Michael Grossman
Michael Grossman is the Managing Director at Social Finance. Previously, he founded and led the mission-driven private credit division of New Island Capital, where he generated and structured market-rate credit transactions in sectors such as financial inclusion, renewable energy, sustainable agriculture, water, natural foods, and education. Michael has also held leadership positions at the Millennium Challenge Corporation, where he created public-private partnerships to support economic growth in Madagascar, Mali, Benin, Senegal, and Morocco. Additionally, he has worked as a Senior Advisor to McKinsey & Company's Social Sector Office and the Calvert Social Investment Foundation.
What we learnt
Michael Grossman shared his journey into the field, which started in banking at Citibank in Africa. He later contributed his expertise to organizations such as the African Development Bank and Calvert Impact Capital before finding his place at Social Finance. His exposure to emerging markets ignited his passion for social good.
Social Finance was originally responsible for launching the Social Impact Bond in the US, which aimed to transfer outcome risk from the government to private investors. However, it has since transformed into a consulting firm that advises the public sector on outcomes-based financing programs. To extend their reach and make a more substantial impact, Social Finance pursued two distinct strategies: "getting bigger" by partnering with industry leaders like Google and "getting smaller" by working at the grassroots level with public sector entities.
They collaborated with Google to establish the Google Career Certificates Fund, an initiative designed to finance the education of 20,000 students over five years and generate $1 billion in wage gains. Concurrently, they engaged with local public sector entities to create and manage job training loan funds, forming partnerships with entities such as the state of New Jersey and philanthropic organizations in Colorado. These efforts aimed to address the training needs of industries experiencing high demand.
Michael also discusses two investment strategies that his organization is working on: providing loans for graduate school to "dreamers" and mobilizing passive charitable capital into active impact-first investing through donor-advised funds. They also plan to launch a fund focused on high-impact strategies where investors are not fully compensated for risk, with a primary focus on creating impact. Michael discussed the importance of understanding the nature and objectives of capital when evaluating risky investments. Depending on the goals, investment appraisals can differ, with a focus on high financial returns or social impact. A balance between audacity and prudence is necessary, taking calculated risks in a thoughtful and analytical manner.
Regarding outcome-based finance, Michael explained that the measurement of tangible results plays a pivotal role in their approach. For their workforce initiatives, they primarily focus on a straightforward metric: income increases. By collaborating with partners, Social Finance strives to provide comprehensive support services and tackle challenges that could impede individuals from completing their training and securing suitable employment. Their aim is to minimize outcome volatility and enhance the likelihood of success.
When questioned about the role of technology in driving impact, Michael acknowledged its potential to reduce costs and improve operational efficiency. Drawing from his experience in Africa, he provided an example where the digital delivery of financial services significantly lowered the cost of providing small loans to individuals. He expressed a keen interest in exploring how technology can be leveraged to disseminate content, foster engagement, and offer career advice to a wider audience at a minimal cost, thus amplifying its effectiveness.
Michael stressed the importance of upskilling financial professionals within the impact investing field. He emphasized that possessing the right skills and experience is crucial to effectively serve the individuals they aim to assist. Grossman highlighted the apprenticeship nature of financial services and the necessity for professionals to gain mainstream finance experience before transitioning into impact investing.
In summary, Michael's insights underscored the significance of comprehending capital objectives, measuring outcomes, adapting strategies to regional contexts, and fostering the professional development of individuals in order to drive positive social and environmental changes.
If you had a magic wand…
My magic wand would be to upskill a whole bunch of financial professionals so that they can combine their open-heartedness with some experience so that they know how to actually serve with capital the people they're trying to serve. It's not enough to be compelled by poor people. You have to know how to be able to help. I would use my magic wand to upskill the financial intermediation part of our industry so that we have stronger intermediaries who could deploy capital.
Key quotes
“Lots of people talk about impact investing, but in reality, it's pretty squishy for most people. The idea of being outcome-focused, being able to observe and measure outcomes, and paying only for those outcomes got all the investor groups really excited.”
‘Social impact bonds are pretty long deals, so let's try to do short deals. Social impact bonds are pretty low flow, and you might see one or two potential opportunities a year, so let's try to do things that are really high flow.’
‘We need to start with understanding the nature of our capital and what it wants. If capital wants a high return, we need to evaluate investments through that lens. If we have capital that is willing to accept risk because we're trying to have an impact, we need to evaluate investments differently. Even if we get back only 70% of our money, it may still be worth it if we're trying to make an impact.’
‘We're a bunch of smart banker, consultant types, but, for most of us, we don't really have any understanding of real lived experience and understanding of the people we're talking about working with. So we need to work with others and do.’
‘if I look at the investor base that we're working with, most donor-advised funds and super high net worths, our objective is to mobilize charitable capital to impact first investing. The increasing ability to deliver content to investors in a way that allows them to have emotional interaction with the investment opportunities is very powerful... You used to go into any kind of nonprofit's offices or get the thing in the mail, and there would always be pictures of smiling and waving brown children. That is because people felt that that was compelling and would motivate the mind. But if you can actually make that so much more interactive and authentic using technology, I feel like that could only drive investor behavior.’
‘There's not a capital supply problem, nor is there a capital demand problem. So, therefore, why isn't there more capital going to impact? There's an intermediary problem. One of the reasons why there is an intermediary problem is that we don't have the right talent.’
‘It's concerning that people go into development finance institutions or other impact investors just to build track records so they can eventually work for Goldman Sachs. If you make a mistake at Goldman Sachs, you lose money. If you make a mistake at FMO, DFC, or other impact investors, you hurt people and the planet. The experience should be reversed, but unfortunately it's not. That's what needs to change.’