Impact investment approaches: proving what you are and what you are not

At ClearlySo the question we are asked most by the clients we are helping to secure social investment is, “what sorts of returns or impact are your investors looking for?”. We urge them not to think this way and just to focus on just building their enterprises, being innovative in how they achieve their social impacts and then working with us to see what type of financial model and instrument best suits.  Investors can be found for pretty much any inspiring social enterprise in the increasingly rich and broad investment ecology that is emerging.  Social entrepreneurs find this answer unsatisfying.  They seem to want a number – if they persist, I tell them “42”, in homage to the Hitchiker’s Guide to the Universe.

The fact is there is no single number.  Our sector is only just emerging and investor behaviours and preferences are still developing.  The importance of social impacts means that values play a big part in the investment decision making process; values shift, are challenging to measure and the trade-offs investors are prepared to make change constantly.

This is very common with angel investors, such as those in our Clearly Social Angel network.  An individual may be willing to accept even a negative return to achieve a social impact they really value (such as educating young girls in Africa), but seek market returns for the rest of their portfolio.  Then we might find they have been inspired by a health-sector social entrepreneur and are investing a substantial sum with a relatively low return.  These ever-changing desires make social finance fun and are part of the self-discovery process in which we are all collectively engaged.  Individual motivations, at a very deep level, play a vital role.

Motivational factors seem to be important to institutions as well.  In my view, one of the most interesting and amusing oddities lies not with individuals but with institutional investors in the impact investment space. This came to light magnificently with a client we were advising.  In order to establish potential demand for social investment into our client’s project, we sought the opinions of investors in advance of an offering.  This is a time-consuming process but makes it much easier to feel confident in levels of demand and appropriate rates of returns investors will seek for a given project.

At the conclusion of the interviews, my colleague summed up brilliantly by saying, “Well one thing is clear: the impact funds are more demanding than the mainstream investors”. The client and I looked at each other, and then at my colleague, assuming he had misspoken – but he hadn’t.  In fact, he was right in saying that, for this investment, conventional investors would accept a lower rate of return than those funds established to target social impact.

This seeming anomaly may be case-specific, but I doubt it.  It also may have to do with deep-seated motivations that are somewhat surprising.  From some of our enquiries it appears as if mainstream investors undertake impact investment for CSR reasons, or because they are experimenting to see if there is client demand, or because of employee pressure, or a combination of the above.  They rarely do so, at least at this stage, to make a lot of money or as a core part of their business.  By contrast, for impact investment funds (IIFs) this is the core business.  They are trying to prove to sceptics that a fund that generates social impact can deliver solid returns.  At this early stage in the history of IIFs this is particularly important.  One could say that the mainstream is trying to prove how social it can be, whilst the IIFs are demonstrating their commercial viability.  This may be an over-simplification, but only a bit of one.  Our sector is indeed fascinating!

First Published in Third Sector in February 2014