An Interview With Bain Capital’s Managing Director in Impact Investing Deval Patrick: The Importance of Long-Term Investments and Better Capitalism in Solving Global Problems

Berkeley-Haas Institute for Business & Social Impact Director Laura D’Andrea Tyson Asks About the Roles of Philanthropy, Government and Business

Deval Patrick and Laura D'Andrea Tyson

Deval Patrick and Laura D'Andrea Tyson discuss the role of impact investing, and Patrick's take on scaling the sector, at the 2016 Best for the World Gathering.
Photo by Jay Coen Gilbert

“I think if we are able to prove out, at scale, that you don’t have to trade return for impact, it changes the conversation of capitalism generally.”

This is one of the statements made by Deval Patrick, managing director in impact investment at Bain Capital, in his interview with Laura D’Andrea Tyson, director of the Institute for Business & Social Impact at Berkeley-Haas during the 2016 Best for the World Gathering at the University of California, Berkeley.

The presenters came to the interview with years of experience in government, philanthropy and big business to discuss how impact investing fits into the equation of solving global problems. Patrick expresses the importance of long-term investments, the dangers of short-termism, and how he sees a way to harness the power of capital to create a better capitalism model. Read more about Bain Capital’s GIIRS-Rated Double Impact fund.

Below is the edited interview. You can watch the interview on our 2016 Best for the World hub, as well as learn about all the 2016 Best for the World honorees.

Deval Patrick on Impact Investing’s Role in Solving Global Problems

Laura D’Andrea Tyson: Hello, everyone. We are indeed honored to have with us one of America’s great statesman. Also one of America’s great lawyers and also one of America’s great social entrepreneurs, Deval Patrick.

You’ve had a distinguished career in everything you’ve tried, Deval. … In his latest set of activities, Deval is really focusing on a central issue that brings all of you here together today, and that is social impact and how to design organizations, or how to fund organizations, and how to structure organizations that both generate a financial return but also generate a social return and really address in a meaningful way social challenges. So what Deval has done is he’s a managing director of something that’s called Double Impact Business. So I’m going to go right to get him to give us a definition of that and then we’ll proceed.

Deval Patrick: Well that’s a big broad pressure that actually an introduction. I think that I should quit while I’m ahead but thank you all for coming. …

This whole area of impact investing, without giving you the straight chronology of what I was exposed to, I will say that I first learned about this field through social-impact bonds. And when Sir Ronald Cohen, who invented the concept in the UK was coming through the United States six or seven years ago, introducing the concept to various sitting governors and mayors, I had the great advantage and opportunity to sit with him and learn about that new tool. We did two of the first in the country in Massachusetts before I left office.

We stayed in touch, Ronnie and I. He introduced me, then, to the ocean of investing in private enterprise for both financial return and measurable or environmental impact. To me, that… Is a notion whose time has come for a couple of reasons. One, having worked in business, in government, and in philanthropy in my professional career. It strikes me that, to some extent over the years, philanthropy and government have let business off the hook. Which is to say … in philanthropy and in government we have said, “We will clean up whatever calamity is caused incidentally by business.” … As a capitalist, I’m not saying business is evil, but there are consequences, and the best businesses, I think, pay attention to those consequences and some do not, and that really brings me to my second point of view.

That is if you really believe in long-term value, at times especially, like this one of ubiquitous information, I don’t think it’s possible to manage to the financial bottom line alone.

Tyson: Wow.

Patrick: Because the environmental or social bottom lines, if you mess up, can come around and affect your financial bottom line. So in the board rooms of large public companies for example, in which I have sat and worked, the conversation was about how you manage those risks. To me, it’s not that big a step from that to impact investing, which is about being intentional about those second and third bottom lines. So our focus is, as we thought about it, how to invest in middle-market companies in North America where, for a host of reasons, we have chosen on that spectrum a competitive rate of return. It’s not a value judgement about where those are on the return spectrum. Where we can generate impact in one of three areas and we describe those areas as sustainability, health and wellness, or community building. We can talk more about that if you like.

Tyson: … First of all, I just want to say that from the audience it might be helpful to just define the social-impact bond … So in all of this we’re thinking about the ways to mobilize capital that’s interested in impact, philanthropy non-NGOs that are interested in impact, working with the business and government, and social-impact bonds are one way. …

Patrick: Just to be clear, we aren’t doing impact bonds in our current business. But that was my first taste of the notion of blurring the lines … between prior capital and public policy. The reason why I was interested and am still interested in … social impact bonds is that, you know, you often hear during campaigns and in between campaigns the notion of innovation in public policy. You need to try new things and so on. I have a lot of appetite for that, but politics actually makes it remarkably difficult to actually innovate, because if you want to innovate you have to have tolerance for failure, and politics punishes failure. So the notion of having a tool of trying new things without the public’s money at risk and paying the bond holders back from the savings of the new thing that works is a pretty brilliant concept.

In its early days in Massachusetts, we did one [bond] on chronic, long-term individual homelessness and high-risk recidivism, and they’re going very, very well.

Tyson: Great. … I only wanted to bring it up because you were a visionary. You saw the vision. You were one of the real movers, and it is sort of seeing how to bring in the private sector with government to try and get something done.

Patrick: Well, I offer one qualifier to make sure I’m understood. I’m not one of those people who believes that all of the best answers are going to come from one sector.

You know, that it’s all up to government or it’s all up to business or it’s all up to philanthropy. I do think it is tremendous power in collaboration and I think part of what is attractive to me about social-impact bonds is this encouragement of collaboration.

Tyson: Right…. Your career allows you to sort of understand the contribution of these various partners. I mean you’ve worked in very large multinational companies. You’ve worked in government at the highest level, and you work in philanthropy. So you can bring together these kinds of ideas.

Patrick: I hope so.

Tyson: Let me go to the effort that you’re working on now, because you talked about the focus. I think actually, this is really an important area to explore because the word “impact” is a vague word. I mean, you can impact a variety of things and lots of investors will say, “I’m interested in having impact,” but then you say, “What kind of impact? Is it environmental impact? Is it in education? Is it in health? Is it in developing countries or market economies?” So it seems to me very important and I think you’ve realize that, to choose the sectors, the areas of impact. So I guess it would be interesting to hear a little bit more about … how you make your choices and then … the one that’s least defined to me is community building.

Patrick: Yes. … So we spent the better part of a year studying and developing a business plan. Mapping what was happening in North America, because we wanted our focus to be in North America. … The field is more mature outside of the United States than within the United States. In the United States, we chose our focus probably 20 percent by personal interest and 80 percent by analysis on [whether deal] flow and return profile could be generated. So there are some things that I’m very interested in that we ended up leaving out, at least for this first go around, because we didn’t think we could meet those goals. We’re very broad in our definition. So sustainability, we mean sustainable agriculture, sustainable consumer goods, alternative energy, energy efficiency. That sort of thing. By health and wellness, we mean access to affordable care, nutrition, issues around food scarcity, and also ed-tech companies whose products are closing achievement gaps and skills gaps.

Then, community building is a place-based strategy. So it’s companies that are creating jobs and catalyzing economic activity in places of chronic underemployment and, again, across North America. We’ve haven’t started our propriety sourcing yet, but we’ve had 180 opportunities just come in over the transit, and they are incredibly interesting, compelling, and frankly, inspiring. Real businesses that are managing themselves to multiple bottom lines and making money.

Tyson: That’s very exciting. That’s very exciting. So the identification of real opportunities has been … they’re coming to you.

Patrick: Yeah. We’d be foolish to rely on just [those] coming to us. There’s a lot of other great players out there, but I have to say if you’ve looked around the United States in particular, of the many, many other impact investments funds, and there are a couple as large or larger than what we want to be, almost all they’re doing is venturing on the early-stage investing. There really isn’t a secondary market just yet, and when we talk to many of the mission-oriented entrepreneurs, they tell us they stay with their venture partners longer than they might because they’re afraid that when they sell on, they sell out. In other words, they can attract the capital because of the type of enterprise, but not necessarily a capital partner who gets and respects all of what they’re trying to do and their mission is aligned with the business they’re trying to create. We want to be that capital partner.

Tyson: Okay. So on the community area … there is, as you well know, through the SVA or through the Department of Treasuries, lots of programs that, possibly, a private entity could link into to try and solve a problem…. To my mind, it’s a very interesting possibility of partnerships because the public funds may not be fully utilized, they may not be the most effectively used. They can’t be utilized in innovative ways, as you’ve said, but if you could link the private entity to this public money, it’s a very efficient utilization of the public money. …

Patrick: I think you’re conceptually right, Laura…. I should say, we’ve been very … modest about our expectations. Which is to say, we haven’t said, “This is a fund where we cure child poverty or lift a whole community.” I mean there’s a lot to like, for example, in community building, that investing in a company or two in a given community, alongside someone who’s doing affordable housing, somebody else is doing education. Might be government. … There’s a lot to like about bringing a lot of different kinds of focus to a community at the same time and being part of a comprehensive strategy of lifting that community.

There, I think there could be opportunities to work alongside a government fund or program. State, local or federal.

Tyson: … I think there’s some interesting things going on in Oakland like that.

Patrick: Yes. There’s some interesting things happening in Detroit.

Tyson: A lot of interesting things are happening in Detroit. You could say that, actually as far as impact investing and social innovation, Detroit is being rebuilt with a significant infusion of social entrepreneurship and impact investing. Absolutely.

Patrick: … I’ve met so many incredible people in the field of impact investing and incredibly generous people. They’ve been very forthcoming about their strategies and their contacts and their insights and so forth. I will say, I think the field suffers a little bit from nomenclature. There’s a lot of debate about what counts and what doesn’t count and what’s authentic and what isn’t. I get that, but let’s let a thousand flowers bloom. I will say that, just speaking of Detroit, there’s a marvelous company. I think it’s very hip, called Shinola, which you may have heard about.

… They make watches and leather goods and bikes and so forth. Founded by the entrepreneur who developed the Fossil brand. You remember Fossil?

Tyson: Fossil. Of course. It’s still around. …

Patrick: He bought the Shinola brand … to create this company in downtown Detroit, because he wanted to be a part of the revival of downtown Detroit. I love that story. I also love their products, as you can see. I got one for Christmas.

Patrick: … Turns out there are a whole bunch of entrepreneurs like that. Who … They’re hard-headed you know, money-makers, but they want meaning in how they make that money. I don’t think that’s a dissident objective. I think that’s a very forward-leaning and long-term objective, and we want to be their capital partners.

Tyson: … You have to, as he said, let a thousand flowers bloom and your fund and what you are doing is defining … Is helping to define the space, but I’m sure you know that there’s a lot of confusion in this space, that sometimes you run across who is a social investor or considers himself or herself to be a social investor. If it turns out there is a financial bottom line, a competitive financial bottom line, that to them is not social. It’s not social. … That’s for-profit and for-profit, in many, many circles, is a negative phrase. For-profit, it must be anti-social…. This fund, and there are a number of others that are developing, is trying to say, “No…. Think about the funding mechanism. This is the way that this entity will sustain itself. It’s the way that the business will continue.”

Patrick: I’m with you. … When I say we picked a point on this spectrum, on this return spectrum, which is about competitive return. I was really serious when I said we didn’t do that as a value judgement on where others choose to be on that competitive return. One of the people I met when I was doing my year’s worth of homework told me, “If it isn’t a concessionary return, it’s not an impact investment.” I get it. That’s fine, for you.

Tyson: That’s a definition.

Patrick: … It doesn’t work for us. … I come to where I do, in part, because I think if we are able to prove out at scale that you don’t have to trade return for impact, it changes the conversation of capitalism generally. I’m excited about that. Now not everybody wants to take that one. Not everybody … You know some people are of the view if it’s capitalism, it’s inherently evil. Okay. I get that, but that’s … As I said, we haven’t chosen where we are as a value judgement about where others have chosen to be. So as I said about a thousand flowers bloom, is basically the notion that private capital is searching for ways to support mission-oriented enterprise is a fantastic thing.

Tyson: It’s great. It’s great opportunity. It’s an amazing set of circumstances.

Patrick: If some investors say I’m willing to do it for the return of my capital, and others say it I’m willing to do it for 3x my capital or 10-x my capital, whatever it is, and there are lots of different choices in between. That’s fine by me.

Tyson: Can I ask a question, because you did mention you have had experience with large corporates, as have I. There is a very significant [number] of funds now in the public-equity market that are going into funds that have some claim to sustainability. That is, there are sustainability funds. There are even now gender-equity funds. There are funds where you can say, “I will focus on alternative energy.” So investors in … publicly traded equities are looking for these kinds of alternatives. These are scaled plays, because these are big companies and there’s a fair amount of capital now moving in that direction. I was wondering … if you’ve been watching that and, … Is another flower blooming? You mentioned that in your time it was about managing risk. I think a lot of firms now really are thinking it’s about long-term investing.

Patrick: Well, that’s a critically important.

Tyson: But let me ask you the question then. Because this is a question that you’ll look at as a lawyer. So you now have these big companies that are focusing on issues of sustainability more and more. They’re issuing reports. Their stock is going into funds to attract sustainability investors. At the same time there’s a whole group of … activist investors, and then there’s another group of activist investors, and they’re the short-term, financial-return activist investors. So how do you see that tension?

Patrick: So I’ve worked in two Fortune 50 companies. I’ve served on the board of a couple of others. I’ve worked in medium-sized and smaller companies, or with them. A poison that I saw was managing to the next quarter.

Getting the short-term results and I think, sometimes, sacrificing the long-term interest of the enterprise. By the way, that bad habit, in my view, has crept into the way we govern ourselves in this country. We govern from election cycle to election cycle, news cycle to news cycle, not generation to generation, a … I’m revealing some of my own deep, deep feelings about the danger of short-termism. … As I said at the outset, more and more I’m persuaded that if you really believe in long-term value as an investor or a business leader, you can’t focus on the next quarter alone, and turning back from that bad behavior is a big, big challenge. It’s a big challenge. Now I would tell you that I think there’s some companies learning that a multiple-bottom-line way of managing [with a] more long term of focus actually is a value-additive focus. I think the markets are beginning to acknowledge that. I think they’ve seen incredible results from Al Gore and David Blood’s fund.

Tyson: They’ve done very well. They’ve done very well.

Patrick: You’ve seen some of the big … You remember Unilever bought Ben & Jerry’s a while ago.

… Soon after the acquisition, Ben & Jerry’s was taught in business school as a failed mission-oriented business because they sold out to Unilever.

… You talk to the CEO of Unilever today, and I think he’d tell you they’re trying to figure out how to get the rest of Unilever to behave like Ben & Jerry’s. Why? Why? Because Ben & Jerry’s customer rates are stickier, and I’m not talking about they have ice cream on their fingers … They’re more loyal. It’s a faster-growing business. It’s a more sustainable business because the Ben & Jerry’s division of Unilever has tried to stay true to sustainability in their supply-chain relationships and in their ingredients, and it turns out that matters to consumers.

Millennials, the data tell us, are leading a lot of this. God bless them, but a few of us parents are millennials.

Tyson: I think the parents are millennials. …

Patrick: We like it, too. I think it’s a really good thing. I think we are in a time of actually seismic shift, and for the impatient like me, it’s not happening fast enough, but it’s happening. How to work in the ways we can, whether it’s in the businesses we work in or the products we buy, the things we support. Our behaviors can drive more of this and as we get to … a true long-term or a longer-term sustainable focus in business, it’s good for the people, good for the planet.

Tyson: I agree. What I would say is, you mentioned the stickiness of customers because that’s very attractive in terms of building the space. I actually think that the fact that we now have a growing share of the capital market, investors interested in this direction is also a tremendous help. So basically the investor interest has been growing. It really has been significantly.

Patrick: I would say following the investor interest is following the consumer interest and the entrepreneurial interest. …

Tyson: … It goes back to let a thousand flowers bloom. There might be an investor who chooses to invest in one of the generation funds. There might be an investor that invests in the kind of fund you’re raising. There might be an investor who decides to go for, you know, a BlackRock sustainability mutual fund. I mean there’s a whole, growing canopy of all kinds of investment opportunities for the investor who wants competitive return and impact.

Patrick: … I would say in the same vein there are a range of entrepreneurs.

Patrick: Meaning there’s some entrepreneurs who are delighted to be described as social entrepreneurs, and there’s some entrepreneurs who say, “Don’t call me that.

… I’m just a business person. The thing I’m doing and the way I am doing it is a positively impactful but … I just want to be a business person. That’s all.”

Tyson: So you mentioned that Unilever experience with Ben & Jerry’s, not necessarily as a plug for the Haas School of Business, but there was a very interesting article a couple of issues back in California Management Review looking at how some of the big companies looking at new entrances in their space. They either try to develop their own de novo sustainability counterpart or what’s really attractive is to acquire them, honestly, because you can see the link with the customer, understanding the supply chain, the whole organization is thee, and rather than try to build it yourself …

Patrick: … From the perspective of a fund that will want an exit at a time, that’s great news. It’s tricky though.

… Now this is related to my point about ubiquitous information. Mission integrity turns out to be really, really important to consumers. So, you can sell on, and that’s great, but it’s got to be real.

Tyson: You’ve got to convince the consumer you’re not selling out. You’re selling on. You’re selling bigger, but you are what you do.

Patrick: … One of the companies I worked for acquired brands all the time, trying to expand the offerings and move in the direction of consumer taste. We were pretty clumsy about sustaining the sustainability of the supply chain of the entity we bought, and, frankly, some of the analysis was about how to get those synergies when we acquired that brand. Now that was a long time ago, before information was quite as ubiquitous as it is today. I’m not sure you can pull that off.” … When we have been in conversation with companies about selling on through a strategic or large company, we’ve had those conversations about how you embed the mission in after the acquisition, because that is a part of what that enterprise is paying for. That’s part of the value, particularly for consumers.

Tyson: … I’m going to put on an economist hat for a minute, because you said something early on about how government and philanthropy have, to some extent, let the business sector off the hook. So, I might turn that around and say government has failed to provide the appropriate policy environment for business to do the right thing. I sometimes say, and it’s an exaggeration but I’ll just say it anyway, that if we actually wanted to solve the climate change problem, we only really need the appropriate price of carbon, and once we have that … everyone would do the right thing, because we would be measuring the externality completely, perfectly, and private entities, universities, private businesses, for-profit, not-for-profit, would do the right thing. … There’s a whole bunch of areas here where public policy is failing in such a way that the business sector, too, fails because it responds to the public policy environment.

Patrick: I want to be careful because I’m in the presence of an esteemed academic. …

Theoretically, I see that. Anecdotally, I see that. On a macro level, I’m not sure it’s as simple as that, or that it varies from sector to sector. I’m a Democrat, but I’m not just a Democrat who thinks government can or should undertake to solve every problem in everybody’s life. I’m a capitalist, but I’m not a market fundamentalist. I don’t think markets always get it just right at just the right time or do what needs to be done with justice in mind. … I think, it goes back to this notion of collaborating to solve problems across sectors. I think probably that the answer to … our questions as a society depends on solutions coming in from more than one sector but being better coordinated than they are today. So, I don’t come to impact investing because I’m prepared to wash my hands of government or of philanthropy. I think those sectors have enormous contributions to make.

… We have enormous, enormous, I mean, breathtaking challenges. The future of the planet. Income inequality. Basic questions about social and economic justice. Everybody needs to lean in to back it, and I think that private capital has an enormously important role to play that goes beyond the moral duty and ethical duty of capitalists but also speaks to the capital part of capitalists.

Tyson: Yes. I think as you’ve described yourself in terms of a Democrat, government, companies. I think we’re at a very similar place. However, I will say that sometimes I feel that the combination of progressive thought and business thought, it’s a difficult combination to make. I mean, some people will just not buy it. They’ll say, “You have to choose.”

You choose. Are you for profit? That’s one thing. If you’re for justice, that’s something else. If you’re progressive, that’s one thing. If you’re pro-business, that’s something else. So, I really applaud your leadership in this space to try to say, “Look, there’s tremendous opportunity to have these things together.”

… I’ve just been looking at these numbers since I’ve been working on a report from the UN. Basically, the reality is that the private sector around the world. The private sector, not the public sector, and it’s mostly for-profit, is the major employer of people around the planet. That is just the way it is. It’s 80 percent or more, depending on the country. So this is a sector we have to work with, because the jobs and the income and the community and the education, everything is basically starting there, so we have to coordinate like this…. What you’re trying to do is really so important.

… I worked the last few years looking at some of the conditions that seem to lead to the greatest probability that of a social enterprise will be sustained, that it will be successful. We looked at a bunch of entities that started, actually on the Berkeley campus, and we looked at five years out, which ones were still operating. We looked at that sample. By the way, at the very top of the list is access to capital. You can’t go on without access to capital and if it’s philanthropic flow, it’s very hard to keep that up, to scale it up.

So basically what you find are these interesting models of … hybrids. You’ll sell some products for one price or profit, and you’ll subsidize another set of products or the same products with another set of consumers, but capital is one. The other one is that shows up all the time, and they’re related, is actually the ability to define a brand which captures the imagination. So you define something which gets the consumers, which gets the consumers, which gives you a fair amount of cache right out of the box, because right out of the box is what’s going to get you the sustaining capital. So I don’t know in terms of the ventures you’re looking at if those two things are fundamental but in terms of our little sample, they were right at the top.

Patrick: … I would say that those two models are not unfamiliar, in well, fashion business, right?… I think of the news business or … TV business as a business where part of the model was generating capital over here with the prime-time stuff that paid for the news over here, right? We knew that. … That notion of a brand that captures the imagination. You know, talk to Coca-Cola. No, seriously.

Patrick: … I think what is interesting to me about this moment in time, and it goes back to consumer interest in mission-oriented brands, brands and services that stand for something, is that entrepreneurs are beginning to understand that that is part of their value proposition and we are having to think about that when we’re doing valuation for investment. That’s really cool.

Tyson: That is cool.

Patrick: It’s hard to measure. It’s hard to measure, but I do think it’s sustainable and more than that. I think it can grow if you steward it.

Tyson: So it’s hard to measure, and it gives great fodder to business schools and academics around the world because what we’re doing is we’re trying to define impact, measure impact, do sort of gradations of impact, talk about all of this in a way, which over time will help us understand what is evolving. So anyway, thank you for your inspiration in all aspects of your life, and watch his fund and watch his firms. I think we’re going to see some great successes. He didn’t say that, I did.

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