Category Archives: High Impact Businesses

If social impact feels hard to measure, try thinking about externalities

I recently taught a class of business school students at the ESMT business school in Berlin. Trying to explain impact and how to measure it is not an easy challenge, although this is hardly news for anyone who has tried to do so, especially in the charity or impact enterprise sector when made to do so by funders. Students find two concepts particularly challenging.

The first of these is what can be considered social or ethical. We discussed examples such as a cooperatively-owned house of prostitution in Amsterdam, or a beer company that manufactures ales made from bread that would otherwise go to waste. Whether or not you consider these to be “social” depends on your belief system. You might find any form of alcohol immoral, and you might feel similarly about prostitution. This also veers into questions about absolute or relative truth, which are well outside the scope of this piece. These are big questions, but hard to resolve.

The second relates to the question of measuring impact. Even something as seemingly straightforward as assessing carbon dioxide emissions has difficulties. It relies on self-declarations and companies might not always be 100 per cent honest about things. Nor does the story end with carbon dioxide: what about sulphur dioxide, nitrous oxide, particulates and the host of other things floating about that account for air pollution? These relate to just one or two of the 17 UN sustainable development goals. And how am I to explain to students how they can compare emission reductions on the one hand with clean drinking water, or educational attainment in poor countries, or helping someone with disabilities to achieve independence? This is hard stuff, and our impact navigator, ClearlySo Atlas, which is based on the UN SDGs, takes a shot at doing some of this, with a solution focused on the needs of venture capital and private equity firms.

Rather than take the students through the complexities of impact assessment, I spoke with them about externalities. Any student who has taken economics classes is fully aware of these. They are what are passed on to society as an unintended consequence of the main thing an organisation does, and they can be positive or negative. Firms involved in chemical manufacturing do not wish to pollute; it’s just an unfortunate by-product of the manufacturing process. Large banks did not want to threaten the world’s financial system in 2008; it is just an unfortunate and undesirable (and undesired) effect of what they try to do, which is structure deals, trade securities and pay themselves well. Whatever you think of banks, nobody employed by them actually wished to cause the world’s taxpayers’ harm by what they did. It was an externality.

Many of the businesses ClearlySo helps generate positive externalities. Some relate to their primary activity – JustGiving, for example, which facilitates charitable donations – or are secondary, as with HCT, which is a bus company that also helps disabled people learn how to travel independently with public transport. Some are even unintentional.

Society foots the bill for the negative externalities generated, as in the crash of 2008 or as a result of pollution. Governments are recognising this and working to “internalise” externalities through taxes or charges. My view is that they should also reward companies that generate positive externalities.

In any event, impact is closely related to the externalities generated by organisations. The money saved by exchequers when firms generate positive externalities – the thesis behind the innovation called the social impact bond – or the cost to society in fixing the impact of negative externalities, is one way of thinking about impact and how to measure it. At the very least, my students seemed to get it when I used this explanation.

This blog first appeared on Third Sector on 04 September 2017.

Why “impact enterprises” outperform

Last week I had the pleasure and privilege of attending the annual social impact review of the HCT Group. HCT has been a client of ClearlySo for quite some time. In fact we met the company about a decade ago, so readers are welcome to take my comments with a pinch of salt.

This annual review has become a key date in the impact enterprise equivalent of the summer calendar. Dai Powell, the chief executive of HCT, discussed trends and how they are increasing the impact of their operations. HCT, as many readers already know, is a charity, but is also considered one of the UK’s largest impact enterprises.

The event was punctuated with glowing references to the various enterprises that provided products on the night. The venue was the St Luke’s Community Centre and the beer was Toast Ale. The highlight of the event was a funny video about someone with disabilities who had gone through independent transport training ans was now able to travel on buses and trains alone. Another video featured HCT chairman Sir Vince Cable, who was appointed leader of the Liberal Democrats on the very same day as the presentation. This video was not as funny, although I suppose that depends on one’s sense of humour.

What struck me during the meeting was the realisation that this company has been enjoying rapid growth at a time when the UK bus market has been in relative stagnation. I’m sure there are many factors behind HCT’s success, but I think there is one factor in particular we can’t ignore: values are “in”.

Observers who dwell on the limitations of enterprises with a social, environmental and/or ethical impact overlook the advantages of being an impactful organisation, especially these days. More and more, people want to work for organisations with values, people want to purchase from organisations with values, people want to invest in organisations with values and, luckily for HCT, local authority commissioners really want to purchase from organisations with values.

This point really was driven home (pun not intended) to me when one of the guests who presented at the event was a commissioner for the three boroughs of Kensington & Chelsea, Hammersmith & Fulham and Westminster. He spoke about how great HCT was and how excited they were about the contract they had recently signed. I suspect the Grenfell Tower disaster happened well after this contract was agreed, but now it’s hard to imagine any other outcome. Up and down the country commissioners are increasingly asking themselves questions such as “does this provider have the best interests of our community in mind, or its firm’s profitability and its personal bonus pool?”

For this reason, among others, HCT has grown at a compound rate of 12 per cent in revenues since 2009 in comparison with a relatively flat UK bus market. Other organisations we work with have seen similar growth and, in many cases, it is the social value provided that is winning the contracts. I believe there will be a lot more of this going forward as more and more commissioners and consumers get on board (sorry again).

This blog was originally published on Third Sector on 26 July 2017.

The ethics of running a charity or impact enterprise

Of all the things that bothered me about Tony Blair, and there were many, the one that probably  worried me the most was the extent to which his actions often seem to follow from a deep-seated view that if he did something it was almost by definition right. The thinking seemed to go something like this: “I am a good guy and therefore if I feel something is good and the right thing to do, it is by definition the right thing to do”.

Normally I refrain from blatantly political points in this column but I think Blair is a well-known example of the sort of behaviour pattern we sometimes observe. Strong conviction is a very funny thing. We admire people who possess it, and it is vital in the work we all do in impact investing, but we recognise that when individuals or groups of people have too much of it, there can be serious consequences. Terrorism is the worst and most extreme example of this.

I must confess that I sometimes observe some of this behaviour in charities or high-impact enterprises.  Let me be clear about what I mean: I have seen actions by charities and impact-driven businesses that, in my judgement, did not adhere to appropriate ethical standards. My reaction to this was sometimes dismay but I have also been downright shocked. On these occasions, I came across a rationale which is like the Blairite one described above. The fact that the aim of these organisations is to enhance society and achieve some positive social, ethical or environmental impact somehow obviates the need for behaviour which is consistent with good governance, proper behaviour and even in some cases the law.

For obvious reasons, I’m not going to go into specific examples. However, I’ve encountered cases where organisations simply choose not to pay bills, or manipulate accounts, or mistreat staff or a wide variety of other actions which, to be frank, I have rarely observed in the private sector. And I used to work for Lehman Brothers!!

Please understand that I’m not suggesting this is widespread or common, and most of the organisations that we work closely with at ClearlySo show a high degree of integrity in the work they do. But I think that because of the sector’s use of the words “social” or “impact” to describe what we do, we must hold ourselves to a higher standard when it comes to ethical behaviour.  The impact of not doing so affects not only the enterprise involved but also casts a shadow over us all. Consider the scandal which emerged last year around charities and their fundraising behaviour towards the elderly which was uncovered in the media, or the widely-reported problems at Kids Company.

Sometimes I do think the higher level of scrutiny, and the higher standards to which charities and high-impact enterprises are subject seem unfair, but that is the world we live in. For example, Baroness Hogg was recently demoted at the Bank of England for failing to appropriately disclose on a timely basis her brother’s role at Barclays. Mark Carney, The Governor of the Bank of England, made it clear that a “one strike you’re out” policy for such “honest but serious mistakes” was not going to apply to all financial institutions, but suggested that considering MPs’ reactions and the Bank’s position, this action had been taken.  We find other organisations being held to high standards because of their ethical or impact orientation—like the Church, for example.

Organisations must not feel their “higher purpose” gives them license to behave without regard to standards.  If they do, it damages themselves and the entire sector.  And an array of audiences is watching carefully and judging.

This blog first appeared in Third Sector on 29/03/2017. 

The benefits of collaboration in impact investment

I recently had the opportunity to give a workshop presentation at the annual SEIF congress in Zurich, Switzerland. SEIF is an outstanding Swiss organisation that helps to develop high-impact enterprises in the Swiss, German and Austrian market and is also building an impact angel network. We at ClearlySo have had the pleasure of working with it cooperatively over many years.

It is therefore not surprising that I was asked to speak about “bringing together different partners to create new models in impact investment”. It felt rather daunting, and I sometimes think that actors in impact investment spend far more time talking about the benefits of cooperation than practising it. However, as it developed, it seemed to me that there were many different types of cooperative or collaborative endeavours and that each worked differently in supporting innovation in impact investment.

The first example I gave I described as “client collaboration”. As observers know, ClearlySo launched ClearlySo ATLAS in December 2016. This is a tool focused on private equity and venture capital fund managers, and it assesses the impact of their conventional private equity investments. The spark for this idea was a conversation with Octopus Investments four to five years ago, which continued as we designed ClearlySo ATLAS. As this was a new product in a new market, we decided to work with the PE/VC community in developing it. In a sense, the end-buyers played a significant role in constructing what they would later buy. ClearlySo coordinated all of this, but the cooperation of client prospects was essential.

Second, I spoke of “partnership collaboration” in the case of the Big Venture Challenge. This was a programme funded by the Big Lottery Fund and managed by UnLtd Ventures. After the first pilot of the programme, UnLtd wanted to improve its effectiveness and contacted three partners: the Shaftesbury Partnership, the Social Investment Business and ClearlySo. Each had a specific role to play and was allotted a share of the programme budget. Our role was to help the more than 100 high-impact ventures to secure external investment, which was matched by grants from the BVC. Securing impact investment is what ClearlySo does, so UnLtd gained access to this expertise at a reasonable price and we delivered our objectives with a combination of existing and new resources.

Finally, the third type of collaboration I would describe as “competitive collaboration” and is a key feature of nearly all impact-investment deals, although I used the landmark HCT quasi-equity transaction as an example. In such deals, each party seeks, as best it can, to get what it wants. HCT is looking for low-cost finance, the end investors (in this case led by Bridges Ventures) are looking for a high return, and we are looking to complete the transaction and secure a fee. If each party pushes too hard, the deal falls through and everybody loses. Everyone needs to work together while pushing for their own interests to get the best possible deal. Such competitive – or even antagonistic – collaboration is the essence of all investment transactions.

In conclusion, collaboration is essential to pushing the frontiers in impact investment, but there are different types of collaboration, and each might be more or less appropriate in different circumstances. In collaboration, there has to be a successful outcome for all – there can be no winner take all, or things speedily unravel, which some of you may know as the “prisoner’s dilemma”.

This blog was first published here for Third Sector on 01/02/2017.

Framework Housing and the point of it all

The past few months have been busy at ClearlySo as we have had the best quarter in our history, closing 15 deals worth over £23 million. We thank our clients, pat ourselves on the back, and brag to our board and our shareholders as well as a number of friends in the marketplace.

In this way I guess we are not that different from other intermediaries. We talk about deal size, target IRRs, transactional complexities, the nature of the investors and the investees. Sadly, we speak too infrequently about impact. This is despite the fact that we are part of the impact investment market.

One investment transaction which brought this home for me was one involving Framework Housing, a housing association based in Nottingham which targets the homeless. As with many of the investment transactions closed this year, this £5.75 million transaction had its complexities.  But it was not the rates of return or the asset-backed nature of the vehicle which I will remember— it was a presentation given by one of their beneficiaries a couple of years ago.

We were asked by Coutts Bank to bring four impact investment opportunities to their High Net Worth clients in Nottingham for an evening of investment pitches, drinks and canapés. Although all the presentations were strong, that of Framework Housing definitely stood out. Chris Senior, who managed the transaction for Framework, gave a brief outline of what they were planning to do and then quickly sat down and introduced one of their tenants— I shall call him “Jimmy”.

Jimmy read from a prepared script about his experience as a homeless person. While his hands shook he told of his life before he came into contact with the people at Framework and how, through their attentions, his life had been transformed. For anybody in the audience, there could not have been a more powerful way to understand the true nature of what Framework does for its clients. It saves and transforms lives. When I came back to the office I related the story to colleagues. We agreed that, almost irrespective of whatever else we did, if we were able to succeed in helping Framework, the year will have been worthwhile.

Many organisations do an excellent job of estimating and reporting on the impact they generate. For intermediary organisations like ClearlySo there is less opportunity to directly engender impact. The social impact facilitated is via the charities and enterprises we help. Thus there is a tendency to capture the essence of the impact generated by talking about the deals done and money raised. The assumption is that there is some correlation between the impact investment secured and the positive social value generated. This may be the case and I believe it is the case, but there is a risk in breaking the connection between capital raised and impact generated.

Financial intermediation in the mainstream economy also began with noble ends. Banks raised funds for entrepreneurial organisations which endeavoured to build great companies. When it worked, the social value was measured in the jobs created and the prosperity achieved. As time went on, the purpose of enterprise became increasingly disconnected from the sums raised, and the sums raised became the purpose in and of themselves. Some of this purposeless and pointless financial market activity contributed to the crash of 2008. If we are to avoid this in the impact investment sector we must remain vigilantly attentive to strengthening and reinforcing the links between financial inputs and impact outputs.  Otherwise we miss the point of what we do and why we are doing it.

First Published in Third Sector in December 2015.

Landmark impact investment transaction for the HCT Group is disproportionately important

Without intending to do so, I notice that my last three pieces for Third Sector (including this one) are about sector leading high-impact enterprises.  Two months ago, I wrote about the Ethical Property Company (EPC), which announced that they would be undertaking their ninth equity share issue.  Last month I discussed a different ClearlySo client, Justgiving, and how our firm was founded on the pledge to create 100 firms just like it (high-impact with good returns).  This month I am tempting fate a bit as at the time of writing the deal has not yet closed.  But by the beginning of December, HCT will have closed a financing of approximately £10m with a range of social investors including Big Issue Invest, Triodos, FSE Group, Social and Sustainable Capital, City Bridge Trust, Esmée Fairbairn Foundation, The Phone Coop, and HSBC, with ClearlySo as HCT’s financial adviser.  Notably the traditional impact investors and foundations were joined by a commercial bank and a Co-op.  We believe it is the largest growth capital investment in UK impact investment to date.

HCT is a giant in the impact investment sector.  A bus operator founded in 1982 (when Hackney’s local authority bus company was failing), the firm has grown rapidly, with circa 1000 employees, 500+ vehicles and turnover of £45m.  It has continued to grow at 10-20% per annum, even in a slowing UK bus company market, and has emerged as a leader outside of the “Big 6” behemoths.

We began working with the company in 2008 (they were keen to lessen their dependence on mainstream bank lenders – a shrewd move), and assisted them in their £4m+ transaction in 2010.  The 2015 deal is larger and even more complex.  The firm continued to use a mix of senior and junior debt, as well as the “revenue participation” (or quasi-equity) instrument pioneered in the 2010 deal.  The mix of investors was even greater (there were four in the 2010 transaction) and, of vital importance to the sector, investors were able to successfully exit the 2010 deal with strong returns.  The impact investment sector will not grow if the capital going in cannot find its way back to investors – possibly to be recycled into other impact deals.

Coordinating the efforts of about a dozen players is no easy feat, and the transaction was not without its challenges.  Each impact investor, with great intentions, has their own passionate view on what is absolutely essential – blending this into a single deal is not easy work.  Also, all of us in the impact space are learning as we go.  Mistakes are being made, new concepts are being developed live in the laboratory of the market, and this can be frustrating for all concerned.  But this is a necessary part of the market-building process.

Returning to my original point, the success of companies like HCT, EPC and Justgiving is absolutely essential.  We cannot solve social problems, or offset rapidly shrinking public services expenditure unless we access large mainstream pools of capital.  These pools have polite interest at best in the early stage ventures which get a great deal of attention (also from ClearlySo).  For impact investing to thrive we absolutely must scale those with the potential and desire to do so, and in this way attract the largest financial services firms into becoming substantial impact investors.  They will only invest in significant, established companies in any size.  In my view, there is no higher priority for the impact space and to address the public services deficit.

First published in Third Sector in November 2015.

The aim was to create 100 Justgivings

Recently I interviewed a candidate for a new role at ClearlySo. During the course of the interview she asked me why it was I came to found ClearlySo, or what was the thinking behind it. She seemed to find the story instructive. It goes a long way to explaining my own personal motivations and the ClearlySo approach, and I thought it would be relevant to share.

After leaving the City, I felt it was important to do something “socially impactful”. I probably spoke in terms of “putting something back” or simply doing something that perhaps my children would be proud of. Roles at UBS, Paribas and Lehman certainly didn’t register on this yardstick. After a few years in conventional VC, I took an early chance, together with some colleagues, to raise impact investment fund in partnership with The Big Issue. This was back in 2000/2001. Our efforts were not successful so I began to hunt around for other ways to make a difference.

In the 1990s I had been quite active in the Liberal Democrat party and even stood as a candidate in the 1997 general election. Fortunately I lost, and realised that party politics was not the best way for me to generate meaningful social impact. Many of my good friends urged me to stop being silly and carry on in the City.  If I felt excessively guilty I should give some/all of my money away. I briefly tried a part-time role at a leading investment bank and realised that was not the way forward for me.

In the mid-2000s I had the opportunity to simultaneously chair a large national charity and a small early stage start-up business. What I found was that the charity, which had only recently considered and then rejected a merger with another organisation, was not wholly to my liking. Although the organisation raises lots of money and had considerable visibility, it was not as focused as I would have liked it to be on the cost-effectiveness of its impact generated. Furthermore, I found myself unable to improve this and other situations despite being Chair. In the end, I resigned.

The early stage start-up business that I had the pleasure and privilege to engage with was Justgiving. With a mere £5-£6 million of angel capital it was able to build the world’s leading online charitable fundraising business and now dominates the sector.  From the start, the two leaders, Zarine Kharas and Anne-Marie Huby, were absolutely focused on making the business successful by controlling costs together with a razor like focus on customer satisfaction. Their theory was that if they could build a successful, well-run business it would generate far more social impact. This is something that is too often neglected in the impact investment and enterprise sector. Unless a business is able to be sustainable, it isn’t really a business. To achieve massive social impact it has to be really great – and Justgiving has facilitated about $3.5bn of flows into the charitable sector. The Body Shop is another excellent example of such a business.  Or to put it another way, social impact and financial success are positively correlated; this is a central tenet of ClearlySo’s worldview.

So in summary, I thought of how I could make a difference and realise that politics, charity and investment banking were not the path for me – Justgiving had shown me the path. ClearlySo was founded with one simple objective – to create 100 Justgivings.

First published in Third Sector in October 2015.

The Ethical Property Company announces its 9th Equity Issue

Recently, the Ethical Property Company (EPC) announced that they would be undertaking their ninth equity share issue.  This is an astonishing achievement for a firm in impact investment and seems almost unnoticed by the normal sector commentators.  Below I will explore why, but first it is worth discussing some of the things that are unusual about EPC.

Very few high-impact businesses  undertake share issues. EPC has completed four share issues since 2001 and has raised more than £12 million since its first issue. These have occurred in the UK where the company already has nearly 1,400 shareholders.  AIM-listed Good Energy Group PLC is another company that has been able to attract UK shareholders, as has Cafe Direct, they are still exceptions.

EPC has also expanded its model outside of the UK. Four share issues have been undertaken in Europe (in France and Belgium) and the company has explored expansion opportunities in Australia as well. Such international expansion by UK impact-oriented firms is also rare.

EPC’s activities are rather straightforward. The company purchases commercial office buildings and lets them to “social change tenants”. These tenants are charged levels of rent which are below the market and given more favourable and flexible terms. In addition, the firm runs the buildings in a more tenant-oriented fashion and endeavours to achieve high environmental standards.

Such premises are in particularly high demand  as charities and impact-oriented tenants are seeing grant income squeezed, prompting a search for cost-savings. As a result, demand for EPC’s services is rising.  Whilst gross rental yields on the firm’s properties may be slightly lower than commercial landlords, EPC is able to enjoy lower voids, thereby boosting income.

The model the company has developed has enabled it to be profitable every year since it was founded in 1998, and it has paid a dividend every year since 2001.  It has increased its net asset value and it just announced updated valuation figures as well as a potential unrealised gain it may achieve on one of its existing properties near the Old Street roundabout.

Of course, there are still obstacles EPC needs to overcome;  shareholders are able to trade their shares through Ethex, but liquidity is indeed limited;   as a property company it did suffer in the immediate aftermath of the financial crisis. Furthermore, its tenants face obvious levels of uncertainty due to government budget cuts.

None of this explains the point I alluded to right at the outset, which is why this has been relatively unnoticed and as a firm within the sector its activities are frequently unremarked upon, but there are three factors which may be important.

Firstly, the firm is based in Oxford. Although Oxford is not far from London, it is my contention that London-based firms receive a disproportionate share of the attention in the impact investment sector. Secondly, the firm has been around for 17 years and in my opinion there is a strong bias in the UK market towards businesses that are new and exciting.  A track record of 17 years may be interesting, but EPC is hardly new. Finally, EPC is a firm that has concentrated on providing services to clients rather than communicating what it hopes to achieve. Even in the impact investment arena we still live in a world where steak is less noticed than “sizzle”.

First published in Third Sector in September 2015.

Let’s start thinking about exits

Barely a week goes by without the arrival of a new, innovative and exciting enterprise into the impacting investing world. At ClearlySo we mentor, advise and promote companies until they are ready to set sail across the sea and spread its impact far and wide. Occasionally the companies have to put into port to replenish their coffers, take on fresh supplies and even repair a few leaks. But our job is to do all we can to make sure these enterprises don’t sink along the way to achieving their goals and missions. Okay, enough of the nautical metaphors…

Most enterprises have a catalogue of goals, missions and impact KPIs, and achieving these is what makes them exceptional and impactful. But what is far too often overlooked is the financial destination for many of these companies once they have achieve scale and stability.

In July, we saw what we believe is the world’s first successful exit of a high impact business from equity crowdfunding, as Europcar bought E-Car Club (a car sharing club using electric cars). This acquisition was a hugely positive moment for the impact investment sector as it set a benchmark for future equity exits.

July also saw another impact investor success story in the form of Scope repaying the £2m that it borrowed from investors in 2012. As the first major charity to launch, utilise and repay a charity bond, Scope has proven the concept of charity bonds as a tool to raise additional capital and increase its impact.

Unfortunately, examples such as these have been very few. Let us not forget that impact investing is still in its infancy and most deals are medium- to long-term and so haven’t realised significant returns yet. Perhaps this explains why exits and building bridges to secondary markets have been consistently overlooked.

It was therefore unsurprising to read in the GIIN and JP Morgan survey earlier this year that investors placed ‘difficulty exiting investments’ as the 3rd biggest challenge to the growth of the impact investing industry today.

Admittedly, this barrier is still eclipsed by the top two challenges, a ‘lack of appropriate capital across the risk/return spectrum’, and ‘shortage of high quality investment opportunities’, both of which the impact investment industry is relentlessly trying to solve and overcome. However, I feel more attention and time is needed on discussing viable routes to exits for those companies and investments that are coming of age.

Is listing on Aim a viable option, given the heavy upfront and ongoing NOMAD and brokerage fees? Good Energy has shown that this can work, as they reach their three year anniversary on AIM next month with their share price doubled since listing.

Can secondary markets flourish and produce the sort of liquidity that investors crave? A new entrant last week on the Social Stock Exchange, Capital for Colleagues Plc, shows continued growth and demand from companies to achieve scale. But will such sector-specific platforms be able to entice the type of investors these businesses need in the long run?

Perhaps clearer thinking around exit strategy even before the investment is made is the missing ingredient to opening up liquidity, attracting appropriate capital, and eventually building deal flow. By plotting a distinct route from one port to another at the start of a company’s journey, we can go some way to solving an important challenge to investor confidence and sector growth.

First published in Third Sector in August 2015.

Plums, lemons and measurement

In recent weeks, a flurry of reports on the performance of impact investments has been posted to my inbox.  Following years of debate, we are finally moving from talk to deals – and from deals to exits — now we are seeing the first analyses of results.

All three recent reports should be commended for their honesty and effort.  With such data and the analysis that has accompanied each report, the work of impact investors has become a little easier.

The first report was entitled The Social Investment Market Through a Data Lens, which was produced for the Social Investment Research Council by EngagedX (an index for impact investments), which sought to consistently measure impact investment performance.  The report is a brave and ambitious attempt to combine into a common framework the results of different investors such as CAF Venturesome, Key Fund and the Social Investment Business. 426 investments had matured and could therefore have their performance measured; the report found that overall impact investors had made a loss of around 9%, while 10% of all these investments were totally written off.

There is an element of mixing apples and pears, as the objectives and approaches of these funds differ. Some of the individual investments made were more impact-orientated, and others less so – these are combined without accounting for this.  There is also nothing which takes time into account as a factor.  For example, if the average investment were held for five years, the average annual loss is only 1.9%; the report does not tell us much about the term over which these investments lost 9.2%, so we cannot make the calculations.  Additionally, the costs of managing the funds were ignored.  Finally, an old venture capitalist adage is that “lemons ripen faster than plums”, so perhaps the investments which had not yet matured will reduce the 9.2% negative figure (or improve the results).

It was a shame more funds did not participate.  Two pioneers, Esmee Fairbairn and Bridges Ventures have spoken informally about their returns, but to my knowledge, have not made such data publicly available. It would be particularly useful to see Bridges’ data; it is by far the sector leader, and its funds target market returns. I suspect the average returns in the study would have increased sharply; so we see that the mix of funds has an excessive impact on the average.  Despite this, it was an excellent first attempt at a tricky subject.

The second report was called Introducing the Impact of Investment Benchmark and was published by Cambridge Associates and the Global Impact Investing Network.  It concluded that 51 impact investment funds (IIFs) performed at nearly the same level (6.9% internal rate of return vs. 8.1%) as 705 comparable non-impact funds.  The report is excellent and the key points are easy to discern.  Most critically, more than half of the IIFs sampled were African and a third from the US – again, what is in the “fruit basket” can have enormous influence.  Interestingly, first-time funds performed well.

The third report, A Tale of Two Funds: The management and performance of the Futurebuilders-England Fund, is a detailed analysis of Futurebuilders, a fund that provided £145m of loan finance to third sector organisations.  The report is primarily intended to answer the question of how the fund performed and whether this changed in its two phases.  The document is very well written and highly transparent.

For all these reports, and for future ones, the lack of performance data relating to social impact makes sensible comparisons more challenging.  This should also be integrated in the future – as should data on risk. I believe that impact investment funds are lower risk than mainstream funds and that correlation to markets is quite low, and would love to know if this is correct.

On the whole, more impact investment funds need to participate in such exercises.  This is especially true for IIF managers like Bridges, Cheyne Capital and LGTVP, which have higher performance targets than those in the EngagedX study.  We might then all feel better about the outcome of the reports.

First published in Third Sector in