In this Investor Spotlight, the GIIN spoke with financier and philanthropist Michael Milken, Co-founder of the Milken Family Foundation and Chairman of the Milken Institute, a nonpartisan think tank that believes in the power of capital markets to solve urgent social and economic challenges and improve lives. For more than thirty years, Michael Milken has been a thought leader and philanthropic funder of social change, especially in the areas of medical research, education, and access to capital.
- GIIN: You have a long history of making socially-motivated investments. How did you develop such a strong conviction that investments can play an important role in addressing social issues?
I can trace my interest in impact investing and the importance of financial capital back to my college years. I was a freshman at the University of California, Berkeley in 1964, at the start of the free speech movement. I chose to go there to see the world, because the views on campus were so diverse. Then, in 1965 when I was home for the summer, the Watts Riots began. Looking to better understand the cause of the riots, I eventually went to the area of the riots and I met a young African-American man who told me that he didn’t feel like he was a part of the American dream. His father didn’t have access to capital, no matter how talented or skilled he was. The man himself was married, had no savings, had a child, and the place he worked had burned down. He too lacked access to capital, regardless of his ability or desire to succeed.
It was in this context that I came to realize there also needed to be concern around access to capital as a civil right. The American dream, as I perceived it, was the opportunity to succeed based on your ability and not who your parents were or where you went to school or your religion or race, but it was clear to me that I had missed another key element of the American dream—access to capital. So I went back to Berkeley and developed this formula:
Prosperity (P) = financial technologies or access to capital x (human capital + social capital + real assets)
In this formula I call the final product prosperity, but you could really call it impact. If you can figure out how to increase access to capital for people and organizations with ability, you can have the greatest impact on society. This formula has really steered my career. Everything traces back to 1965, those riots, and that formula—in order to have a positive social impact, you have to bring capital.
- GIIN: You have supported the idea of “emerging domestic markets.” What are emerging domestic markets and how do they relate to the prosperity equation?
“Emerging Domestic Markets” refers to the underserved and underrepresented communities in America’s urban core. For many years, the Milken Institute has worked to raise awareness of the economic potential of these areas. Because human capital is the world’s largest and most-valuable asset class (and the key variable in my prosperity formula), we’ve encouraged capital investment that not only helps the target neighborhoods, but also provides growth and innovation opportunities for businesses as well as educational opportunities and training for community residents. Friends and supporters of the Institute have grown their customer bases by successfully financing and developing projects that range from quality supermarkets offering good food choices to movie theaters playing first run films for packed houses.
- GIIN: Is there one investment that you are particularly proud of?
In 1985/86, when I was at Drexel Burnham Lambert, we lent money to a group led by Linda Wachner to buy Warnaco Group and we were attacked viciously in the marketplace for doing that. Linda was the first woman in the history of America to lead one of the country’s largest companies, and not through inheritance. Then, in 1986/87 we lent to an African-American man named Reginald Lewis, enabling him to buy TLC Group. We received unpleasant calls and death threats for that investment. The financing of that transaction, in particular, completed a cycle that had begun 22 years before with the Watts Riots and my rethinking about access to capital. Reg was the first person to whom we provided USD 1 billion in capital, and it was simply because he had the most ability.
In fact, when I initially met Reg Lewis, I did not finance his first business McCall Patterns; I wanted to see how he would do with that smaller deal. Once I saw how he succeeded in a very difficult industry, I was convinced that he had the ability and talent, and when I saw how he prepared for business, I knew he was the right person. There were also very few transactions that shined the light on impact investing as brightly as that USD 1 billion investment in Reg. He and I went into inner cities and schools and showed kids that any one of them could be the next Reg Lewis.
- GIIN: How do you view the relationship between philanthropy and impact investing?
I have been really active philanthropically, beginning in the 1970s, and later through the Milken Family Foundation, which I co-founded in 1982. There is more than a place for philanthropy. Where you have strong philanthropy, it can be an example and a source for impact investing. Where philanthropists have identified people of talent and people who can execute, it’s quite possible that impact investing can come next. Whether it’s a young scientist, an individual who can run a program for children with autism, a clinic or medical center in a high-need community, there are tremendous benefits to be gained from those philanthropic efforts.
But while charitable dollars are an important element, there are two reasons why philanthropy alone isn’t enough. First, the amount of capital needed to address all social issues is much larger than all of the available philanthropic dollars. We need to address issues on a systematic basis. And as a philanthropist applying capital, you can have a major effect, but ultimately today we need to redirect the flows of trillions of dollars, not billions. And secondly, in increasing access to capital you need to be able to sustain it in the long term, which requires a rate of return.
- GIIN: What parallels do you see between philanthropy and impact investing?
In both cases, increasing access to capital requires the right allocation of capital. We have to divert and change the flow of capital to people who have ability. Traditionally, philanthropists, investors, and impact investors alike greatly underestimate the importance of human capital. We should be looking to create financial instruments that unlock the potential of human and social capital, and serve to have a multiplier effect.
In addition to increasing human or social capital, at the Milken Institute, we also pursue increased access to financial capital by supporting financial innovation, identifying the problems of society and creating financial instruments that can solve social issues. This is not a new concept—take efforts to address acid rain in the 1980s and 1990s, for example. Establishing credits and creating a market mechanism can be viable solutions to helping address social and environmental issues.
- GIIN: Are there specific social issues that are particularly well suited for impact investing?
Many social issues can be addressed through impact investing, but if you assume human capital is the greatest asset, then the way you increase human capital is through education, through an appreciation for lifelong learning. And at the other side of the spectrum, there’s increasing the length and quality of life. Medical improvements and education are two of the greatest elements of increasing human capital. The largest company I’m associated with today is Knowledge Universe, the largest provider of early childhood education in the world. Today we have more than 2000 schools.
Data show that the highest rate of social return in education is in ages zero to five years old. A dollar invested in a young child and his or her education at age five has two or three times the productivity as a dollar invested at age 15, five times investments made at college age, and ten times the investment at age 30. Knowing this, we have worked to become the largest early childcare provider in the world. At the end of the day, doing good is good business.
- GIIN: Can you elaborate about your views on the relationship between social outcomes and financial returns? You mentioned that doing good socially is also good business, but are there any notable risks in investing with the intention to produce positive impact?
Financial access serves as a multiplier, but there can be negative implications. For example, non-recourse mortgage loans have had significant detrimental effects on America over a long period of time. My personal belief is that these are the major cause of most financial problems in America in the last 20-30 yrs. The government’s loaning of money in an absurd, irresponsible rate to people to purchase a house has changed the utility curve of the middle class in America. It sent a clear signal that your house and car are more important than your child. Middle class Americans today are spending more than 50% of their income on houses and cars, and 2% on tutoring children. In America, the size of middle class homes increased 60% while the average number of people living in them decreased. Providing access to credit isn’t always positive.
- GIIN: You say you have been making impact investments for a long time. What is your perception of the market for impact investment today? How does today’s economic climate, in particular the recent global financial crisis, affect impact investing?
Today’s interest rates are so low, with more than USD 30 trillion receiving a return of 1% or less, that the financial hurdle rate for social impact investments, independent of impact, is lower than ever. With the US Government having yielded less than 2% over the last 10 years, you should be able to attract substantially more investment in the area of impact investing because riskless investment rates are at a historic low. Today, the hurdle rate impact investments have to achieve as an alternative investment is substantially lower than at previous times in our history.
- GIIN: What is needed to move more capital into impact investing and increase prosperity?
With impact investing having gained popularity in the aftermath of the global financial crisis, it’s important to understand what caused a lot of the financial problems. The best investor is a social scientist, someone who looks closely at markets from macro and micro views. When you look at the creation of financial markets, in America today banks own less than 15% of the market and America is financed by tens of thousands of people and institutions, rather than a handful of banks. This has greatly helped the success of impact investing. Unfortunately few countries have this structure, so understanding the financial market in those countries is going to be important.
I also look to learn more, and the work the GIIN has done is very helpful. If you look at the publications of the Milken Institute, there are clear themes focused on impact investing. [Editor’s note: readers of this interview may be particularly interested in Fixing the Housing Market: Financial Innovations for the Future, and "Green Finance" and "Social Impact" Bonds: Philanthropy Gets Innovative, which are archived on the Milken Institute website. Also, “Investing in Science, Reaping Rewards” and other articles by Michael Milken are archived at www.mikemilken.com.] However, I personally am particularly focused on scale. It’s inefficient to create an investment model at a price that cannot be reproduced. Impact investing will need to look closely at the scalability of projects, assuring that impact is being delivered at a price that can be economically justified.
A note to readers from the GIIN:
Diversity is a hallmark of the impact investment market, which has attracted traditional financial institutions, pension funds, private foundations, government-funded development finance institutions, fund managers, high-net-worth individuals, and family offices. As a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing, the GIIN aims to bring transparency to this market and to the practice of impact investing. To this end, we believe it is in the interest of the field to share a sample of the diverse viewpoints held by investors who are motivated by social and environmental considerations. The publication of such diverse viewpoints, however, should not be construed as an endorsement by the GIIN of those viewpoints or the individuals or institutions expressing them.