewish Agency for Israel $50 million for 15 years at 5 1/2%.

The collateral was the good faith and credit of the American Jewish people, which means they didn't have physical collateral that they could just seize. And so, that 5 1/2%, I looked this up, and I'll tell you where you can see this story too. But 5 1/2%, at that time, was the mortgage rate in 1965.

Romy: Oh, yeah.

Douglas Stewart: And the only reason I know that is because I looked it up, and I wanted to see, was this a concessionary loan, right? And it turns out it was because you can't get a mortgage with no collateral, right? So it was concessionary, and it was 15 years, and they paid it off in like 12 or something.

And if you want more information of that, we do have a Max M. Fisher Archives, it's called. It's just MaxMFisher.org, and if you were to look up loan in the resource center, you can see all the original documents. You can read the loan agreement.

Romy: Wow.

Douglas Stewart: So I think that and we can get to this, but the development profession with planned giving and with other instruments inside that kind of that like charitable gift annuities and so forth, the development profession has developed tools to respond to donor interests and donor needs.

And so that's what planned giving was, and I think now that donors are creating something in terms of impact investing that they want, that now when the development professionals grab a hold of this, it's going to accelerate. It's not for everybody. It's not for every group, but it is for a lot of them, I think.

Romy: I agree-

Doug Stewart: It is for a lot of them I think.

Romy: I agree. Well, and that story is absolutely fascinating.

Doug Stewart: It's fun; it's really fun.

Romy: It's fascinating because it was before the 1967, where they got Jerusalem. That's extraordinary to me.

Doug Stewart: It's unbelievable.

Romy: It's really, really unbelievable. I love the good faith. To go back to this donor drive, and I would like to come back to some of the terminology in a minute. I want to stay on this theme, because without question the drive from the donor or potential investor, I'm going to call them the philanthropic-minded person, who wants to move the needle but wants the accountability is really driving it with estate planning attorneys, life agents, program authors, financial professionals.

It's whereas before it was either/or, now everyone's sort of forced to have the conversation. It's not happening in isolation just for the very, very wealthy anymore.

Doug Stewart: That's right, I totally agree. We all know that Fidelity Charitable is the largest for-impact organization, otherwise knows as some people call non-profits, in the country. Out of the philanthropy 400 on the Chronicle of Philanthropy, they're number one. They've been hovering in two and threes, but now they're number one.

They're amassing donor advise fund assets, and this is not against Fidelity what I'm about to say, Joshua, all these firms have these things. The question is, are they advising them philanthropically? Are they only advising them on how to put money aside, not putting money to work?

Everybody is getting into the conversation. I would draw the analogy of the donor advise fund and the commercial folks going after that in the same way that I would if I can lean back on planned giving in 1987 when I first heard about it. That was my first year in college, and I got my first development job by accident at Michigan State University and found this profession that I fell in love with.

Back then, donors would be talking to a development professional. The development person or a volunteer would've asked them for a gift, and they might have said something like this. They might have said, "I really want to do this, I want to make this gift, but I don't have the cash for it. You know what stinks about it, is that I have this piece of property that if I could just sell it, it has value to me, but it has this huge basis. If I sell it, I take a bath on it. I'm going to be killed. If I could make that a revenue-generating property, but I can't because it's this thing."

Usually back then the development officer would say, "Oh gosh, that's terrible." Then they would go for another immediate cash gift. Then they would go back to the office and maybe tell an attorney there, an estate planning attorney, just maybe that something happened. They wouldn't do what all development officers do now, that say, "If I could show you a way to create a trust that would allow you to keep that property, and get full value of it, and when you pass we could get the asset."

Now, put ourselves 30 years ahead of time, now we have donors like the two stories in the article. There's Philip and Lauren, and then there's Jamie and Denise, who made a program related investment, a loan, to an organization without even being asked.

What they said was they got pitched, in Jamie's case, Jamie and Denise, they get pitched a clinic. Jamie and Denise were saying, "Look, they were very generous donors to the organization." They went into that meeting because they had made other commitments, and these aren't fake stories, these are real people. As a couple, they went in, and they were really well versed in development and so on. They've been asked, they've done leadership gifts.

They said they were only going to give a certain amount, and that was $50,000, that's a lot. Jamie and Denise are in the car saying, "No more. We love this group, but let's not fall in love again in here and do more than we can." Then they ended up, through a series of questions and a series of meetings, giving $250,000 loan.

They realized that there was a revenue stream attached so that they could loan them the money, shut the campaign down, and they could wait seven to ten years for their payback. The group didn't say, "Could we get a $250,000 loan?" The group was asking for the gift.

Again, this isn't going to work for everybody, but it's analogous. That's why I said in the article that planned giving or impact investing in the program officer, program professional realm in 2017 is like what planned giving looked like in 1987.

That's why 30 years later, here's this huge potential that development officers need to know that donors want, just like they want charitable gift annuities.

Romy: I noticed the theme of both of these stories; I am full agreement with donors, is that both of these couples were very intentional about attempting to solve and help the organization they're trying to fund. What ended up happening is their capital ends up recycling to catalyze something else in the future. This is very attractive to donors, this idea.

Doug Stewart: It is. I love that you said that, in terms of the recycling. I sometimes think when people, especially development professionals, I've shared this article with two of my friends who happen to lead two very large university development offices. I met with them before like, "Gosh, why don't you guys do this?" They're like, "It's complicated, we're worried about it cannibalizing our annual donors. If they start investing, will they give?"

There's some concerns about that, and I say, "Man, that's the same thing we were saying about planned giving and now look." Then when others think about impact investing, they think about the high flying market-rate side of it, more like the mission-related investing.

If we were to define these things, program-related investments being concessionary returns so that if you lose it, you can mark it off as a gift. On the market side, you lose it; you lose it. When you're going for market returns, this article talking to development professionals is about the concessionary side.

It won't be for everyone. A women's shelter that's taking in women from domestic abuse and all these things that we're hearing so much more about nowadays, they may not have an opportunity for this. When we say the donor, we are talking about donors who are, to your point, they want to do this. Many of them are direct cash donors in addition.

Our first PRI was to an organization that the family had just made ... When I say our, I mean the foundation that I serve. The first PRI that the foundation I served made was to a group that the family had just given a half million dollars to. Then they said, "Would you be interested in a loan for another 200? For seven years, use the money to do exactly what you were doing here, and then give it back to us."

I'm probably talking too much, but I have one other example where this makes sense.

Romy: No, I love it.

Doug Stewart: You said the money recycling, one of the things that we also know about investors, in the truest sense of the word, meaning an actual financial investor; they always have a cash account. There's for cash flow purposes; there's this certain amount of cash sitting there.

Foundations have that that have endowments; individuals have it. Imagine you live in a small town, and your small town gets a federal grant for a certain program, it's a violence prevention program. Like any good federal grant, you have to do it, and then they pay you.

Your small town now can't do it, and because of the for-impact organizations that they're using, don't have the cash flow to front it. Everybody says, "Darn." Then they "Leave money on the table." An investor or a donor who has a cash account and has X sitting in there that might be a small portion, and all they're doing is parking their cash in a different place. It's a federal grant.

They're just helping with cash flow, 0 interest. Then that money, instead of sitting in Goliath National Bank, just to use a funny. Instead of sitting in Goliath National Bank, it actually creates an impact, and then the money comes back. You're not even paying rent on it, how much are you getting in your cash account?

Romy: Right, some are negative.

Doug Stewart: Yeah, some are negative. That's just to your point, that's not even recycling, that's almost like putting something to use that wasn't going to be used, it's just going to sit there.

Romy: That's right; it's queuing up an asset. By queuing the asset and putting it into the right puzzle for a season, it multiplies the already existing puzzle.

Doug Stewart: That's a great way to put...