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Scaling Impact Investing Part 2: Large Raises

| Tuesday October 12th, 2010 | 0 Comments

While the field of impact investing started small, it has been gaining momentum in recent years.  With increased scale has come increased interest on behalf of larger institutional investors who realize the potential returns available in this space.  Initially, large raises were focused on microfinance with its proven returns.  Several companies, including Ignia, Elevar Equity, Bamboo Finance, and MicroVest, are now looking to move beyond microfinance into other social issues that they believe have the potential to generate financial return while creating value.

Speaking on a panel at SoCap 2010, Alvaro Rodriguez of Ignia explained his impetus for moving into a new space.  While talking to micro-entrepreneurs he found that many of them wanted access to health care, housing, education, and insurance.  The problem was that no one was providing these services to the bottom of the yramid.  Rodriguez realized that there was clearly a market for these services.  What was needed now was capital to fund businesses that were willing and able to deliver them.

As in any new space, there are questions about the methodology to conduct large scale raises for BOP services.  The first question is how investments can be properly screened.  Maya Chorengal of Elevar Equity explains that the financial due diligence is much like that of mainstream investments.  The most important aspect is learning about the unique economics of businesses serving BOP populations and ensuring that management teams have not only the vision but also the ability to execute.  Elevar has a unique approach to understanding the social impact of its investment targets – it talks to the customers of these businesses to understand what impact will really mean for them.

There’s also the issue of returns.  Ignia has a 25% threshold return and believes that in order to attract large amounts of capital they must offer high returns.  Rodriguez says that while many people ask about the trade-off between financial returns and social impact, he does not believe it is any different than the trade-offs that traditional CEOs make every day.  CEOs must weigh making decisions that generate short-term returns versus decisions that ensure the long-term health of the firm.  In the impact space, firms must weigh the short-term financial return for investors versus the long-term impact on the standard of living of the millions of people at the bottom of the pyramid.

Finally there is the potential for abuse.  Mexican microfinance firm Compartamos has been widely scrutinized for its decision to go public as many worry about the potential to exploit BOP populations for profit (though Rodriguez points out that interest rates have actually decreased since the bank went public).  As Gil Crawford explains, MicroVest manages this risk through a rigorous selection process for its investment targets.  MicroVest looks not only at the credit and financial soundness of investments, but also at the country to understand the political, economic, and cultural context and at the character of management teams to ensure ethical standards.

There are still challenges to investing in early stage firms in a space that has not yet been proven.  As Jean Phillipe de Shrevel of Bamboo Finance stated, there is a need for seed capital from local venture or private equity firms to build nascent models and ensure their sustainability before they can attract capital from larger players.  Elevar has decided to only do early stage investing where they have physical offices through which they can help build organizational capacity in new businesses.  The biggest challenge, say Choreval, is finding the human capital to that can apply skills from mainstream businesses to new models for the bottom of the pyramid.

Vale is a second year MBA student at Duke University’s Fuqua School of Business and is interested in how for-profit businesses are finding innovative ways to create social and environmental value and how capital is being driven towards those businesses. Prior to enrolling at Fuqua she was the Deputy Director at Empowerment Group, a non-profit microenterprise development organization based in Philadelphia. This summer she interned with B Lab, auditing certified B corporations and working on the organization’s policy and capital markets initiatives. Vale has a BA in Economics and Political Science from Swarthmore College.


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