The Ford Foundation's $1.0 Billion Bond - A Briefing Note from SeaChange Capital Partners
The Ford Foundation (“Ford”) announced last week that it would roughly double its grantmaking in each of the next two years. This is terrific as the immense challenges of the present moment require this type of outside the box thinking by foundations. But what made the news “historic” and “unprecedented” was not the extra grants; it was the plan to finance them through the issuance of a $1.0 billion, AAA-rated, 30-year (with perhaps a 50-year tranche), unsecured bond. Why is a $1.0 billion bond financing such a big deal given that a staggering $1.0 trillion+ of investment-grade bonds have already been issued in 2020 to take advantage of record-low interest rates? What does it mean for other foundations?
Although it has been labelled a “Social Bond”, the bond issuance is a financial transaction, so it is useful to consider it in the context of Ford as a financial entity. As a financial entity, Ford is a mid-sized investment management company (about #400 in the world by assets) running a “Yale Model” strategy whereby the vast majority of its portfolio is invested in various forms of alternative assets—private equity, hedge funds, natural resources, etc.—using outside managers. As of 4/30/2020, Ford had 87% of its $12.2 billion portfolio invested with these managers and a further 17% in outstanding (i.e. unfunded) commitments. The strategy is overseen by an investment team which includes four of Ford’s top five executives.
Over the past five years, Ford has paid out an average of ~75% of its investment income in the form of grants (~85%) and the associated costs (~15%). By paying out less than 100% of its real (i.e., inflation-adjusted) investment income, Ford has grown its portfolio by an average of 1% per annum over the last 25 years in real terms. Interestingly, the real growth over this 1994-2019 period is roughly equal to the $1.0 billion in extra spending that Ford has announced.1
As a financial entity, Ford appears to be under-leveraged (i.e., it should borrow more money). The risks it would face from “levering up” are modest given its very low fixed costs (its only hard obligation is to give away 5% of its assets—net of debt—each year), small long-term commitments, and almost infinite time horizon.2 By increasing its leverage, Ford could expect to earn a spread on the difference between its borrowing costs and its investment returns. While the past is no guarantee of the future, there has never been a 30-year period since Ford was founded in 1936 where stock market returns did not exceed the interest rate on long-maturity, investment-grade bonds. With the benefit of hindsight, it seems like Ford has left money on the table by not using more leverage; money which would have allowed it to make more grants...