As Impact Investment gains momentum and generates increased investor interest, impact financial intermediaries have scrambled to create new products and strategies that meet investor needs and provide scarce capital to ventures with social impact (VSIs). I see a number of trends emerging through these exercises and have flagged five of these to watch in 2012:
1. Impact Investment Funds of Funds (IIFoF) will come on strong: Most money moves into microfinance or impact investment through special purpose fund vehicles. Raising capital for these vehicles is time-consuming, expensive and highly inefficient. New funds, with new managers, are often small and resource constrained, adding to potential investment risk. The new crop of impact investment advisors hope to overcome some of these constraints by creating IIFoF structures that can serve as anchor investors in emerging funds while at the same time offer a more diversified product to their own investors.
Before you rush to invest in an IIFoF, ask yourself what the Fund Manager is offering to portfolio investee funds, aside from a slug of capital. Where the Fund Manager has a robust plan for supporting investee funds, enhancing governance and adding value, an IIFoF may indeed offer superior returns, compared to a single fund investment. On the other hand, if the Fund Manager assumes that financial capital is the primary area in which new funds need support, you’ll still benefit from diversification, but the potential return profile is a bit more opaque.
2. Mobile Payment Networks and Systems will displace MFIs in delivering financial access to the Base of the Pyramid (BOP): As the microfinance industry has grown, poverty alleviation theorists have pushed for the addition of savings products in what has been a largely credit-oriented industry. With many microfinance practitioners (including myself) moving from access to finance into “access to life” issues, poverty alleviation theorists have been looking at MFIs as conduits for health insurance, renewable energy programs, education finance and so on. The thinking is that since MFIs have regular contact with the BOP target market, they are ideal distribution channels for non-financial goods and services that improve BOP quality of life. While an interesting theory, most MFIs are still struggling to adapt to regulation, manage growth and move from single product (working capital loans) dominated portfolios to offering a robust and diversified suite of financial products. Regulatory issues aside, there isn’t enough bandwidth in most MFIs to tackle other social sector challenges.
Mobile payment networks are stepping in to fill the gap. MicroEnsure clients in Africa can purchase and pay for health and other types of insurance using their mobile phones. Simpa Networks uses a mobile and digital control network to offer prepaid renewable energy solutions for rural villages in India.
3. Latin America will return to favor: In recent years, multilaterals and development experts have favored investment in Africa and Asia and reduced or eliminated new commitments in Latin America. The argument for doing this? More poor people and poorer poor people outside of Latin America. The problem? Latin American economies and societies are far more “investment ready” than most African and many Asian counterparts. As an investor, I want Latin America in my portfolio. As a social development expert, I believe that poverty is poverty, wherever it occurs.
Can you ethically exclude Latin America from your impact investment work? Aren’t you then saying that you want to help only the most miserable and to heck with the moderately miserable? Excluding the Latin American BOP won’t necessarily get you better impact results given investment readiness issues; but it will probably lower your portfolio returns.
4. Focus on Operational Excellence will become a key differentiator across impact investment funds and firms. Mainstream asset managers asked about innovation trends and what it takes to outperform (Investment Innovations: Raising the Bar) consider operational excellence to be a core driver. In the impact investment world, we’ve been more focused on selling a new vision and figuring out how to report on the multiple bottom lines we’re promising investors. Few of the impact investment funds & firms coming to market have a lot of hands-on experience with social sector lending, much less equity investing. We must, collectively, demonstrate that we are giving as much thought to how we can add value through our work with #ImpInv portfolio companies as we do to the issue of what social & environmental impacts we plan to measure. Failure to do so will contribute to sub-par results that make #ImpInv a temporary bubble rather than a long-term agent for sustainable change.
Are you thinking that you know how to invest in health clinics because the clientele are the same poor people served by the MFI you invested in a few years ago? Regardless of whether the target market is the same or not, lending to financial institutions isn’t the same as lending to corporate whether these latter are small enterprises or giant conglomerates. And I don’t care how many years you’ve been a lender, there’s no reason to believe you’ll make a good early stage equity investor, social or otherwise. What I hear from colleagues with money to place is that “there’s no there there” – they’re hearing a lot of high level mission statements, without a lot of substance behind them. What they’d like is to hear is impact investment fund and firm managers talking about the HOWs in addition to the WHOs and WHYs.
5. Broader discussion around Values & Sustainability, and how these relate to what we can achieve as a society: I hope we get to a time when ALL investments are sustainable and multiple bottom-line. Before we get there, we’ve got to cross the “impact measurement” hurdle and that implies a clearer understanding of what we want to accomplish given the values we hold dear. It’s important to note two things: (1) having a mission statement is not the same as having identified and actionable core values; and (2) we do not all value the same things to the same degree and that’s OK. Successful product development and differentiation is likely to happen faster as a result, assuming the values discussion comes first.
Getting clear on values will save investors money (and reduce the stress on investment managers). Most “impact indicators” cost money to collect, and some – like those requiring randomized control trials – may cost a significant amount of money. If you know what matters most, you can focus on greater depth of understanding in those priority impact areas and skip the rest.
Values clarity may also help address one of the biggest problems I’ve found in my exploration of impact measurement. Specifically, the social and micro-entrepreneurs we invest in are people, not objects of charity. They have human dignity and the same rights to privacy that you and I expect to enjoy. When we ask questions that are illegal to ask in our home markets to satisfy our drive to understand impact, we are crossing an ethical boundary – we are essentially saying that the ends (economic development, peace etc) justify the means (privacy violations and other “crimes” against human dignity). We are certainly intruding into the private lives of our clients to a greater or lesser degree! Measuring fewer –but more important to us — things would not only save money, it might also lessen the ethical transgressions we commit in the pursuit of impact. I’d be very happy about that.
My trends list derives from unscientific observation of the impact investment industry and lots of conversations with a wide range of social entrepreneurs, private investors and development organizations. One additional thing you’ll be hearing more about in 2012? Convergence. It doesn’t mean what you think it does – but what it does mean has significant implications for sustainability, impact investment and the possibility that socio-economic conditions will improve for the BOP during our lifetimes!
How do you think Impact Investment is changing or will change in 2012? Let me know what you think!