Welcome to the Money in the Middle

The working poor constitute a market of 2-4 billion people who lack access to a broad range of priority social sector goods and services. Meeting these needs effectively offers not only economic opportunity, but also the prospect of improving quality of life and creating a healthier and happier planet. An increasing number of investors look to “do well by doing good” and an impressive array of non-profits and foundations are focused on helping social entrepreneurs achieve investment readiness. Unfortunately, no one is paying much attention to the money in the middle – the intermediaries that channel investor resources into promising ventures with social impact.

The model of intermediation used to launch ProFund, the first commercial microfinance investment vehicle, in 1994, was designed to attract private investors by using a venture capital type structure: stand-alone, closed-end investment fund. Those of us involved in starting ProFund assumed that, over time, good fund managers would grow into multi-product asset managers. 17 years later, the market for microfinance and social investment has evolved considerably, but “best practice” has not. Worse still, very few fund managers have organically morphed into diversified product managers. At the end of 2009, there were only two microfinance asset managers in the US with more than $100 million under management and the first social impact investment funds, Ignia and Bamboo, were just being launched.

Pent up demand for impact investment products is strong and growing. Hope Consulting’s impact investment overview paper “Money for Good” offers the smallest estimate I’ve seen of this amount – $120 billion looking for sustainable emerging markets impact investments. Given that it took 15 years for the commercial microfinance industry to reach US$ 14 billion (and at least half of that amount comes from public sector rather than private sector sources), the issue of absorptive capacity is of critical importance.

This blog – The Money in the Middle – will look at some of the key issues surrounding the development of a robust social impact investment industry. Numerous quantitative studies from the mutual fund industry confirm that outperforming “the market” requires talented fund managers. While there are many no-load fund options (especially from larger, diversified mutual fund management companies), there are also a significant number of specialty funds that command fees in the 3-5% range. Why should we expect that the effort required to develop a successful portfolio of unlisted emerging markets ventures with social impact can be obtained at a lower cost than generating a similar size portfolio of listed equities? Is a track record in microfinance lending the best basis on which to build a social sector investment practice? Do you have to “give up” financial returns to create positive social and environmental impact? And how in the world do you measure non-financial outcomes? Please join me as I explore these issues — and don’t be shy about sharing your own experiences and concerns as well.

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