08/14/2012 03:18 pm ET Updated Oct 14, 2012

Private Equity's not so Dirty Secret: How it's Making a Difference and Helping People

Private equity has been in the news quite a bit over the last few years. The industry, once known mainly in financial circles, is now ingrained in the public consciousness, and its dealmakers can thank Mitt Romney for the unwelcome glare of public scrutiny. Not surprisingly, Romney's political foes have sought to paint his private equity career -- and by proxy the entire industry -- in a negative light. During the Republican primaries, the Romney campaign even took fire from the same side of the battlefield when a Super PAC supporting Newt Gingrich released a hatchet job film about Romney's time at Bain titled "When Mitt Romney Came To Town."

Romney hasn't been helped by the fact that a former Bain Capital colleague and significant contributor to his campaign, Edward Conrad, recently wrote a book arguing that growing income inequality in America is a sign that our economy is working well. No matter your view on Conrad's thesis, he's not doing any favors for Mr. Romney or the private equity industry in the brave new world of the 99 percent vs. the 1 percent.

But that's in America. In contrast, private equity plays a different role in emerging markets regions such as Latin America, Eastern Europe, Asia, and Africa. In those economies, it provides badly needed risk capital since other forms of financing are both expensive and hard to come by. Just as important as capital, private equity firms bring considerable business acumen to the table. In developing economies where human capital, like financial capital, is scarce, private equity investors can actively contribute to the success of a business by investing in and upgrading the financial, operational, and management capabilities of their portfolio companies.

The secret is out about private equity in emerging markets -- over the past five years, firms have invested nearly $200 billion in the space. Still, there is far less talk about how private equity in these markets is changing the face of philanthropy as well. The scale of poverty and inequality in many countries makes it impossible for traditional philanthropy alone to make a difference. Realizing this, firms like the Acumen Fund and NESsT are pioneering a specialized segment of private equity called impact investing. Using this approach, non-profit organizations invest in companies whose business models positively impact society as whole. Moreover, they work hand in hand with social entrepreneurs in order to tackle the myriad obstacles seen in developing economies.

While these organizations are often non-profits, there is a fundamental difference between impact investment and traditional development aid. The investment capital is not a "hand-out." Through a combination of capital and hands-on management, impact investors help businesses to become self-sustaining, thereby generating a lasting development impact. As they say, "teach a man to fish... "

Impact investors can drive significant benefits for society. Take the case of NeSst, an impact investor that operates in Latin America and Central Europe. NESsT invested in a Hungarian business called Fruit of Care that produces high quality gift and decorative products. Its entire workforce is comprised of adults with intellectual disabilities. In a country where less than 10 percent of adults with such challenges can find work, Fruit of Care employs 150 such individuals. With nearly 200 percent growth, the company is now a living of example that doing good can be good for business. Rather than living off grants, Fruit of Care's innovative business model allows its impact to be scalable and replicable.

While the efforts of impact investors have drawn growing attention in development circles, these firms still fail to attract much attention from the private equity community. In order to harness the best that the PE industry has to offer, NESsT has figured out an interesting way to bridge the gap. Realizing the business expertise that resides within the private equity community, NESsT not only seeks financial support from private equity firms, but also asks them to contribute pro-bono resources, from training to business plan screening.

Forty emerging market private equity firms and a network of 250 private equity professionals now support social enterprises incubated by NESsT (I was so impressed by what I saw at NESsT that I joined their pro-bono Business Advisory Network). Sure, they know that "giving back" is the right thing to do, but they are also attracted to a philanthropic model that is aligned with their investment approach. After all, supporting and expanding the middle class in the emerging markets will create the next generation of investment opportunities for private equity firms

Perhaps the private equity community in the United States can learn a thing or two from its emerging markets counterparts by supporting initiatives that find profits at the intersection of commerce and social enterprise. I'm pretty sure that's something that both Mitt Romney and Barack Obama would be happy to endorse.