Co-authored with Cathy Clark and Jed Emerson.
Some may be surprised to hear it, but impact investing would barely exist -- certainly not at its current, modest scale -- but for the support and partnership of government. Government is ubiquitous in all economies, to be sure. But in the types of underserved markets in which impact investors operate, the role of public policy is profound.
Consider the Community Reinvestment Act in the U.S., which underpins a $60 billion community finance sector, or the Small Business Investment Companies (SBIC) program at the U.S. Small Business Administration (SBA), which invests $8.8 billion and leverages another $9.4 billion in private capital into over 300 funds. Consider also Big Society Capital, which with nearly a billion dollars in anchor funding from the U.K. government will invest in a variety of social ventures across the country, or the $333 million set aside for impact investing from the U.S. government's Overseas Private Investment Corporation (OPIC).
These are big numbers, with big impacts. Among the companies initially supported by the SBIC program over the years -- since 1958 -- are Apple, Fedex and Costco. And yet the importance of government is often underestimated once we become distracted by the thrust and parry of the investment process.
We were reminded of this recently when we examined the experiences and performance of 12 outstanding impact investing funds as part of our two-year research collaboration, Impact Investing 2.0. We expected to find just a couple of outlying funds extensively involved in matters of public policy, but instead discovered a deep partnership between the public and private sectors on multiple fronts.
We learned, for example, that eight of the 12 funds had been direct recipients of public sector investment, whether through grants, equity, loans, or guarantees. Moreover, government actors were not simply procuring the services of impact investors in a one-dimensional client/vendor relationship, but engaging actively, with an eye to opportunistically embracing new forms of social value creation through the tools of business and finance. We called this characteristic in impact investing "policy symbiosis." And it makes sense, since governments are often one of the most dedicated constituents to the outcomes sought by impact investors.
Business Partners Limited (BPL) in South Africa and the SEAF SME Sichuan Investment Fund - the latest two case studies in the Impact Investing 2.0 series - speak volumes to the importance of policy symbiosis. They deserve the attention of any policymaker around the globe looking to encourage impact investing, especially those wanting to encourage successful small- to medium-sized enterprise (SME) development.
BPL, which provides risk finance to underserved SMEs, including in rural areas, was founded in 1981 as a direct partnership between an industrialist family, other large South African corporations, and the Government of South Africa, which provided 50 percent of the funding.
Since those early years, that foundational investment from government has enabled BPL to deploy a total of $1.5 billion to more than 69,500 SMEs, creating more than 550,000 jobs in the process.
SEAF's $22.5 million Sichuan fund was created at the behest of the International Finance Corporation (IFC), a development finance institution with 184 member countries, responding to the central Chinese government's desire to incentivize economic activity in its underdeveloped provinces through SMEs. The fund was successful in part because of its close working relationship with local and regional public officials -- delivering an 11.4 percent net internal rate of return, supporting 5,000 jobs, and generating annual employment growth of 21 percent.
This is what our research shows: that successful impact investing depends on enabling environments that include active government involvement, together with financial intermediaries that understand and contribute to the development of regulations that support the delivery of both social and financial returns. In Impact Investing 2.0 we called out five categories of policy symbiosis: public private partnership at the point of creation, co-investment by government, regulatory influence, field and market-level policy advocacy and opportunistic efforts to collaboratively bolster the prospects of success for the enterprises that receive and make use of capital.
Policy symbiosis in impact investing is finally getting the attention it deserves, thanks to the U.K.'s leadership of the G8 in 2013, which resulted in the creation of the G8 Social Impact Investment Taskforce, and the work of others, including the World Economic Forum and Impact Investing Policy Collaborative.
Seasoned funds like BPL and SEAF, as well as other intermediaries and institutions that work explicitly to achieve public goals through private sector activity, including community finance institutions, SBICs, the IFC, SBA, Big Society Capital and OPIC, offer important lessons that will clear the path for more impact investors to succeed.