Both the triumphs and the growing pains of "impact investing" were on display in Oxford, England last week. Impact investing goes beyond the passive tactic of limiting investments to, say, companies that are green or that don't produce guns. Rather this practice combines traditional and cutting edge investment strategies to provide financial return through active support of enterprises taking aim at major social issues -- like housing, workforce development, education of low income populations or clean water and the environment. Last week at Oxford University’s Said Business School, the Skoll Centre, CASE at Duke University and ICAP Partners gathered social entrepreneurs, investors and other stakeholders from around the world to advance the evolution of what is being touted as a new investment lens.
It is a tall order to find a proverbial win-win that on the one hand offers investors financial returns and at the same time channels working capital to social entrepreneurs launching breakthrough - though not yet self-sufficient - businesses to address social needs. But in recent years a framework of investors, fund managers, intermediaries, investment targets and ratings agents has begun to take shape to address this critical limiting factor for the social sector: a viable flow of capital.
However, at least two big challenges have surfaced.
The first hurdle is risk. While small amounts of seed money in the $50,000-500,000 range are flowing, the maturing social enterprises that are ready to scale and need $5-10 million are left empty-handed. This is because they are deemed too risky with inadequate collateral, in spite of successful track records and vibrant revenue-generating models. Sadly, without an influx of working capital, these practical and promising ideas that could systemically grapple with tough social concerns around the globe, plateau in their mezzanine phase and never realize their full potential.
It was heartening to hear the commitment among those at the gathering to identify answers to the risk challenge. Now is the time for the same level of innovative thinking used in designing the larger social solutions to be applied to this sticky question. Just as one example: Couldn't twenty foundations contribute $10 million each to a fund that would guarantee some low collateral loans? Investors would avoid loss, foundations would break new programmatic and philanthropic ground, and the experiment of scaling social enterprises could begin in earnest.
The second impact investing hurdle can be called "access." While the investor side of the equation is evolving new models, potential investees are not tapped to add their voices to the discussion often enough. Large new models like social impact bonds have attracted some attention and investment, but most entrepreneurs and investors are in the dark about how to join the conversation or how to hear about each other -- let alone play robustly in this new space. This is a lose-lose proposition because enterprises don't gain access to scaling capital, investors have no way to learn about powerful new models to effect change, and neither is leveraging the visionary thinking of the other. So far, the rule of thumb is the dusty old adage "it's not what you know, but who you know." Several at this meeting called for the development of a user-friendly database to allow better access for anyone eager to participate. A digital solution would dramatically open up communication among the stakeholders and we believe the result would be powerful new models and significant impact.
In spite of these two persistent roadblocks, there is hopeful and exciting progress. Based on their experiences, lenders are learning incrementally how to project success; academics are digging into unique ways to quantify outcomes; and social enterprises are applying more disciplined and strategic thinking to their visions.
This new momentum in impact investing and "social" capitalism bodes well for all of us. The future of the field is dependent on these gatherings and the discussions they spark. The far-sighted support of Barclays and the leadership of CASE at Duke University, ICAP Partners and Skoll Centre Director Pamela Hartigan are contributing to building critical and timely momentum in this evolving sector.
Co-Authored with Jane Robinson, Chief Financial Officer at First Book
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