In 2001, after 29 years cultivating Napa’s Silver Oak Cellars and its iconic cabernet sauvignon, Justin and Bonny Meyer sold their 50% stake to partner Ray Duncan for $110 million. With Justin’s health iffy, they hoped it would give them more time together forphilanthropy and to build their newer winery, Meyer Family Cellars. But just eight months later Justin died of a heart attack at 63, leaving Bonny, then 52, to manage the money and their shared charitable mission.
For starters she sold the family home to create a $5 million charitable kitty. But it seemed like a pittance when, at the 2004 Global Philanthropy Forum at Stanford, she rubbed elbows with billionaires who had hundreds of times that amount to give away. “I’m thinking, how in the heck am I ever going to come close to doing what they’re doing?”
Meyer found an answer in her sizable noncharitable portfolio, then a conventional mix of stocks and bonds. “It occurred to me that I could do a lot more good in the world and enjoy it more by investing [that portfolio] in social entrepreneurs,” she says. While the term “impact investing” wouldn’t be coined for another three years, she threw herself into it.
For decades socially responsible investing meant keeping businesses you disapproved of–say, tobacco or weapons producers or polluters–out of your portfolio. The Forum for Sustainable & Responsible Investment estimates that more than one out of every six dollars invested in the public stock market is now socially screened in some way. A good many socially responsible mutual funds are little more than index funds minus the screened-out stocks.
By contrast, impact investing is more targeted, funneling money into businesses (often startups) likely to do good. In some ways it’s more like traditional private equity or venture capital investing: It is available primarily to the well-off, it’s riskier than the traditional stock-screening approach, and it has a potentially higher change-the-world payoff. Financial returns? They’re all over the lot, with some impact investors consciously sacrificing profits and others dreaming of venture-capital-like returns.
Regardless of return, more investors are clamoring for this type of proactive do-gooder action. At the end of 2014, $60 billion was committed to impact investments worldwide, up 25% from year-end 2013, a study by JPMorgan and the Global Impact Investing Network finds. It predicts 16% growth in 2015. Geographically, the most impact money is invested in North America and Sub-Saharan Africa; everything from an Uber-like app for auto rickshaws in India to early childhood education in Utah has attracted impact dollars.
To be sure, some very smart investors–most notably Berkshire Hathaway CEOWarren Buffett–question the wisdom of chasing both profit and social good with the same buck. “I think you should make the most money you can and then use that for whatever philanthropic goals that you have,” Buffett said at The Forbes 400 Summit on Philanthropy earlier this month in New York City.
But other billionaires who once shared Buffett’s skepticism have changed their minds. “I always had this naive notion that capitalism was about making money and philanthropy was about doing good,” Pershing Square Capital Managementfounder Bill Ackman said at the same summit. But then, true to the activist investor he is, Ackman got impatient with how traditional charities operate. He once baited Buffett by describing a charity as a company where “the CEO spends pretty much all his time raising money to pay off debt, only half of the board of directors show up at the meetings, and there are ten other companies in the space.”
Ackman thinks that philanthropists shouldn’t fund a nonprofit if there’s a for-profit trying to solve the same problem, since the for-profits should be better able to sustain themselves long term. While he and his wife, Karen, as signers of the Giving Pledge, plan to give more than half their wealth to charity, Ackman likes the idea of getting a return on his impact investments and recycling the money into new ones.
In March Ackman put $5.8 million into Bridge International Academies, a for-profit that has built a chain of more than 400 private nursery and primary schools in Kenya and Uganda that rely on technology and a standardized “school-in-a-box” approach to deliver quality education for just $6 a child a month. “It’s a volume business. You need to keep prices so low that someone living on $1.25 per day can afford your service,” says Bridge cofounder Shannon May. “If you can figure out how to drop prices on anything for someone living in poverty, there’s an unbelievably massive market.”
Bridge now has nearly 119,000 students, is opening a new school every two and a half days and plans to expand to Nigeria and India by early next year. It expects to become profitable at 500,000 students. Meanwhile, an acquisition or an initial public offering is a possibility, May says.
Ackman isn’t the only billionaire betting on Bridge. Facebook cofounder Mark Zuckerberg invested $10 million in the same March round. Bill Gates put in an undisclosed amount in 2013 after sitting next to Bridge cofounder Jay Kimmelman (May’s husband) at a dinner. The first billionaire to back Bridge, with $1.8 million in December 2009, was eBay founder Pierre Omidyar, who set up his Omidyar Network in 2004 with the then unorthodox notion of mixing philanthropy and profit.