June 22, 2023: How to get financial returns through impact investing
Daryn Dodson is Managing Partner of Illumen Capital, an impact fund of funds addressing systemic inequity by reducing racial and gender bias in investing. Previously, Dodson led the Special Equities Program as a consultant to the board of the Calvert Funds, a $12 billion pioneer in impact investing. Through this vehicle, Calvert maintains a portfolio of more than 40 funds on five continents, representing over 350 underlying portfolio companies.
Would you share with us a bit of your journey into impact investing?
I started my career at the Self-Help Credit Union, where we lent more than $6 billion. There we applied systematic frameworks, controlling for many variables, to uncover more than $9.1 billion in annual overcharging of fees and interest by some of the world’s largest banks because of the race of the borrower. That analysis was used in 18 states by advocates to pass consumer protection laws. I then went to Stanford Business School, where I took a deep dive into how companies transform communities in powerful ways; before heading to New Orleans, where I worked with entrepreneurs rebuilding their lives and businesses after Katrina [in 2005]. For the eight years before launching Illumen, I served the Calvert Funds working on deploying impact capital.
Illumen is both an investment vehicle and a vehicle for change in the investment field. Tell us about your goals and the research that backs up your approach to address racial and gender bias of overlooked and underestimated entrepreneurs.
Illumen Capital is a fund of funds investing across seed, venture capital, growth and private equity funds. One of the things that differentiates us from many in the movement for economic justice is that we apply a market-based approach. We invest in leading fund managers and provide them with a systematic bias reduction framework over a 10-year period, aiming to increase the inclusion of women- and people-of-color-led companies in the investment selection process—along with attracting, promoting and retaining talent within those pools.
Through a partnership with a team of social psychologists at Stanford SPARQ, Illumen conducted research that interviewed nearly 200 asset allocators and ultimately published a paper that showed that not only does race influence the decision-making of professional investors but that Black-led fund managers face more bias the higher they perform. In fact, asset allocators are more willing to leave money on the table than invest in Black-led funds at higher ends of performance. In response, we built a fund to go after that latent market value — a massive investment opportunity for those who see not only the humanity of these fast-growing demographics but also the value they bring to the marketplace.
How do you perform due diligence that emphasizes both impact and financial return?
We look across transformative, tech-enabled solutions in environment, health, education and financial inclusion. Each of these impact themes has created massive economic value historically and are poised to capture new value in the future. One unique aspect of due diligence that we bring as a firm is our bias reduction methodology. We partner with our fund managers over a 10-year journey to find these underestimated and overlooked parts of the economic ecosystem that represent the growing new majority of the country.
Do you see more managers coming into the field to continue to diversify your capital?
Yes. While guest teaching at Stanford Business School, Harvard Business School, Howard University Law and other schools, I have seen the power curve of impact talent globally. Many in the next generation are focusing their career decisions on the importance of making meaning and impact along with financial return. It's exciting to see the most talented people in the world deciding that they are no longer willing to compromise their values. What an incredible boost this will be to the GDP of the country, what an incredible boost to communities and to inclusion throughout the world and to overall prosperity in a way that we can all be proud. These funds are poised for possible outperformance because they attract some of the most talented students who are orienting more and more in this direction.
As you focus on the sectors, is there alignment with the United Nations Sustainable Development Goals (UN SDGs)?
We anchor within SDGs to create broader impact via equity and inclusion throughout the world. Recognizing the overlooked and underestimated people of color and driving that intersectionality, particularly with women, is an important dimension to delivering on several SDGs.
Your partnership with Impact Experience and Stanford SPARQ is focused on both increasing the diversity of managers and helping them think differently. How do you help managers see through new lenses?
The Illumen Capital Impact Experience is a two-day deep dive into the history of slavery, lynching and mass incarceration so investors can have a sense of the periods in history that created the imbalance in the global financial markets. Only 1.3% of the over $70 trillion of wealth in this country is currently managed by firms owned by women and people of color. When we look back at our history, we can focus not only on the barriers to achieving transformation and change, but the leverage points. Managers begin to understand and unlock the pent-up potential of these already successful entrepreneurs and back them. We create ties between the fund managers of different races in our portfolio to generate powerful experiences to think tactically about the ways they can work together to offset systems of bias throughout the marketplace.
Is there any empirical evidence that shows alpha is created if you invest with values?
You can make good investments in impact investing or in the broader market, and you can make bad investments in both. The task is to do the due diligence and find these massive trends like overlooked and underestimated women and people of color who are leading companies that are often dismissed because of bias and not because of their return potential. Those who do the work to find these opportunities will win in the future.
What are your hopes for the field in 2030 and 2040 and the cross section of your team's work in accelerating that field?
I often reflect on the idea that Martin Luther King was assassinated over 50 years ago. And when we look at what he was doing in his life — fighting for economic justice — not much progress has been made within asset management. When I think 50 years into the future, I see a $30 trillion shift in assets toward women- and people-of-color-owned firms, which is where we would naturally fall if the screens of bias were lifted from the eyes of investors. My sense is there's a real possibility here for returns and impact in the world, and massive shifts of capital are necessary to create more global prosperity.
We need to think about the systemic bias we bring to the table to ensure the next 50 years don’t look like the last. We need to include women and people of color because of their humanity, but also because of the value they bring to the marketplace.
How to cultivate a future generation of collectors and enthusiasts
By THOMAS H. RUGGIE
Car collecting is a popular hobby among auto enthusiasts and wealthy investors alike. Not only is it a way to showcase a passion for vintage and classic cars as well as the sport of car racing, but it can also serve as a potentially profitable alternative investment.
One of the main draws of car collecting is the potential for an increase in asset valuation. Cars, particularly vintage and classic models, can increase in value as they become rarer and more sought after. This is particularly true for cars with unique histories or limited production runs. In recent years, there have been several examples of high-profile auctions where rare cars have sold for millions of dollars, such as the Ferrari 335 Sport Scaglietti that sold for more than $35 million in 2016.
And while car collecting initially brings exotic machines, wealthy patrons and high sticker prices to mind, interestingly, the average car enthusiast — of which there are about 70 million in the U.S. — has invested $35,000 in that passion. While there is definitely a luxury aspect to the marketplace — as with other collectibles, such as art, wine and sports memorabilia, among so many others — most can pursue their interests at a level appropriate for them.
I recently had the great pleasure of speaking with Jack Butcher, the recently retired former president of Hagerty, who was responsible for maximizing stakeholder value and growing the company’s global insurance business. During our conversation, we covered a range of topics — from asset valuation and insurance, which is the core of Hagerty’s business, to the future of car collecting and the next generation of enthusiasts who will drive it (pun intended). In this first article from that conversation, Jack and I focus on the next generation.
From the perspective of my profession — I founded a multifamily office serving high-net-worth people — the next generation is often viewed as the children of wealth creators. Within this context, the parents are pursuing their destiny and considering various aspects of legacy. That includes the transfer of their family values; personal interests, such as collecting; and wealth to their children and future generations. I was intrigued by Jack’s perspective and Hagerty’s strategic focus on cultivating the future drivers, enthusiasts and collectors of cars.
“We have taught over 4,000 young drivers how to drive manual transmissions, for example, and we do that because we see these young people turning up at events, turning up at tracks with their families, Jack told me. “We believe this is a market built by a community of like-minded, passionate enthusiasts.” Whether family or community, there are shared values that unite people, and there is great desire to see those values carried forward purposefully.
While Jack’s focus is obviously on cars, my focus — a personal passion since my youth — has been sports memorabilia. As Jack and I spoke, what emerged is that while the category of collection may differ — from cars to wine to art to sports memorabilia — the constant is the passion: the history and intrinsic value of “the thing” that was often so much more than its assessed value.
Yet across so many collectors and their collections, there is a lack of valuation, resulting in a collector not having a clear appreciation for the monetary worth of something that is so important to them, as well as a lack of thought into how to pass it on to future generations.
In an interview I did with Wade Boggs, the Baseball Hall of Famer recognized the importance of estate planning and related considerations, such as insurance, which all require an assessment of value. And while there was recognition of a need to get this done, my sense was that it would remain on a to-do list for some time.
In my article Deconstructing A Collection: Preparing Your Family to Handle Your Investment Down the Road, I discuss what both a collector and investor should consider to appropriately protect their collection, investment and transfer of wealth to family members, a foundation or other possible beneficiaries.
Understandably, with Hagerty, the valuation of cars is foundational to its business of insuring them. “You know, some people are extremely practical, and it is a purely economic trade,” Jack said. “Many people treat collectible cars as they would any other tradable asset. Yes, they purchase it with the intent of the value going up and selling it at a profit. But there are others who simply purchase a car to augment an existing collection.”
And regardless of whether you are acquiring the car as an investor or a collector, or perhaps as both, having accurate data on which to place a valuation is essential to insuring that item.
“They're missing the one that they've always wanted, and it would complete their collection, want a fill-in-the-blank car because it was raced at Le Mans or raced at Indy or belongs to a certain individual,” Jack said of these collectors. “Many will purchase to gain privileged access to different organizations and clubs. There’s a lovely tour in Europe called Mille Miglia, an exclusive tour, and it’s limited to only those vehicles that were produced no later than 1957, so people will purchase vehicles to be eligible to be invited to that. And so the list goes on.
“I would say people will often collect for nostalgia, where they want a car because it was the one their grandfather or grandmother owned, or they remember riding in it as a young child, or they restored it with a parent. That’s powerful.”
There are any number of ways that Jack and I have seen collectors think about the future relative to their collections. For example, gifting vehicles to the next generation (Each state handles this differently, so speak with your adviser or accountant). Jack has seen parents co-title certain vehicles with their children or gift vehicles to museums, all with the intent of facilitating tax advantages.
Estate planning is where the valuation of any collection plays a particularly important role. Conversations with the next generation about the significance of the collection — personally to the collector as well as monetarily — should take place so that key stakeholders have an appropriate understanding of and appreciation for the collection as a whole.
Said Jack: “Make sure that everyone involved knows, before someone’s passing, how they might direct the estate to work with certain auction houses to ensure that — if there is no next generation to pass the collection on to or the next generation does not share the collector’s interests and passions and wants to sell the collection — the value of that collection is harvested at the proper level.” Jack and I have both seen numerous situations where this was not properly managed, leaving the collection and next generation vulnerable.
What are his top three recommendations for a next-generation collector?
“I think it is really important that a collector understand their own ‘Why?’ ” Jack said. “While there is no right or wrong answer here, they do need to be clear on it when they’re going to acquire that car.”
The second recommendation: “Be sure to get a fair price, making certain you understand the value of the asset prior to acquiring it.”
And Jack’s third recommendation: “Once you own it, make sure you protect and maintain it — as much for your own benefit as for the future.”