Category Archives: Institutional Investors

High Impact Businesses, Impact Investing, Institutional Investors, Social Entrepreneurship

The benefits of collaboration in impact investment

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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.

Government Policy, Impact Investing, Innovation, Institutional Investors, Social Economy

Problems for impact investment in Sweden

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Over the last few years at ClearlySo we have been travelling regularly to continental Europe as part of what we do. We have done business on the continent, and have also used these trips to learn about new innovations in impact investment (such as SIINCs from Germany and “90/10 funds” from France) and to identify financial institutions with a developing interest in impact investment. We believe that accessing new pools of capital is of great benefit to our entrepreneurial and impact fund clients looking for investment.

Sweden as a country seemed promising. It is liberal (small “L”), progressive and open to new ways of thinking. In addition, the positive and non-adversarial relationships between business, finance and the government have made Sweden a role model to which other countries aspire. One recent development in this regard is the introduction of a six-hour workday throughout Sweden. This is intended to make Swedes happier, but in a particularly Swedish twist, experts there also believe it will make Sweden more productive. It is already one of the most productive in Europe:  in 2014, per capita GDP was $45,143, significantly higher than the UK ($39,136). This is despite the fact that people in the UK worked 4% more hours each year.

Given such an open-minded, progressive approach, I felt confident that impact investment would be surging in Sweden. Sadly this appears not to be the case, based upon conversations I’ve had with experts. There seem to be few high impact entrepreneurs, at best one or two impact investment funds, very little government involvement and near zero involvement from the mainstream financial sector (although this is true of the UK mainstream as well).

This surprised me. However according to the experts I met, while Swedes are intellectually open to new ideas, they are actually relatively conservative (small “C”) in terms of implementing them. Swedish society already works rather well, and there is a reluctance to tamper. People earn high incomes, income disparity is well below UK/US levels, and taxes are higher, but the public expects and receives much higher quality social services than other European countries. This is in fact part of the problem for impact investment in Sweden: although Swedes cite all sorts of social problems, in fact, the Swedish social compact operates relatively well.

There are also two deep-seated beliefs I encountered which act against impact investing or even philanthropy. First, there is genuine suspicion of mixing the profit motive with social outcomes. I would not describe it as closed-mindedness, but just a wariness of this very Anglo-Saxon idea. This is then amplified by a particularly Swedish aversion to charitable giving. According to the Charities Aid Foundation (2012) Swedes gave 0.16% of GDP to charity. This compares with 0.54% in the UK and 1.44% in the USA. It is in Sweden where we see the clearest distinction between the Anglo-Saxon model of earning/giving and its model of using taxation to fund social welfare expenditure.

Such an environment is not particularly fertile soil for high-impact enterprises or impact investment in general. In fact, along my European journeys, I found that troubled economies were more hospitable to the necessary innovations (maybe out of desperation). In 2007 I journeyed to 10 Balkan countries and found flourishing innovations in places like Serbia and Bosnia as individuals grappled with deeply troubled societies in the aftermath of a brutal civil war.

I know very few Europeans who would trade places with Sweden as a successful economic model. On a recent trip to Stockholm, any slight disappointment I felt in Sweden’s current approach to impact investing was overwhelmed by the beautiful weather, celebrations of Walpurgis Night, May Day and the 70th birthday of King Carl Gustav. Stockholm is very close to paradise on earth. Nevertheless, this is not to say that Sweden is a lost cause from an impact investment perspective – the banks do, for example, raise money for overseas projects (most notably through microfinance). Once Sweden has considered the model and made it relevant to their domestic needs, I have no doubt that impact investment will eventually flourish in Sweden.

3D Investing, Impact Investing, Institutional Investors

Incentivising Impact: Should Impact Investors practice what they preach?

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I had the privilege of attending the first ever HCT Group (a high impact enterprise involved in transport) investor day recently. This was the first time the company met with a group of investors, at a time when it was NOT seeking capital, to explain itself and discuss progress against both financial and impact targets.  We expect to have more of these events for our clients in the future, and see it as a useful practice borrowed from the mainstream.

An award was meant to be given to the best question from the audience, but when it turned out to have been asked by Dai Powell, the CEO, the award was given to someone else instead. What was Dai’s question? “Do any of the investors who have backed Impact Investment Funds (IIFs) vary their returns based upon the social impact achieved by the fund managers?”

This sounds a very simple straightforward question but there is actually quite a lot behind it. First of all, readers should know that HCT recently closed a £10 million financing with a range of impact and mainstream investors. ClearlySo advised on this offering, which had several interesting features. The one which is most relevant to this article is that is the interest rate paid by HCT to investors would be reduced if HCT matched or exceeded certain impact targets. This is understandable, as IIFs exist to increase the social impact achieved, as well is to earn a satisfactory financial rate of return. We are aware of a few other notable transactions which also have this feature but it is by and large an exception rather than the rule in impact investment. If we wish to increase the social impact achieved by entrepreneurs then surely it is sensible for the fund managers to put in place incentives to grow that social impact. This is obvious, straightforward and requires no further explanation.

But if we follow the logic then it makes sense for the IIF fund managers also to be similarly incentivised. As by definition they exist to encourage social impact, this would seem obvious. I myself have been at dozens of meetings where entrepreneurs are lectured to by IIF fund managers about the urgent need to measure, demonstrate and increase social impact achieved.  Therefore it is extremely interesting and bizarre to note that none of them face similar pressure.

Not a single case comes to mind of an IIF whose returns to investors are adjusted for the impact achieved.  I cannot think of any funds which Big Society Capital (BSC) has backed which have such a “ratchet”, nor is BSC itself held to account in this way. In the interest of transparency and equanimity I should also confess that we as a leading intermediary face no such ratchet, and we too lecture entrepreneurs on the importance of generating, measuring and increasing the social impact achieved. In fairness to BSC, I should add that our agreements with them require us to report to them about impact.

I think that all of us in impact investing agree that economic incentives are a useful mechanism to adjust organisational behaviour. We recognise this as a matter of principle, we speak out in public on the importance of this issue and we work with entrepreneurs to try to put such incentives in place. For the sector to get to the next level it might be interesting to reward the providers of capital in this fashion as well.

High Impact Businesses, Impact Investing, Institutional Investors

Framework Housing and the point of it all

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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.

High Impact Businesses, Impact Investing, Institutional Investors, Social Economy

Landmark impact investment transaction for the HCT Group is disproportionately important

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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.

Impact Investing, Institutional Investors, Social Economy

Ex-bankers in “social investment”: Disease or cure?

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Before we talk about a “cure”,   let us first be clear on the disease.  I assume it is the fact that the economy has been run to profit-maximise, without any interest in societal ramifications – financial markets have supported this.  The full cost of this narrow-minded approach has been realised through the financial crisis and its aftermath.  We can spread the blame about if we wish and include governments, regulators and all of us as shareholders and consumers, but the main blame lies with bankers – it their actions were primarily responsible for the pain and suffering on an enormous scale.

Impact investing is about using these same financial markets, without which modern society cannot function, and take into account risk, financial return, and a third dimension: the social, ethical and environmental impact (we use social impact to mean all three) of investments.  At ClearlySo we speak about “3D investing”, where investors make conscious decisions  about these three dimensions and how they relate to each other – and this is becoming more popular by the day.

Who can help investors make these decisions, and explain to entrepreneurs how to seek the most attractive capital with which to expand? I am afraid it is the bankers – at least in part.  We do not have to forgive them for their role in the crisis, but they do have expertise in the financial markets on which we depend to improve our world.  Scientists and politicians built and delivered the atomic bombs that killed tens of thousands of Japanese and have unlimited destructive potential.  Should we absent them from disarmament negotiations because of their complicity?

Bankers understand how financial instruments work.  They know when debt or equity is appropriate for an entrepreneur, or a combination of the two.  They know how to build financial models, how relevant legal documents are structured, or who the likely investors are, and they can advise in negotiations.  We find it substantially easier to raise capital for clients when finance professionals (yes, ex-bankers) are involved.  Ex-bankers not only possess expertise, but also useful contacts, market awareness and speak the language of finance.  To refuse to access these skills because of past misdeeds would be counter-productive and harmful to the entrepreneurs generating impact.

Do bankers deserve the historically outlandish rewards for their skills as intermediaries?  Probably not.  Should we have deified them as some did before the crash?  Certainly not!  However, demonising them is not the answer. In my experience, no sector has a monopoly on saints or scallywags.  I have encountered highly moral senior bankers and scandalously corrupt leaders of charities.

As a society we believe individuals can redeem themselves.  We give prisoners a second chance – why not bankers?  (Note: I have a strong personal interest in this being the case, as an ex-banker myself!)

In immunology, it is not uncommon to inject the body with a bit of a disease in order for the body to develop useful antibodies.  Too much of the disease would be harmful, but what caused the disease can help foster a cure.  I think the same is true in finance.

First Published in Pioneers Post in August 2015.

Angel Investors, High Impact Businesses, Impact Investing, Institutional Investors

Let’s start thinking about exits

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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.

High Impact Businesses, Impact Investing, Innovation, Institutional Investors, Social Economy

Plums, lemons and measurement

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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

Impact Investing, Institutional Investors

Are there really too many VCs in Impact Investment?

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For years I have heard those involved in impact investment moan about the extent to which experienced VCs are “taking over”, bringing values which will destroy the very essence of the movement.  As someone who spent the better part of ten years as a conventional VC, perhaps I am being a little sensitive and taking this criticism too personally, but recent developments have brought me to reflect on the reality of this situation and its consequences.

One of ClearlySo’s Non-Executive Directors (NXD), Tim Farazmand, has just stepped down as Chair of the British Venture Capital Association (BVCA).  Tim made impact a central pillar of his tenure at the BVCA and has been interested in this sector since I first met him around 2000.  Significantly, Tim’s first new role since stepping down from his post at the BVCA is as NXD of the Ethical Property Company, a leading enterprise generating substantial social impact and a pioneer in using UK investors to raise tradable share capital. One imagines that there may have been quite a few options for such a person – the fact that he chose a values-led business is very significant.

This migration of VCs into impact investing is a well-trodden path.  An old friend, Stephen Dawson, was one of the founders (together with Nat Sloane) of Impetus (now Impetus PEF), the venture philanthropy investor. Antony Ross is a sector heavyweight with Bridges Ventures, and was previously at 3i.  Another 3i alumnus is John Kingston, the driving force behind CAF Venturesome, an early pioneer in impact investment.  Doug Miller, who used to raise money as a placement agent in private equity went on to found the European Venture Philanthropy Association.

Of course, the best known ex-VC in the field is Ronnie Cohen, a previous chair of BVCA and also Chair of the original Social Investment Task Force (SITF), as well as the founder of several impact firms including Bridges Ventures and Social Finance. Ronnie has been a leading advocate for the sector, the first Chair of Big Society Capital and was most recently Chair of the G8 SITF.  His influence within UK governments of all colours and with decision makers across the western world has been an important factor in UK pre-eminence in this space.

Some may not approve of the influence of these ex-VCs, but it is worth exploring why such individuals gravitate towards this field and what they are able to contribute.  Firstly, VCs understand, better than most, the ability of capital to effect transformation – they do this for a living.  Successful VCs understand how to grow entrepreneurial businesses and in many cases these are highly disruptive.  Their experience in generating growth can be useful in scaling organisations with the potential for sizable social impact.  VCs also are very experienced in raising capital.  They are forced to do this from time to time when they raise new funds – but any successful VC also knows that companies, especially the successful ones, require many rounds of funding before they achieve exit.  They are therefore resourceful when it comes to finding co-investors and other partners to work with during the life cycle of a business.

I believe that these are skills that are invaluable for the sorts of enterprises we work with, those that generate substantial social impact.  Others somehow feel that the influence of such thinking and experience will “damage the sector” or “destroy its soul”.  Frankly, I find this baffling.  We need people who understand rapid growth and have experience in achieving it.  We need people who understand how to galvanise capital.  And we really need people who understand disruption, which is the essence of what this is all about.  I think that any attempt to stem the flow of VCs into impact investment will actually harm the growth of the sector and will ultimately constrain the flow of funds into impact investment and thereby bring about less impact.  Encouraging trade bodies like the BVCA to get involved is enormously useful, particularly when one considers the scale of today’s societal problems.

There are still those who maintain that VCs undermine “the sector” and the purity of its purpose. I do not believe that any single person can define for others how the field should operate and what constitutes purity, or have a unique insight into its soul.  Each of us contributes our skills, our experience, our views and our influence – and sometimes our capital.  If there are those who feel a less financially-oriented marketplace, with a greater orientation towards impact is more desirable, there is ample opportunity to bring this about. There is also a great irony; the field was created by many of these same VCs whose views are deemed to threaten its future.  The debate continues …

First published in Pioneers Post in April 2015.

High Impact Businesses, Impact Investing, Institutional Investors

Moral Decency and £1,000 per Day

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At a recent conference on impact investment, I got talking to someone from a well-known funder over lunch. The conversation soon turned to whether it had used the services of impact investment intermediaries. He said it had and wished to use more, but he believed intermediaries to be “incredibly greedy”. In the past, it had been charged up to £1,000 per day – a sum he considered indecent.

As my own company ClearlySo is an impact investment intermediary, I need not bother to declare an interest — and I saw his point. It is challenging to justify payments of this magnitude in a world where so many people are living on less than $2 a day.

The figure of £1,000 per day is also relevant as many government-related contracts directly impose such limits.  It seems eye-popping amount and how many people really deserve £200,000 a year, and if so, should they be in this sector?  But let’s look a bit deeper.

Nobody is “billable” 100 per cent of their work day.  If we assume that a professional does client work 60 to 70 per cent of their time, then expected annual revenues amount to about £130,000 a year. Behind each professional is a team who do HR, administration, finance, legal and so on but who you don’t bill for their time. In addition, there are sales teams which generate costs, and do not win every pitch, and even if successful, cannot bill that time to the client.  Nearly half of the £1,000 a day is eaten up this way.

This leaves £65,000, which means you can pay about £50,000 in salary after adding around 30%  for national insurance, pensions, training and other staff benefits.  This leaves no surplus, which the organisation requires to be sustainable and invest for growth.

To become sustainable the intermediary must charge more, become more efficient, or pay less.  Now £50,000 a year feels a decent wage, and is nearly twice the national average, but unfortunately, most intermediaries are based in London, where most deals are transacted, and costs are substantially higher than in the rest of the UK.  Furthermore, financial transactions in the impact space are no less complicated than in the mainstream—they need to accommodate standard financial trickiness and the added complexity which comes with social impact tweaks.  These skills demand individuals with significant financial acumen and their alternative market value is many multiples of the figures above.

When I explained this to the funder, he was not impressed.  He accepted the maths, but he still felt the figures too high.  I asked him what it pays its lawyers a day, and he said, “Well, that’s different”.  “OK,” I said, “what about your accountants?” He argued that too was different.

Maybe transactions will become simpler, or London will become cheaper—but these seem unlikely.  Admittedly, intermediaries need to better articulate and demonstrate the value they add, and funders, investors and entrepreneurs should be transparently explained the maths above.  As an alternative, these three groups need to better explain to intermediaries why impact investing is so unlike mainstream financial intermediation, and that their skills are worth significantly less than those of lawyers and accountants in the impact domain.

It would be utterly indecent for impact intermediaries to earn the packages rampant in the City, but this is far from the case today.  If we want the sector to “work” we have to first talk about and second, try to tackle this challenging issue.

First published in Third Sector in December 2014.