Jessica Millstone, managing partner of Millstone Investments, and her sister are passionate about promoting both education and women’s sports. One way they do this is by investing catalytic capital — what Millstone calls “a melding of what used to be philanthropic money into cause-related allocation, putting it into for-profit companies and funds as a way to really drive investment into those spaces.”
Their use of Millstone Investments to drive change is just one example of how family offices are being deployed for purposes beyond simple wealth preservation.
“It’s very impact-oriented, but these are also companies that could have an interesting outcome,” Millstone says. “It’s risky, like it is with any early-stage investment, but these are the companies we want to see make it, so we’re investing quite a bit up front to be their champions.”
Families who use their capital to champion causes are redefining the roles of philanthropy and impact investing in the family office.
“All investment of capital has some impact, whether you intend for it to or not,” says Dipti Pratt, managing director of Americas at Toniic, a global community of impact investors. Investing for impact does not usually replace philanthropy, but rather works alongside it.
Not all impact investments are labeled that way or promoted primarily as a way to make an impact. Some may be investments in companies making innovative products whose use will have a positive impact on the environment, for example.
These investments may serve a dual purpose of making money and promoting change.
“Every family has investments, but how are they being utilized? What are they being deployed to achieve?” says Scott Saslow, founder and CEO of ONE WORLD Investments. “Some asset owners realize they can back the kind of companies and funds that are driving the kind of change they think is exciting.”
Improving information sharing
For Drew Payne and his family, expanding educational opportunities has been the focus of their family office work.
“How do we get resources to communities to make a difference in creating the opportunity for people to reach their potential?” Payne says. “That’s a common theme for my mom and dad, who used education to improve their quality of life and create wealth. They want folks who are interested in progressing to have that opportunity, no matter where they’re born.”
The family has used both philanthropic contributions and impact investing to work toward this goal. But they found that money was not getting to nonprofits effectively.
“There was a gap when it came to purpose,” Payne says. “We were doing investments in funds, but when we met the portfolio companies the funds were investing in, how they were defining impact and success was very different from the GPs.”
To address this issue, Payne used his investment operating background to launch a company called UpMetrics, which works with organizations to define success from an impact performance perspective, then helps collect and structure that data.
“We felt like, from a systems change perspective, if you have structured information connected with relationships, you can get money out faster to organizations — whether for-profit or non-profit — that are doing good work. That will make a difference faster within communities and in peoples’ lives,” says Payne, who is CEO of UpMetrics. “We didn’t want to be a top-down reporting platform and service technology. We wanted to work both sides of the aisle, both from the capital allocator and management side of it, and those that were receiving the money. If we can start to bridge the gap as to how information is being utilized across those organizations, then we felt like more money could get out faster with intentionality.”
The goal is to move beyond impact reporting that is transactional and shares information in only one direction, Payne says.
“Imagine a world where this information is more real-time across a portfolio and can connect financial performance to the impact performance,” Payne says.
Redefining stewardship
Families who are looking to make an impact with their money can customize their approach based on specific interests or asset classes. Other families choose a geographic focus for the impact they want to create, often focused on the place where they created their wealth.
“Often a good place to start is by trying to understand the areas you’re excited about. What are you supporting through your philanthropy?” Saslow says. “It might be climate, it might be K-12 education, it might be supporting entrepreneurs in sub-Saharan Africa.”
Asset classes are another lens through which to assess options.
“There are ways to use your public dollars for impact as well, both equity and bonds,” Saslow says.
This can be done in a non-concessionary way, with investments that earn market-rate returns.
“But if people are OK with taking some investment capital and having it not be market rate, there are managers and funds and strategies designed to do just that,” Saslow says.
An evolving field
Options for making an impact with wealth have expanded in recent years.
“When I went to business school, most folks who were very socially oriented went into public service,” Saslow says. “There wasn’t an opportunity to use the levers of the private sector with some sort of environmental or social goal in mind. That has very much changed.”
Saslow says when he first got involved in impact investing a decade ago, he was beginning to see interest from institutional-grade players.
“I was starting to see venture capital funds that were committed to an area of impact, that had grade A talent and looked very professional. Today, the impact investing field has become a lot more professionalized,” Saslow says. “Some family office principals, particularly those in G2 or later, are now realizing they can tap into their family office investment capital, and they can invest it in ways to achieve change that they want to see happen. I think that’s very inspiring.”
Investors who are committed to a cause often give more than money. Millstone and her sister, for example, put personal effort into the companies they invest in.
“We invested in a women’s sports media company that is aligned with our team investments, because this organization is going to make content and do storytelling around women’s sports in general, and specifically the teams that we’re involved in,” Millstone says. “There’s that potential synergy. And it’s two women who are starting the company. We really want to support women entrepreneurs.”
Benefits on both sides
Supporting a cause can be one way to boost family engagement in the family office.
“The research is really clear that when you have more engagement, you have a healthier family office,” Saslow says.
Family offices have some advantages when it comes to impact investing. For example, Pratt says, they can cut checks and move capital quickly, and they often have a larger appetite for risk than other investors. They also often have access to other pools of capital, such as from family members or a family business.
However, it can take time for everyone involved in a family office to align around impact investing, particularly in more established family offices, where the principals are more comfortable with traditional investing. If the family still has an operating business, that can complicate decision making.
“A newly established family office often has time to think about how to do impact investing from the outset, whereas an established family office may be looking at how to add it on as a layer,” Pratt says.
Sometimes the decision to explore impact investing comes during conversations about creating or updating an investment policy statement.
“It’s going to take time to make sure everyone aligns with that,” Pratt says.
And just as the field of impact investing has evolved, so can a particular family’s strategy.
“I think all family offices, whether they’re impact oriented or not, want to think about the long-term legacy of the wealth,” Saslow says. But that doesn’t mean their approach must stay static. “There are a lot of different themes families can choose to support. There are a lot of different ways to support those themes through different asset classes. That doesn’t mean there is only one path, or once a family kind of chooses a path, they’re always on that path. It evolves, just like every few years you look at your overall asset allocation.”