The Gates Foundation Reveals How It Makes Program-Related Investments

When the Bill & Melinda Gates Foundation started a $400-million program to make investments related to its programs, the fund set up a process that encourages program officers to look at investments as a potential tool in their work — but also forces them to weigh the social and financial returns involved, Andrew Farnum, senior program investment officer at the foundation, told participants at the Skoll World Forum on Social Entrepreneurship.

All of the investments focus on the foundation’s areas of interest – education in the United States, international development, global health – and are the result of close collaboration between program and investment officers. Since the program was announced in late 2009, the Seattle foundation has made investments totaling $150-million.

When a program officer suggests a potential investment, the investment team analyzes the deal to estimate what the financial return is likely to be and compares that to the 5 percent annual return that the foundation expects from its traditional investment portfolio.

Weighing Returns

To explain what happens next, Mr. Farnum talked about a hypothetical $10-million investment in a for-profit diagnostics company whose work might be beneficial in the fight against malaria.

“If it’s close to market rate, we allow the malaria team to make that $10-million investment with no charge to their budget or a very low charge to their budget,” he said. “The entire $10-million comes out of the $400-million pool of capital that we have to make these investments.”

But if the estimated rate of return is lower than what the foundation anticipates from its traditional investment strategy, the foundation would charge the difference between what it would have earned keeping the money in the endowment and the low-return investment to the malaria team’s budget.

Doing that gives the foundation the flexibility to make investments with a wide variety of expected financial returns, Mr. Farnum told conference participants.

At the same time, it makes program officers think about questions like, “Am I going to have more social impact doing that versus just giving a $5-million grant?” he said. “They’re forced to quantify the potential impact of a program-related investment versus a grant.”

The process that the Gates Foundation has established is important because most U.S. foundations would count a $1-million program-related investment against its program budget the same way they would a $1-million grant, said John Goldstein, managing director of Imprint Capital, an investment company that specializes in social investing.

“So they can give a grant —which is easier, less headache, and what they’re used to doing — or they can go through the hassle and the headache of making an investment, with no difference in terms of their budget,” he said. “It creates a huge disincentive” to make investments.