August, 2015 - Rodney Schwartz

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.

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 3^rd 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.

Rodney Schwartz

Monthly Archives: August 2015

Let’s start thinking about exits

Rodney Schwartz