Insider Q&A: Serving the neglected for profit, not just good

NEW YORK — Making money by helping underserved communities? It took Bobby Turner years to convince big investment funds such a thing was possible.

But today, sustainable investing is so hot on Wall Street that investors are rushing into funds that consider the environment, social issues and corporate governance in their strategies. It’s been such a sea change that Turner now warns about charlatans in the business touting big promises but little expertise or rigor.

After partnering with basketball legend Earvin “Magic” Johnson around the turn of the millennium, Turner raised $300 million to build movie theaters, coffee shops and other real estate in Los Angeles and other urban areas. Since launching Turner Impact Capital in 2014, Turner has raised about $1.5 billion to build charter schools, medical centers and housing for low- and moderate-income households.

Turner spoke recently with The Associated Press about his goal of marrying “profits with purpose” and why he continues to partner with big names, such as tennis‘ Andre Agassi, Hollywood’s Eva Longoria and basketball’s Chris Paul. The conversation has been edited for clarity and length.

Q: When did you start trying to marry profits with purpose in your investment career?

A: When I graduated from Wharton, I thought that with the creation of wealth would come happiness, and it didn’t happen for me. I became a philanthropist, but I really struggled there because the organizations that my wife and I were giving money to were just really putting Band-Aids on issues.

In my mid 30s, I thought that if you want to create durable, sustainable changes, then you had to harness market forces. Doing good and doing well needn’t be exclusive. Using business as a force for good is not bad. I think a lot of people think it is.

Q: How did you get started?

A: My first social impact initiative was in 1998, when I launched a series of urban real estate funds with Earvin “Magic” Johnson. I didn’t do this out of the goodness of the heart, I was doing it (after seeing a market opportunity) with strong population growth, huge mismatches in supply and demand and a dearth of institutional capital. Most investors misperceive the risks associated with investing in minority communities.

I explained to Magic what I was thinking about doing (by opening) Starbucks, movie theaters, TGI Fridays. We agreed on everything except how long it would take to raise the fund. I was thinking six months, because the fundamentals were so compelling. He bet me it would take two years to raise $300 million, to which I was a little bewildered.

Q: How long did it take?

A: The reality is that we were both right. It took two years and six months to raise that first fund. Back then, there was a belief that anytime you superimpose a social metric on financial investments, you will sacrifice yield.

Most investors are trained and taught that profits and purpose don’t play nicely in the sand box. When I graduated in 1984, you had two choices: go into business or go into nonprofits. If you wanted to change the world, the intersection of the two didn’t exist

Q: And now?

A: For 25 years now, I’ve been able to prove that investing in social change didn’t come at a sacrifice in yield. It can generate better risk-adjusted returns because it’s not based on speculation. (Turner says his first fund with Johnson returned an annualized 10.7% after fees.)

The reality is most investors are speculators. They are trying to create demand. If you’re building a hotel, you’re hoping people will like your hotel. If you’re building condos, you’re hoping people buy it. Everybody is speculating.

But impact investing is not based on speculation. We’re not trying to create demand, we’re focusing on opportunities where the underlying demands are large, growing and unmet. Think about demand for hotels or retail space. They’ve been eviscerated over the last 18 months. What’s happened to demand for affordable housing? It hasn’t gone down. What’s happened to demand for education? It hasn’t gone down.

Q: Is it encouraging to see how popular sustainable investing has become?

A: I think the bottleneck today is the lack of qualified managers that have a track record of being both a fiduciary to investors as well as a fiduciary to communities of neglect. There’s a tsunami of capital pouring into this space and a confusion about what impact investing is. There are truly a lot of charlatans running around with a Cirque Du Soleil moral flexibility peddling product that they should not.

Today it’s so fashionable to talk about DEI — diversity, equity and inclusion — and everybody seems to be using it as a “check the box” or reaction to shareholder pressure. I candidly believe that diversity for diversity’s sake is a mistake, is negligence.

We believe diversity is a competitive advantage if done correctly. Magic told me the two words of “arrogance and distrust.” The only way to bridge this gap is to build organizations that are diverse.

Q: Arrogance and distrust?

A: Two words clearly define impact investing: arrogance and distrust. Arrogance comes from institutional capital that assumes because we have the wealth, power and education that we know how to solve the problems. And distrust comes from those who actually suffer being born in the wrong ZIP code or color, that capital is just there to make money. You have to bridge that gap between the arrogance and the mistrust.

Q: And if an investment fund doesn’t do that?

A: You’ll see no social impact, no real impact. And I think you’ll see bad returns. You might say, ‘Gee, I’m going to buy low-income housing with my funds,’ but unless you understand what’s important to drive low-income housing projects, you’ll make mistakes.

One of my senior (employees) is former DEA, former Marine and former gang task force member. He doesn’t use an Excel spreadsheet to figure things out. He goes into communities and underwrites gang issues, prostitution issues and underwrites how we’re going to address these issues with local law enforcement. If you’re a traditional investment manager, you might not even know to look for these issues. You have just blown up your Excel spreadsheet.

I think there’s a lot of talk, not a lot of walk, when it comes to using business as a force for good.

Q: You’ve partnered with some other celebrities since your days with Magic. Do you need to have high-wattage names to draw interest?

A: They raise awareness of the issue. I have two jobs: change the world and change people’s perspective on how to change the world. People don’t care about me. If I want to get on CNBC, by having Chris, Eva or Andre as partners, I get a better bully pulpit for sustainability.

Q: How has the pandemic affected things for you?

A: If there’s one blessing from this pandemic, it’s truly highlighted how unsustainable the American dream is and the American way of life is unless we truly enrich the historically neglected communities with some sense of hope. If we don’t, there will be some kind of revolution. Most people are living in survival mode, paycheck to paycheck.