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7 May 2012

Alternative investments: impact investing

This is the second in a bimonthly series of articles about the personal alternative investments markets available to the professional corporate venturer. This section in Global Corporate Venturing magazine looks beyond our readers' day jobs at how they manage their time and wealth using the same skills of insight, trend analysis and managing risk they bring to their professional careers.

Author: Marianne Abib-Pech, venture capitalist and writer

Charlene is in her early 30s - she is getting married in a couple of days and seems completely unworried by the event while showing me the latest pieces made by her protégés.

She is also on her way to a meeting with one of the luxury hotel brands in Asia to agree details of its new orders. Charlene, beaming with passion and confidence, said: "After local international airlines, we are now making our way within luxury hotel gift shops in Hong Kong and Macau... Singapore is next.''

"We" is the Mustard Seed Workshop, a company she created about 18 months ago to showcase handmade gifts produced by socially marginalised groups around the world.

A former investment banker, Charlene is also a devoted Christian and said she had an epiphany while on a missionary trip in Qinghai, China: "I realised life should be more than making money. A lot of suffering would be alleviated not by simply giving money away, but by investing in these marginalised people, teaching them skills, showing them how to make a living.''

She added: "As we are pursuing a charitable cause, rooted in our faith, we at times have a hard time communicating in pure business language. Some investors do not get us. Hence, having access to a community with both financial savvy and the right sensitivity to social justice is critical."

Reconciling profitand social wellbeing is in l'air du temps, and flavour of the month is impact investing.

Although the concepts may not be new, the intention to creat triple-bottom-line reporting measures - that is, include non-financial results - is a recent phenomenon, according to Scott Lawson, chief executive of SOW Asia, a Hong Kong-based charitable organisation for helping social businesses.

Lawson added: "Doing well for oneself is part of human nature. Doing good is also important to many, especially as the social and environmental challenges we face are so large. Now these two impulses are being combined in innovative ways."

In November 2010, US-based investment bank JP Morgan published a report saying impact investing represents $400bn to $1 trillion in funding needs over the next 10 years.

Serge Raicher, co-founder and chairman of the European Venture Philanthropy Association (EVPA), said: "There is a growing fashion about impact investing. A lot of corporations are rethinking their corporate sustainability and responsibility programme to add an investing angle.''

Impact investing is also reaching out to the private banking and wealth management sectors, with several companies developing a special portfolio. It is, therefore, becoming an asset class of its own?

What is impact investing?

Impact investing is an emerging space in the process of being defined but broadly covers investments intended to create positive impact beyond financial return.

Richard Roque, founder of SA Capital, which is trying to launch an impact investment fund, defined it as "the happy medium between pure philanthropy - where the money is purely given, generally locally with the trust that it will be put to good use - and a full business mindset, where mostly profitability matters".

Who is nowadays willing to invest if there is little notion of return? In impact investing the notion of return is expanded to include different metrics - financial and impact (social or environmental).

Traditional investors are familiar with financial measures of returns, such as internal rate of return (IRR) and return on equity (ROE), but how does one measure impact?

About 80 years ago, US President Franklin Roosevelt spoke of "helping the man at the bottom of the pyramid".

Roque said: "Impact is about positive externality. It is defined as doing good for others while participating in building ecosystems that will be net creators of value.

"In the long run, externalities from impact investment reduce risk and hence provide the basis to achieve supe-rior returns on a risk-adjusted basis."

Wolfgang Hafenmayer, managing partner of the venture philanthropy division of the Liechtenstein-based bank LGT, added: "Successful impact investing will apply the rigour and discipline of the private equity field to creating value for and with less advantaged people.

"Impact investing's vocation is to help and build in every way possible, from financial means to providing needed skillsets and management know-how."

So impact is about creating long-term value for less privileged people, to help them develop local wealth. Anyone, anywhere who intends to create a business with this goal in mind can be tagged a "social" entrepreneur.

Three ways to invest

First, ask yourself what is driving you towards this particular type of investment.

The financial returns from impact investing will probably be lower than from traditional investment or other alternative assets (wine at 12% as we saw in the March issue of Global Corporate Venturing, or art at 10% to 12% as we will see in a later issue.)

It is now possible to participate in impact investing with your charitable dollars, through organisations such as SOW Asia, or with your investment dollars.

For this reason, it is important to begin with a clear idea of your own moti-vations and the returns you seek. For years, most socially responsible investing referred to what one opposed, such as cigarette and arms manufacturers or gambling.

In the new phase of impact investing, it is more about what one supports, including clean air and water, educational oppor-tunities and medical services for the underprivileged.

Many of these markets are huge, remain relatively untapped and overlap with for-profit corporate venturing units looking at entrepreneurial ideas.

As Raicher said: "The concept of high financial returns coupled with high societal impact is very compelling but is not yet the norm."

A 5% to 8% return might be an average expectation from this type of investment. You should also be wary that some investments will barely give you return on your capital.

However, all your investment will have the potential to create value for the future, such as through projects in education, clean energy and consumer sectors.

Second, tap the right channels.   

With the growing fashion for impact investing, increasing numbers of deals labelled "impact investing" or "social investing" are flourishing in different markets.

You should be wary of the hype and it is important to do your homework - the EVPA has defined venture philanthropy as separate to impact investing partly for fear the latter is becoming overhyped.

Impact investing could include institutions demonstrating they can offer all financial instruments, such as grant, loan, debt and equity, while adding mentoring and guidance on product development.

Prefer structured organisations that have a history, a purpose or a bigger vision.

It could be designing and implementing standards for this "new'' industry, such as the European Venture Philanthropy Association, or its sister body the Asian Venture Philanthropy Network.

They are currently putting together a think-tank to define a framework for assessing impact.

Or it could be specificallydeveloping strong ties with big corporates. Hafenmayer said: "Every industry, every project has an impact potential - positive or negative - on a new market, and corporates will need to start integrating this in their growth strategy.

"Ensure that you and the fund or the direct investee have a clear and somewhat aligned understanding of what impact means and how it will be measured."

Third, invest time debating or investigating definitions  and metrics.   

How intensively would the investment reach the people targeted and how? What is the ultimate outcome? What is the timeframe from investment to realisation? How many people will it affect? What demographics are most likely to benefit?What are the repeatability and the sustainability of the impact? How would it happen? What would be the first indicator of success?

Ask the right questions and learn until you are comfortable that this is going to make a difference you would want to see, as well as make you some money.

Look at the effect your personal contribution, or impact, can have on the company or organisation. Most importantly, be patient. Creating impact takes time and the investment horizons are typically much longer than traditional investments.

In the light of a huge social, environmental and values crisis, Hafenmayer said: "It will most definitely emerge as the only allowed way of making money in the future for individuals and corporations alike."

Boxes:

Useful questions:
How do I want to have an impact? Financially or personally? For example, dedicating time to help a social entrepreneur.
What part of my portfolio am I ready to dedicated to impact investing?
What is my threshold on financial returns? For example, is 3% a feel-good number or am I happy just with impact?
In what sectors and regions am I more willing to create impact? For example, water in Africa, education in India, standard of living in the Philippines.
For me what would be a successful impact? For example, how many lives affected, for how long, in what ways?

Useful organisations:
European Venture Philanthropy Association
Asian Venture Philanthropy Network
SOW Asia
SA Capital
Advantage Ventures
Ashoka
LGT Venture Philanthropy
Impetus Trust
Jacana Ventures

Supporting articles: Alternative investments: wine

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