The following is a conversation between Deval Patrick, the former Governor of the State of Massachusetts, and currently the Managing Director of Bain Capital Double Impact Fund, and Denver Frederick, Host of The Business of Giving on AM 970 The Answer WNYM, in New York City.
Denver: When you’ve been the successful, two-term governor from the State of Massachusetts, and as someone who has always been very thoughtful and conscious of the need to serve, you have a lot of interesting options from which to choose when you decide to leave office. For my next guest, that choice was clear. It was impact investing and the vast potential it holds to help create a more equitable, just, and healthy society. He is Governor Deval Patrick, two-time governor from the State of Massachusetts, and currently the managing director of the Bain Capital Double Impact Fund. Good evening, Governor, and welcome to The Business of Giving.
Deval: Thank you very much for having me.
Denver: Let me follow up on that introduction. You have been bitten by the impact investing bug. How did this first get on your radar? And what helped you decide to dedicate this part of your career to helping to build this field?
Deval: I first learned about the field through social impact bonds, which was the concept invented really by Sir Ronald Cohen from the UK– himself, a successful, regular way private equity investor, as you may know, who came up with the notion of bringing private capital in alongside public funds to innovate around solving public policy issues. He and an American colleague, Tracy Palandjian were coming through the United States to try out this idea with various governors and mayors, and I met them.
I loved the idea. I loved it, Denver, in part because I think lots of people in office, and lots of citizens are interested in innovation in public policy. Any successful innovation requires an atmosphere where you have a tolerance for failure. But in fact, politics punishes failure. So you get less innovation than I think we would like, or indeed that we need. So, the idea of being able to have this laboratory over on the side where you can try some things with social impact funds using private money… And if they work and there’s a savings, you have a proof point, you can show to the legislature and to the public, is a wonderful idea. We did two of the early ones in the United States before I left office in its early days. I think they’re going well anyway. Pay for success. Ronnie went on to create an impact investing fund. He was getting returns comparable to other venture firms. I really love that concept, and I thought that’s the sort of thing I’d like to try to do.
Denver: And that’s what you’re doing. Bain Capital was not in this impact investing space. You and the firm launched the Double Impact Fund back in 2015. How did that union between the two of you come to pass?
Deval: I had friends who were there as partners. Some of them have been there since the founding, and they were interested in being coaches of mine, as I was thinking – thought partners, as I was thinking about the next thing to do. There wasn’t really any impact investing opportunity in Boston. My wife and I did want to stay in Boston. We were thinking about… I was thinking about other things to do, and I was talking to them about those other things.
At one point, one of them leaned over the table and said, “You know,” in reference to those other things, he said, “you don’t really sound passionate about those other things. What are you passionate about?” I said, “There’s this thing called impact investing; I don’t know if you’ve ever heard about it.” He said, “I can’t believe you brought that up.” I said, “Why?” He said, “Because that’s exactly what we’ve been trying to figure out how to get into the last couple of years.” Because it turns out that investors in other Bain Capital Funds from Europe have been asking about this kind of investing, and in Europe as you may know, impact investing is a more mature field. He said, “Why don’t you come in and help us figure it out?” That’s exactly what I did; we did it together. We did it in about a year’s homework together before we launched formally in 2016 with what is now the Double Impact Fund.
Denver: You went out to raise $250 million. I guess it didn’t stop there.
Deval: Indeed. We’ve raised about 40% more than we set out to. We stopped at that point. I will say, that’s a lot of money to me. In the Bain Capital world, that’s a charming little fund. We started in small, relative terms because we wanted to prove the concept and then scale, and the concept was that we could underwrite to the same financial terms as the large cap fund in smaller companies, but that we could do so without trading return for impact. So, we decided we would focus on North America on so- called lower, middle market companies, where we could generate both a superior financial return and measurable social or environmental impact in three thematic verticals… and we can talk about those.
Denver: I can’t tell you how smart I think that is. So often people want to have a big impact, and they go too big, and you really have to start small; all innovation begins by starting small and iterating and iterating and learning before you go bigger.
Deval: We’ve learned a lot. We’ve done really well. Other people come at it in different ways. I don’t want to say that ours is the only way, but I will say that, that year of study was very much not just about library analytics and independent research. It was about talking to everybody and listening really closely because there are a lot of folks who’ve been doing this work here in the United States and beyond, and who have done a lot of that iterating, and learned a lot of those lessons, and who’ve cautioned us about hazards that they’d already experienced.
If you really believe in long term value, especially at a time of ubiquitous information, it’s not possible anymore, I believe, to manage to a financial bottom line alone. Because if you ignore people, if you ignore the planet, those issues will come around to bite your financial bottom line in time.
Denver: Looking at impact investing and the Double Impact Fund, again, it’s that double bottom line of a financial return and a social and environment return. As you just mentioned, as far as the financial return is concerned, you have those impact-first investors who really will take a concessionary rate, really want to have a social-environmental impact. More often than not, they’re going to be foundations and organizations like that. But you really believe it was important that you be a finance- first investor to prove a few things. Tell us about your thinking as to why you’ve done that.
Deval: I wouldn’t describe it as necessarily finance-first with due respect to your question, although it’s an important one. I wanted to show… first of all, we chose a place on a spectrum of returns that was at a place that had a return comparable to a regular way private equity fund…not as a value judgement for where others have chosen to be, for two reasons; one, because the kinds of investors who invest in Bain Capital businesses expect that kind of return; number two, I think it’s important to show that, though you may choose to, you don’t have to choose between… to trade return for impact; and as we demonstrate, that you don’t have to at scale, I think it raises really important questions for investing generally.
This explains my personal passion. If you really believe in long term value, especially at a time of ubiquitous information, it’s not possible anymore, I believe, to manage to a financial bottom line alone. Because if you ignore people, if you ignore the planet, those issues will come around to bite your financial bottom line in time. For me, it’s not such a big leap from there to impact investing, which is about being intentional about those other bottom lines. What good can you do alongside your financial bottom line that actually enhances in the end your financial bottom line? And if you’re looking out over the long term, I think that’s the way you have to think and how you have to manage. We were looking and, indeed, we chose thematic verticals within the lower middle market where we were pretty convinced we could deliver that kind of return. I think we’re seeing in our experience that we’re able to do precisely that.
We have distinguished ourselves with many of those entrepreneurs because we’re interested in the whole of what they’re trying to do, and it’s just been a blast. It has been a blast to get to know them and to encourage them, and to work alongside idealists who are also pragmatists, and who realize that there comes a point in their own development as business leaders where they need a more sophisticated partner. And we can bring the resources and the experience of a Bain Capital to bear on that kind of enterprise.
Denver: That’s fantastic. Let me ask you this question. If I’m an outfit: I go to Bain Capital, and the returns of the Double Impact Fund have to be competitive with all your other funds there. I could theoretically just go to one of those other funds. Why would I take on that added responsibility and obligation to have that social and environmental impact? I could do that anyway if I wanted to. What is their incentive to go to the Double Impact…?
Deval: There are a couple of things here. First of all, ours is the only middle market private equity fund at Bain Capital. If you are a large company with a much different kind of balance sheet, there’s not a home for you in our fund. There is elsewhere in the firm. If you’re an earlier stage company, a startup, you need seed money; we’re not for you. We are a company that is doing mainly control investments in companies that are cash-full positive, that have reached a stage of stability, but are looking to scale.
What we are finding is that there are mission-oriented entrepreneurs – because these are usually founders we’re dealing with – who are ready to go to the next level; they can attract capital in the general market because they’re growing companies. But they frequently don’t find capital sponsors or partners who are as interested in growing the mission as they are in growing the commercial enterprise. We have distinguished ourselves with many of those entrepreneurs because we’re interested in the whole of what they’re trying to do, and it’s just been a blast. It has been a blast to get to know them and to encourage them, and to work alongside idealists who are also pragmatists, and who realize that there comes a point in their own development as business leaders where they need a more sophisticated partner. And we can bring the resources and the experience of a Bain Capital to bear on that kind of enterprise.
Denver: You are certainly at a very interesting intersection. There’s no question about it.
Let’s talk a little bit about measuring social impact, and I know you made a very intentional decision not to create from scratch a brand-new tool or measurement, but to plug in to something that already existed for comparison purposes. Tell us what you use.
Deval: We’re using something called the GIIRS survey out of B Lab. We’re using that because we got a lot of advice in that year of homework from potential investors that it would be better if we used something in general usage – mindful that there is not yet a gap accounting for impact. But if we use something in general usage, it will enable an investor in a fund like ours to compare our performance on impact with other impact funds. We also got advice, by the way, not to turn our companies into reporting agencies. Try to keep it simple. Just a couple of factors that were material against which a manager could actually manage their performance.
GIIRS is adaptable in that sense, and we manage our companies individually, and we roll that up as a measurement for the fund, and we report that to investors periodically. I will say that the whole industry, the whole field of impact investing, has been really working on and debating this question of measurement. And I would say that our experience with our investors in this first fund is a continuing conversation about measurement because it turns out, they’re interested in the GIIRS report. But individual investors are interested in other information as well.
…we are not passive investors. It’s not about: we’re placing our bet, and we’re going to see what happens with the company when it’s time to exit… We’re interested in being active partners with management– not running the company– but: what can we do to really chart a course?
Denver: It’s really hard, and I can even say from the nonprofit field, and that’s all nonprofits do – we have a hard time measuring impact. It’s very elusive. Does the GIIRS tool allow you to project social and environmental return before you even invest a dollar? Or is it more looking back at how well the investment has done with regard to social and environmental impact?
Deval: Really what we do is we take a baseline measure when we first invest, and then we set our own goals for that company, and we measure against those goals. Exactly as we would for the financial performance. I should add, we are not passive investors. It’s not about: we’re placing our bet, and we’re going to see what happens with the company when it’s time to exit. I’m not personally interested in that kind of investing, and it’s not the tradition at Bain Capital. We’re interested in being active partners with management– not running the company– but: what can we do to really chart a course? How do we develop a point of view about what the destination is of that company over a period of years? And how do we help that company meet and exceed those objectives over that period of years, both commercially and from an impact point of view?
Denver: You mentioned earlier, Governor that you invest in three broad verticals. Why don’t we share with us what those are, maybe give us an example from each.
Deval: They are health and wellness, sustainability, and the third, we describe as community building. In health and wellness, we’ve been interested in access to affordable care. We’ve been interested in community-based care, strategies that reduce healthcare costs. Within that same space, we’ve looked at EdTech, educational and technology companies, whose products and services are about reducing skills gaps or achievement gaps.
Within the sustainability space, we’ve been interested in companies that are around cleaner, alternative energy or energy efficiency. We’ve been very interested in urban agriculture or other kinds of healthy eating and wellness strategies.
Community building, Denver, is more of a place-based strategy. It’s companies that are creating jobs or catalyzing wealth in places of chronic underemployment. That one has been particularly interesting, but also challenging, because there’s no amount of conversation with investment bankers or other intermediaries that gets them to bring those companies to you. You better go find them. You’ve got to put in the shoe leather.
Examples under health and wellness: I’ve just mentioned that we invested in a company last year called Penn Foster, which is a low-cost, very affordable online education company. It actually grows out of more than a century-old correspondence school. They offer high school equivalency and indeed high school diplomas and college courses online. What we’ve been interested in is this as a platform for middle skills needs, which is a huge challenge in this country… and upskilling. For example, what kinds of affordable courses can people get access to online? And I say affordable meaning: not those schools you sometimes read about where people get into huge debt, and then the school disappears… they’ve never done any of that. These are not the so-called kinds of courses. It’s a very, very accessible… these are well-paying jobs. The examples of people who would get… who had minimum wage, who took a Vet Tech course, got certified. There was a practicum with it, and they went to a $60,000 or $70,000 job. That’s a transforming experience. We’re very interested and very excited about that new investment. Lots of opportunity there to build going forward, from both the commercial and an impact point of view.
In the sustainability space, we looked at a lot at different kinds of ways of penetrating our frankly impenetrable food system here in United States. Sometime, have a look at the fishing system here in the States; it’ll just blow your mind. We migrated to frankly minority investments in two relatively small restaurant chains. One is a vegan restaurant chain based here in New York called by CHLOE which is a… its premise, in addition to the fact it’s a vegan menu is, they use it as an opportunity to teach diners about the benefits of this way of healthier eating; and the food is delicious, by the way. Another is a sustainable sushi chain out on the West Coast. You learn a tremendous amount about where the fish comes from and how it’s caught and, indeed, who catches it as well.
In community building, we have a number of investments that straddle that and other of the other two verticals.
Denver: Very good examples. Those are very exciting.
Governor, we’ve had a number of people on this show who have said that they believe the excitement, the energy, the hype around impact investing has gotten a little bit ahead of the reality, and that deals sometimes are just really hard to come by. How would you assess that?
Deval: We are swamped. This is hard. It’s hard enough to do this kind of private equity investing without the commitment to help build the business. And then you add to that, that you’re building a business with impact alongside of it, and you add to that, that you’re building a business with impact that you intend to measure and hold the management team accountable for it. For example, we set those impact goals; meeting those goals becomes an element of the CEO and the senior team’s compensation. This is really… we’re not messing around. The team isn’t messing around.
We bulked up our investment team to 16 of us now because there was so much coming in. And it’s one thing to say: it doesn’t fit the mandate; it’s not the right time; there’s some hair on the deal. It’s another thing to say: we’re passing because we don’t have enough capacity to be able to look at it. We’ve just had wonderful opportunities come our way. We’re competing with other impact funds. We’re also competing with just other private equity firms in the middle market. That’s, I think, a good place for us to be. No paucity of opportunity.
Denver: I’m always interested in ancillary impacts, so I’d be curious as to whether you believe the Bain Capital Double Impact Fund that was launched back in 2016 has had an impact inside of Bain itself, creating a sense of awareness among all the other funds around these vital issues.
Deval: I think the sensibility that there were multiple and intertwined bottom lines was one that our colleagues in other parts of the firm had already. Particularly, you think about the large cap private equity fund at Bain Capital; TOMS Shoes or Canada Goose are examples. There was a company that came to the firm soon after it was announced that I was coming to help build this new business. We didn’t have a fund yet. The company called Sundial Brands. It’s based here in New York. Had we had our fund, it would have been too big for us. But we walked them upstairs to our large cap fund; it was exactly the sort of thing that the folks in the consumer brands unit of our large cap private equity fund were interested in. I was on that deal team. We invested. We helped build that business. It was absolutely sustainable bath and body products. Marvelous story. Terrific family-owned business with fabulous owners, who continue to be close friends of all of ours. We ultimately sold it to Unilever. The impact proposition was so valuable a part of the brand, that it was baked into the deal much the way Ben & Jerry’s was when they sold to Unilever.
There were a lot of lessons there, and I would say to your point, this isn’t a radical or breakout notion within Bain Capital. I think what we are learning is that there really is an impact alpha for many, many companies. There’s an enhancement of the value of a company itself, and I think we need more and more proof points of that in the market, and we are aiming to do that.
I think that there are more and more young people who are questioning some of the suppositions of capitalism itself after the experience of the great recession and the extremes of capitalism – behavior that led us to drive the economy into a ditch. And I think, from my own perspective, this whole notion of emphasizing short-termism… that we should squeeze as much as possible out of the next quarter, and that what we squeeze out of the next quarter should be for ourselves alone, has been a problematic
Denver: When you stop and think about it, all investments have an impact, whether it be good or bad or neutral – every single one of them has some kind of impact.
I remember reading about…I think the first impact investing conference was sponsored by Rockefeller at the Bellagio about 12 years ago. Not only was it about impact investments, but the other objective of that conference was to get the way people thought about capital… to look at capital and the purpose of capital… differently. Are you seeing that begin to happen?
Deval: I am, and I think there are a number of factors. There are the visionaries like Rockefeller and Ford Foundation and their leadership. There are capitalists like: I think of Larry Fink’s letter from BlackRock… I think it was a year or two ago, who’ve been much more assertive about the responsibility of business to think about multiple bottom lines. I think that there are more and more young people who are questioning some of the suppositions of capitalism itself after the experience of the great recession and the extremes of capitalism – behavior that led us to drive the economy into a ditch. And I think, from my own perspective, this whole notion of emphasizing short-termism… that we should squeeze as much as possible out of the next quarter, and that what we squeeze out of the next quarter should be for ourselves alone, has been a problematic – and I’m exaggerating to make a point.
It’s a problem I think that has crept in the way we govern ourselves as well. It’s why I went into government in the first place. And I think that more and more people in the broader population are beginning to realize that. So, impact investing– for me and for many, many others– is a way of righting that ship.
Denver: We don’t have a generational outlook in terms of solving our problems.
Deval: Exactly. And that’s been a problem I think for a long time. It’s a problem I think that has crept in the way we govern ourselves as well. It’s why I went into government in the first place. And I think that more and more people in the broader population are beginning to realize that. So, impact investing– for me and for many, many others– is a way of righting that ship.
I have a partner who says.. I think very beautifully… that, “Impact investing is the laboratory where capitalists work to reform capitalism.” I love that way of phrasing it.
Denver: $390 million in the Double Impact Fund; do we have a Fund #2 maybe around the corner?
Deval: We have to finish our work on Fund 1, but we’re well along. We do see, and we have begun to think about Fund 2. That’s exciting. We have a number of investors who are encouraging us to think about Fund 2, and that’s even more exciting.
Denver: You’re a beekeeper, right?
Deval: I am.
Denver: My goodness.
How worried are you, or how worried should we be, about honeybees dying off, and these colonies collapsing?
Deval: Gracious. I worry about it. I have just three colonies. I’m not a large-scale beekeeper, but I read a lot about it. I’ve had my own experience when the colony collapsed, and every other kind of collapsing that beekeepers deal with. I have come to appreciate that: no bees, no food. They are marvelous creatures about which you should never ask a beekeeper because we will go on and on and on.
Denver: May I ask how you got involved?
Deval: I’m interested in gardening, and I’ve been forever. My wife and I, my family have a place in Western Mass with a lot of apple trees, old apple trees that we’re trying to bring back. I’m just interested in the ways more and more – first of all — things that make you slow down, get off your schedule and on to another that you can’t control, that you just have to slow down. Gardening is that way, beekeeping. And also the interconnectedness of just about everything.
Denver: It also just takes everything out of your mind that’s been bothering you, and you’re just fully occupied.
Deval: Yeah. You better be focused.
I think everyone is feeling – more and more people, let’s put it this way– are feeling… appreciating that the scale and scope of the challenges that face us as humankind are such that we need everybody on the field.
… that no one has responsibility for anything, that folks get to step entirely to the side—I think those days are over.
Denver: Let me close with this, Governor. You’ve said to an extent that government and philanthropy have let business off the hook, responsible in many cases for cleaning up the messes they have made. Do you believe that business is still getting off the hook?
Deval: I think everyone is feeling – more and more people, let’s put it this way– are feeling… appreciating that the scale and scope of the challenges that face us as humankind are such that we need everybody on the field. That includes business. It doesn’t mean that business can or should substitute for government or for philanthropy or for personal responsibility; but that every person and every sector has a role and has a responsibility. And we should each step up to it. And where the lines fall in solving any given problem is, and should, and will always be a matter of debate. But that no one has responsibility for anything, that folks get to step entirely to the side—I think those days are over.
Denver: Governor Deval Patrick, the managing director of the Bain Capital Double Impact Fund, I want to thank you so much for being here this evening. If people want to learn more about your organization, they can go to baincapitaldoubleimpact.com. But for those who want to learn more about this field, and maybe some tips you have as to how you immersed yourself in this field initially, what would you recommend for them?
Deval: One great organization from which you can learn more is the Global Impact Investing Network, GIIN. They have a wonderful and highly informative website. Another is the B Lab, which is a terrific organization, run by a fellow named Andrew Kassoy here in New York. Any internet search will yield all kinds of activity in the area and lots and lots of academic and practical debate going on in the field. There’s an awful lot of it, and lots of food for thought.
Denver: Thanks Governor. It was a real delight to have you on the program.
Deval: Great to be with you Denver. Thank you.
Denver: I’ll be back with more of The Business of Giving right after this.
The Business of Giving can be heard every Sunday evening between 6:00 p.m. and 7:00 p.m. Eastern on AM 970 The Answer in New York and on iHeartRadio. You can follow us @bizofgive on Twitter, @bizofgive on Instagram and at www.facebook.com/businessofgiving.