Client case study: Jean-Jacques Laffont Foundation
The Board of Directors of the Jean-Jacques Laffont Foundation in Toulouse decided last year to make their first foray into impact investing when they took up a mandate in one of AXA IM's impact programmes. Below leading members of the investment committee share some of their considerations in arriving at the recommendation in favour of this investment.
Established 10 years ago, the Jean-Jacques Laffont Foundation was set up to support the creation of Toulouse School of Economics (TSE), one of the leading research centres in economics in Europe. The joint establishment of the Foundation and of TSE was undertaken with the goal of creating a firm and durable institutional basis for the world-renowned research cluster in economics that had emerged in Toulouse as an offshoot of the centuries’ old public university, the University of Toulouse-Capitole.
Funded through both public and private contributions the Foundation has built up a sizable endowment of close to €100m. This is used to create a highly competitive research and educational environment with state-of-the-art facilities to produce world class research, and to attract and retain the best faculty staff. The Jean-Jacques Laffont Foundation, whose president is Nobel laureate Jean Tirole, is currently undertaking a promising international fundraising campaign focused on individual and corporate donors interested in supporting first-rate economic thinking and knowledge.
The Foundation’s financial policy is built on a model inspired by the leading US universities. That is to build up a sizable, perennial endowment that finances its spending through the endowment’s financial returns, without depleting capital. Its aim is to limit drawdowns of expected real returns. The preservation of the endowment’s capital is an important signal to stakeholders, staff members and the public that TSE’s strategy is focused on securing and consolidating its position as a leading research centre over the long term.
Securing the endowment is paramount, but the Foundation has the flexibility to ensure a steady spending policy by smoothing fluctuations in returns, so that it remains consistent with its long-term goals.
The endowment’s very prudent financial profile is in line with the view of the public auditor who oversees the Foundation.
The impact investment forms part of the endowment’s exposure to alternative asset classes, that is assets that are considered stable but not very liquid. As is the case for many university endowments, the endowment can afford a significant exposure to illiquid assets. In the current low-return environment, the Board of Directors authorised that up to one third of the total endowment can be placed in alternative assets.
Diversification was a key criterion that made impact investing attractive to the Foundation. The investment committee reasoned that the investment projects included in AXA IM’s impact strategy would very likely hold the promise of a low correlation with other asset classes in the portfolio. In particular, the impact strategy’s exposure to emerging markets provides significant diversification and the structure of the projects means that they are probably less exposed to the macroeconomic fluctuations that characterise other asset classes in emerging markets.
Motivation for the move into impact investing
The investment in impact projects allowed the Foundation to reconcile its investment activities with many of the topics that characterize its research activities. As a man of conviction, Jean-Jacques Laffont, the late founder of the Toulouse centre of excellence in economics, believed that economics could be a force for good in the world, and his vision is still alive today in TSE’s research community. The research agenda of many faculty members and research groups at TSE are focused on areas where economics can make a positive change. Furthermore there is a strong presence of research topics that relate to impact investing, such as energy transition, climate change and sustainable development. For example, the idea of sustainable finance is one that has been explored in detail by TSE researchers for quite some time, and their research and conclusions bear strong links to impact themes.
Thus, an allocation to an impact strategy was the opportunity to reconcile the way that the endowment’s capital was invested with the topics of TSE’s economic research, and consistent with many of the conclusions that TSE economists have arrived at. In short, it provided a way of directing TSE’s money towards the same investments that much of its research points to.
For the investment committee, it was always clear that this investment would be held to the same high standards of risk and return applied to all investments of the endowment. The committee members are confident that its investment in the impact strategy provides an effective way of meeting its goal of achieving a level of return for a given level of risk that is at or close to the efficient frontier. At the same time it allows it to fund projects that make a positive contribution to society.
Impact strategy – considerations and concerns
There was initially some scepticism from the investment committee regarding the revenue goals achievable with impact investing. The prior belief of some committee members was that there would need to be some concession on income generation if the impact aspect was taken seriously. However, the revenue targeted by the strategy is in line with the benchmark return that the Foundation hopes to realise, and the objective to generate a predictable, smooth income profile is consistent with the overall strategy of the portfolio.
As this was the Foundation’s first experience in impact investing, it was important that they were able to select an asset manager that had an established history with the strategy and had ‘skin in the game’ through co-investments with large institutional investors.
Even so, the Jean-Jacques Laffont Foundation views the investment as a learning tool. The investment committee is keen to learn more around how particular aspects within the impact strategy develop over time. For example, investments in microfinance have been tried and tested but how scalable are these investment opportunities? Will the market become overcrowded? Will there continue to be sufficient projects in which to invest or will opportunities become limited?
Measurement and reporting
The investment committee considers regular reports from the investment manager to the endowment crucial as they need to provide the Board with transparent metrics on the investment. Given impact investing is a relatively new concept, there is a necessary element of due diligence, but there is also a broader range of criteria to consider. Measures of financial performance, risk exposure, and impact outcomes provided are through relevant financial and impact KPIs. These are delivered in a clear, consistent framework on a periodic basis to help the committee to provide concrete evidence to the Board. This helps to ensure that the Board can make informed decisions on future investments.
Supply needs to rise to meet demand
Ultimately, the members of the investment committee believe that there is significant demand for these kinds of impact strategies from investors like themselves. The supply side needs to step-up to meet this demand by developing investment solutions that retain integrity with regard to impact projects, and competitiveness in financial returns.