For Auld Lang Syne: Bidding Farewell to TMITM

My dear friends, frolleagues and colleagues,

The time has come to set aside “The Money in the Middle” to focus on other aspects of achieving a better world. When I began this blog in 2009, recent exciting successes in commercial microfinance (the Compartamos and SKS IPOs in particular) had captured the interest of mainstream money managers. At the same time, a rising generation of millennials recognized that maximizing profit is a losing proposition if people and planet are destroyed in the process. The converging promise of financial returns combined with a more sustainable planet and improved quality of living tipped into something called “impact investment”.

What’s the definition of “impact investment”? Well, it remains as controversial and muddy today as it did in 2009. For some people, impact investment requires targeting a positive social outcome, as well as a positive financial return. For others, reducing harm is as legitimate as increasing good. Blending financial and non-financial goals is where the definition process falls apart. The Heron Foundation has made significant effort toward promoting an unfortunate “finance first versus social first” dichotomy and many have found this helpful. I can assure you, however, that after almost three decades of investing for multiple bottom lines (financial, social, environmental, ethical/cultural), I have never seen this as a reasonable guiding principle for achieving meaningful impact. Optimized impact alpha is like a linear programming equation – you’ve got to solve for all the variables simultaneously.

The mainstream folks enamored of “finance first” often end up buying products that have some type of social benefit grafted on, but this isn’t the same as having impact. A company that gives 10% of it’s profits to charity is not an impact company. The firm could charge 10% less for its product and we could each give the 10% difference to our charity of choice. Sad truth is that many firms that tout giving money to charity as a marketing tool are unable to fulfill this promise because their non-profit partners are under-resourced to scale. If you want to give money to a philanthropic cause, do it directly! Make your purchase decisions based on the quality and features of the product you are looking for, not because it absolves you from thinking about needing/wanting to doing good things for others. If you want a charitable partner, make sure that you prioritize their growth and development in parallel.

“Social first” usually suffers from the reverse problem. Typically born of urgent need identified on the philanthropic side of the bed, social first projects almost always lack sufficient human capital to operate efficiently and generally lack the organization development skills and financial capital to build and grow in the same way as a “real” commercial business. Social first supporters desperately hope to convince the mainstream that investment can do good as well as generate wealth, but few of their activities are structurally or intrinsically likely to generate high enough financial returns to offset the very real risks investors are asked to assume. If a social first enterprise does generate high double digit returns, it can make investors happy, but only by charging poor and low income clients more than needed to sustain and grow the business.

When impact investment got started, it was focused finding ways to sustainably improve quality of life for the global base of the pyramid, the 2 billion plus people living on $2 a day or less. The US economic development community soon realized they were missing out and began to rebrand community development finance as “impact investment”. The primary instruments for catalyzing private sector investment in the US are fiscal incentives: New Market Tax Credits and Low Income Tax Credits. Unfortunately, neither of these catalyze impact investment. The portions of community development projects supported with NMTCs or LITCs are stripped and sold to investors interested in the enhanced return, not necessarily the impact. The investors who care about the non-financial returns are then left with most of the risk and the lowest financial returns. How does this encourage firms or individuals to invest directly in impact?

Do we want to doom US economic development to growing in lockstep with whatever amount of fiscal incentives the politicians authorize in any given election cycle? If not, we need to develop impact investment instruments and solutions that optimize across bottom lines. Philanthropic actors can creatively assemble a strong suite of credit enhancements that support new private investment. Investment and money managers can begin to understand that philanthropic organizations that support impact investment work ALSO need to provide reasonable living wages to their staff and invest in program growth. If there isn’t adequate operating budget to execute an impact investment, results will always be sub-optimal in the medium to long-term.

Over and over again, I see new microfinance, SME and impact funds being formed using the same ‘magic’ fee formulas used in Silicon Valley (with no adaptation to the different business model or sectoral challenges faced). This often means a $20-50 million fund that is meant to make and manage small, complex investments cover multiple geographies. If you’re paying your SME fund manager $400k per year (2% of that $20 million fund), how much staff and overhead does that cover? How much below-market are the salaries paid? Are you ok with the notion that every two or three years, all the junior staff (ie, the ones doing the work) that have apprenticed on your dime are going to move on to higher paying fund management jobs at larger firms? Do you think this has an impact on your financial or non-financial returns?

For impact investment, the role of the money in the middle remains as important and as misunderstood as ever. If you’re an investor, make sure that your values are truly reflected by any impact investments you make so that the positive non-financial outcomes give you true satisfaction. If you are an entrepreneur, focus less on marketing impact and more on identifying the tangible forms of impact that your business can offer. I love when someone wants to give 10% of my money to charity but has no plan to nurture staff skills, recycle trash, improve product quality or affordability etc. You can definitely fool some of the people some of the time with this approach, but I’m not one of them.

As a society, the mindset we bring to investment and financial markets is beginning to change. My role is changing too, from one that is primarily financial markets focused to one that is more strategically and ‘human’ focused. Sustainability and wellness are both needed in greater measure for our planet and all of its inhabitants to survive and thrive. In 2016, I’ll be introducing new products and activities centered around these principles – that what we do should feel good and be sustainable over time – in finance and in health. Farewell 2015 and good night TMITM! To my readers, thank you for sharing my impact journey this past six years. I wish you all incredible joy, success, health and creativity in the New Year and always!

Lauren A. Burnhill