Impact Investing in Israel Roundtable

Definition and Core Concept

• Impact investing is defined as an investment strategy with two-fold goals: achieving strategic philanthropic objectives alongside generating financial returns.
• The approach combines traditional grant-making with investment capital to leverage funds, recycle resources, and attract additional market capital.
• Unlike standard philanthropy, impact investing aims to fund social enterprises that can operate sustainably through market mechanisms rather than relying solely on donations.

The Israeli Context vs. The American Model

• Unlike the United States, Israel lacks a robust foundation and endowment culture, making impact investing essential as the primary vehicle for scaling social funding.
• American impact investing leverages the 95% of foundation assets not required for the mandatory 5% annual grant distribution to generate mission-aligned returns.
• Israel's unique challenge involves a prosperity paradox where economic growth exists alongside persistent social and economic inequalities that require new funding models.
• The Israeli philanthropic community is described as "small and young," necessitating the adaptation of capital market solutions (e.g., consolidation, credit enhancement) to the social sector.

Key Speakers and Strategic Proposals

• Didi Lachman (Moderator/Host): Emphasized the need to adapt capital market tools to the social sector to address resource scarcity and consolidate philanthropic/institutional money.
• Lorraine Alexander (Portland Trust):
  • Identified "social impact investing" as the "new venture capital," noting it is currently at a stage similar to early 1980s venture capital.
  • Estimated $300 billion in global Jewish endowments, with potential for an additional $3 billion annually if just 1% of the non-distributed 95% were deployed.
  • Stated that a 7% return is generally required for impact investing to be viable for foundations covering operational costs and maintaining endowment value.
  • Highlighted that impact investing complements, rather than replaces, traditional grant-making.
• Alan Hoffman (Jewish Agency):
  • Described the Agency as an ecosystem identifying challenges, mobilizing funders, and providing solutions.
  • Noted a generational shift where new philanthropists from the financial sector demand social returns on investment (SROI).
  • Cited the specific case of Ethiopian immigrants, where 60% face military jail due to cultural friction, presenting an opportunity for a large-scale social impact project quantified by state budget savings.
  • Argued that current philanthropic sources cannot fund such large-scale government-linked interventions alone; impact investing instruments are required.
• Carl Kaplan (Koret Foundation):
  • Reported 20 years of experience leveraging philanthropy to facilitate over $300 million in financing for small businesses, creating 50,000 jobs.
  • Disclosed a 20-year loss of only $4 million (1.5% loss rate on guaranteed funds) and an overall operational cost of 4% of credit facilitated.
  • Highlighted a 16-to-1 leverage ratio achieved through a U.S. government OPEC guarantee, allowing significant capital multiplication.
  • Focuses on underserved niches: the Negev/North, Israeli Arabs, Orthodox Jews, Bedouins, and Ethiopians.
  • Proposed a model where a $30 million social fund could utilize its lending to the Koret Foundation to secure 6-to-7 leverage from commercial banks for working capital.
• Izzy Tepuchy (Israel Bonds):
  • Reported current annual sales of approximately $1 billion in the US, with ambitions to expand sales to half a billion to $750 million in Europe, South America, and Canada.
  • Described Israel Bonds as a proven infrastructure tool that builds national confidence and creates "double benefits" when proceeds are donated to social causes.
  • Proposed the creation of "earmarked bonds" for specific social projects and suggested partnerships with organizations like the Milken Institute.
  • Emphasized the confidence factor of the 62-year record of reliability, especially during economic or security crises.
• Yaron Neudorfer (Social Finance Israel):
  • Proposed three vehicles for a social capital market: Social Impact Bonds (SIBs), social venture funds, and a Social Investment Bank.
  • Described the UK model of SIBs where investors receive returns (approx. 13.3% IRR in the first recidivism bond) based on government savings from achieved outcomes.
  • Outlined Israeli SIB pilots targeting: employment for Haredim, diabetes management, and Arab employment.
  • Advocated for a Social Investment Bank (modeled on UK's "Big Society Capital") to supply capital to social funds, potentially utilizing dormant bank accounts for equity.
  • Noted that 12 of 17 investors in the first UK SIB held the bonds as investments rather than grants.

Operational Challenges and Future Steps

• Measurement Gap: A critical barrier identified is the lack of standardized international or national systems for measuring social impact, which is essential to prove the "double bottom line" to investors.
• Institutional Friction: Philanthropic investment committees are described as "incredibly conservative," often separating board strategic vision from investment committee risk management due to "prudent investor" rules.
• Capital Mobilization:
  • Proposed using "crowdfunding" mechanisms to aggregate small amounts from donor-advised funds (DAFs) for social impact vehicles.
  • Suggested that financial institutions (e.g., Fidelity, Schwab) creating Program-Related Investments (PRIs) could significantly expand the asset class.
  • Calculated that if foundations allocated 20% of their mandatory 5% grant distribution to low-risk social investments, they could preserve endowment value while achieving higher social leverage.
• Risk Mitigation:
  • Investors require returns of at least 7% to be viable, but the sector aims to keep returns capped (e.g., 13.5%) to ensure social focus.
  • Successful tracks records are necessary to overcome the "conservative" nature of institutional investors.
  • Public-Private Partnerships are deemed essential, with private sector expertise (e.g., insurance) needed to guarantee losses in high-risk social ventures.

Forward-Looking Statements

• The sector is projected to become the "venture capital of the coming decade" as a track record of successes percolates into the conservative world of foundations and endowments.
• The Israeli government is preparing to create its first social investing fund based on a public-private investment model.
• There is a specific initiative underway to develop a social impact bank in Israel with Milken Institute support to channel capital into the ecosystem.
• The G8 has placed social impact bonds on their agenda for the following year, signaling global regulatory momentum.