Do Impact Investments Need Subsidies?
Posted: April 18, 2012 Filed under: Uncategorized | Tags: featured 2 Comments »Impact investors may not be all that interested in jump-starting new ventures that aim to provide vital services to the world’s poorest people after all.
But a new report from Acumen Fund – one of the earliest impact investing funds – and the Monitor Group suggests there is another class of funders who should play that role. They’re called philanthropists. (The report was funded by the Gates Foundation, the world’s largest philanthropy, though the report notes the conclusions “do not necessarily reflect” the foundation’s views.)
The report, “From Blueprint to Scale: The Case for Philanthropy in Impact Investing,” takes on the issue that has been vexing many would-be impact investors: the shortage of investable deals combining significant positive impact on disadvantaged populations and some level of financial return.
The report identifies a “pioneer gap” that is choking the pipeline of potential deals. Unlike angel investing in advanced markets for technology or health care, investments in new ventures for the “bottom of the pyramid” can’t promise outsize returns to outweigh the early risks. Likewise, most such “inclusive” businesses can’t cover the costs of testing and refining their often novel business models, nor pay for the market development needed to create customer demand for new approaches or whole new categories. “This poses a question: how will promising inclusive business models get to these later stages where they become investable without support earlier on in their journey?”
Monitor found that only six of 84 impact funds investing in Africa offered early stage seed capital. Even Acumen, which initially made investments in high-risk early stage ventures, has dramatically changed its approach to focus on later-stage opportunities. Acumen’s investments in “blueprint” stage companies dropped from 64 percent of its portfolio in 2001-2004 to 11 percent in 2009-2011.
Acumen’s new caution is not hard to understand. Its portfolio companies have an average after-tax loss of 20 percent, and even its eight most profitable investments return profits of just 6 percent. Despite its investments to enhance value and manage risk, Acumen merely expects its capital to be returned, “far off the expectations of mainstream financial-first investors,” as the report notes. Monitor’s analysis of 50 inclusive businesses in Africa found net operating margins of between 10 and 15 percent.
“The dirty secret is, I’m not seeing a lot of people making money in this field,” Jacqueline Novogratz, Acumen’s founder and CEO, said at the Global Philanthropy Forum in Washington, D.C., where the report was released. “The real metric is, are we changing lives?”
To mitigate low and volatile returns, the report proposes a strategy it calls “enterprise philanthropy,” in which strategic grants take on the roles of risk capital and market development. The report provides case studies in which such grants have generated impressive social returns, as in the Shell Foundation’s early grants to Husk Power Systems, which is now providing electricity generated from rice husks to 25,000 households in Bihar, India, and the Gates Foundation’s investments in demand-generation in India for drip irrigation systems from Global Easy Water Products. Instructively, it also provides a case study of a failure, in which Acumen’s wrote off its investment in First Microinsurance Agency in Pakistan, which offered polices to cover adverse health events.
The report is likely to fuel the debate about whether impact investing, absent subsidies, can really deliver the social transformation its champions sometimes promise. But it argues that for foundations, enterprise philanthropy that serves to attract private investors can be a high-leverage – and high-impact – strategy.
“Many pioneers will fail,” the report concludes, “but some will succeed and establish, in time, effective market-based models into which billions of dollars of impact capital can be directed to improve the health, education, livelihoods and security of our poorest and most vulnerable communities.”
Catalyzing Capital, 1 of XX
Posted: April 15, 2012 Filed under: Uncategorized Leave a comment »We talk about how “impact” is becoming increasingly central to capital markets overall, as emerging markets come to the fore and as new technologies and new financial mechanisms open opportunities to provide affordable health care, education, water and energy to the global poor.
The inverse is also true as “investing” becomes increasingly attractive to philanthropists who have long been committed to the issues and are seeking new ways to make a difference, and to government agencies looking to leverage private capital for global development.
The Global Philanthropy Forum, starting today, is a case in point. The Forum is mixing its Silicon Valley tech types with Washington DC development officials to pursue “Social Good: By All (Private) Means Necessary,” as Elizabeth Littlefield, CEO of the Overseas Private Investment Corp., puts it in the title of her talk at the event. OPIC has committed $285 million to six impact investment funds in emerging markets, seeking to catalyze $875 million of investment.
Catalyzing capital for global change, not philanthropy per se, is the forum’s explicit goal. Jane Wales, a former Clinton Administration and president of the World Affairs Council who is now also the Aspen Institute’s vice president for philanthropy and society, launched the Global Philanthropy Forum 11 years ago because she was struck at how little of Silicon Valley’s wealth was being strategically deployed for social change.
“I was operating on the theory that entrepreneurs were by their nature people who liked affecting change, so that wasn’t the problem,” Wales told me when we sat down at last year’s Forum. “I thought the problem was, they have no evidence that philanthropy works, so why do it? I picked international development … because we have a huge amount of data on what works and what doesn’t.”
The amount of such data is exploding, as is the ability to harness it (see “Beyond Connectivity,” my report from last year’s Global Philanthropy Forum). The Gates Foundation, for example, has invested more than $100 million in methods to evaluate progress in global health. “So all these family foundations that don’t have $100 million to spend on just that one area, they can piggy-back on that.”
That same data-driven approach is now guiding her members to impact investing. In India, for example, “The opportunity for social business is huge,” she says. “There’s such a tradition of entrepreneurship there. You’ve got a talent base. Marry that with 40 percent of the population below the poverty line. India is leapfrogging philanthropy. They’re going from very traditional charity, to looking at social businesses, looking at all these new tools, without lingering in the middle.”
It may be the adult children of the Forum’s members who drive the shift, she says. Financial advisors are finding that the parents want to talk separately about their investments and their philanthropy. Their kids want to make their investments work for social change as well. They say, “’Bring us investments that make both a social and financial return,’” she says. “’We’re not only interested in financial return.’”
Wales’ optimism is contagious. “Problems are being solved that we thought were insoluable a few generations ago. The idea that we are truly eradicating diseases. The idea that it’s a small incremental investment to wipe out polio — that’s astounding. The same situation with meningitis — the vaccine got brought to market at a speed I’ve never heard of before.”
“I’m not sure the world is in worse shape than it used to be,” she says. “We have fewer civil wars than we used to, but we know about them now. We know about them and we care about them. That’s just to say, we have a much different degree to which we are connected to the rest of world, not just economically or physically, through disease or terrorism, but morally.”
Social Bubble
Posted: March 5, 2012 Filed under: Uncategorized | Tags: bubble 3 Comments »I love that old New Yorker cartoon with the guy praying, “Please God, just give me one more bubble.”
The current concern among the social capital market crowd is that “impact investing” has gotten too hot. After years of trying to get investors to look beyond the financial bottom line and consider social and environmental impacts, there’s now too much money and too few investable deals.
I’ve heard that dozens of times from fund managers, investment advisors and other smart observers of the space, so I’m sure it’s true.
But too damn much money looking for ways to solve social problems all around the world for billions of people? That’s a good problem to have.
Too much money to finance slum housing and sanitation in India. Too much capital to install off-grid solar systems in health clinics, schools and homes in Africa. Too much operating capital for new small business in low-income communities in cities across the U.S.
This problem of too much money hasn’t yet become apparent to social entrepreneurs themselves. But let’s stipulate that smart business models, sustainable revenues and crisp execution are too rare among social ventures, which is why the same standout examples are cited repeatedly.
The experts fear a “social bubble.” If deals get overvalued and returns don’t meet expectations, the fragile new edifice of social capital markets could come crashing down before it really gets rolling. Investors who are finally accepting the invitation to the dance may conclude it really wasn’t that great of a dance after all.
But bubbles may be the way the economy really works. Back in the 90s, telecom was a bigger boom-and-bust than even dot-coms themselves. The billions of overinvestment helped lay thousands of miles of undersea cables that has since been lit up. In the same decade, the Gates Foundation pumped hundreds of millions into global health when that field barely existed. That created a new career track that thousands of grad students and others have eagerly jumped onto, creating the capacity needed to absorb the funding.
Moreover, who’s to say the early bets won’t pay off? The drivers seem clear: the billions of people aspiring to join the global middle class in the next few decades are going to need sustainable food and water, green sanitation, green energy, green health care and green transportation. That’s an unprecedented opportunity for new goods and services. And the radical reduction in the costs of delivery, starting with cloud computing and mobile connectivity and renewable energy, means that new entrepreneurs are building their ventures on top of a powerful infrastructure that is they essentially don’t have to pay for.
All this is not to say that it will be easy to scale up solutions to the 21st century’s greatest challenges. But the problem of what to do with too much money is one I’m happy to put my journalistic skills to work on. Stay tuned.
David Bank
