Why I Dream about White Swans

Successful exits are a challenge across all equity markets. Investors looking to maximize financial returns (aka “take the money and run”) want out at the highest price, regardless of what happens to the company after they exit. Social Impact investors, in contrast, are looking for sustainable companies that provide needed goods and services to the 2-3 billion working poor on the planet. Our exit objectives embrace both achieving a risk appropriate return on investment and using our departure to bring in the right shareholder(s) for the next stage of growth. We want our portfolio companies to grow and prosper after we exit so that the market they serve has access to ongoing quality of life improvements.

So why exit at all? One simple reason – most investors favor certain company life-cycle stages over others. Growth investors want to exit maturing companies to pursue new growth investments (which is a good thing). Particularly risk averse investors may prefer senior debt in mature companies within stable industries. Those of us who design and manage impact investment products must do so in a way that reflects the realities of investor preferences. In other words, if I want to raise money to invest in social enterprises, I need to offer a credible exit strategy to potential investors.

Admittedly, the “impact investment ecosystem” has many gaps to fill with respect to financial intermediation. Ventures with social impact (VSIs) need seed funding, growth financing and working capital. One Planet’s core strategy results from grasping the need to create better financial intermediaries to address these needs. More financial intermediaries that effectively and efficiently channel financial and human capital to VSIs should lead to bigger and faster impact creation. Preferably we’ll achieve better impact too, which brings me to the topic of impact measurement.

Investors, even social impact investors, need impact indicators for non-financial returns – and they need this information on a continuous basis. Policy-makers, technical assistance providers, consultants and donors need deeper, long-term impact data to set a forward-looking path. In trying to understand how people acquire better health, education, housing, employment, etc., we must remember that the “objects” of our social impact work are actually individuals with human dignity and unique aspirations. How invasive should we be of their privacy to satisfy our impact curiousity? How do we gather enough market intelligence around our multiple-bottom-line goals so that we can achieve them with minimum invasiveness? And how do we use this market intelligence to structure better products?

For starters, we can explore ways of using technology and sociology to create basic self-reported indicators that can be collected frequently and at very low cost. We may not be able to track sustainable reduction in childhood malnutrition using SMS messaging, but if we had monthly updates on child height and weight, trend data could offer a useful proxy. Taking this a step further, parents providing these updates could receive feedback on their child’s well-being (height/weight percentile), and those with low height/weight children could receive nutrition advice or social service referrals through this same SMS channel. The notion of using impact data to add value for our target market (and not just for our investors) is worth exploring.

Secondarily, echoing Professor Ebrahim and his colleagues at Harvard Business School (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1611810##), NGOs and universities could focus on defining long-term goals and monitoring progress toward these goals. If these “design” solutions could then be executed in partnership with relevant municipal, state or national agencies who seek this same data to set and evaluate public policies, that would be a real win-win-win-win for impact investment. It’s a win for NGOs because it offers a clear value proposition for framing strategy and programs. Government agencies get a “win” if private partners offer academic and financial support for impact measurement. Investors win because they have access to deeper insight into non-financial performance, and the working poor win because they have fewer intrusions on their personal privacy (in the form of impact studies organized by different and potentially overlapping constituencies).

This post was written in response to Laurie Lane-Zucker’s query to the LinkedIn Impact Investment group (http://tinyurl.com/43sgfup) questioning whether exits are antithetical to impact investment. While the wrong exit can certainly do harm, exits are a necessary component of investment. As challenging as it may be to realize “good” exits, financial intermediaries must do just that in order to stay in business. Personally, I dream about “white swan” events, those rare exits (like the Compartamos IPO) that generate outsize return and interest. It’s fair to say that while I expect most of One Planet’s investment will generate decent financial returns and positive non-financial returns, there are one or two sectors and a handful of countries where white swan events might be feasible and desirable. For better or worse, these rare events will probably do more to attract impact investors (and mainstream investors looking for low beta) than any non-exit related activity we can offer.


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