A Revolutionary Solution for Institutional Investors – Impact investment is a fairly new, very young industry with enormous, unlimited potential for making a real difference in the world. A number of global leaders started to support this “phenomenon” in the last 3-5 years due to the fight against global poverty, income disparity, youth unemployment and other social ills across the globe. Also in the aftermath of the Global Financial Crises in 2009, leaders realised that capital should be made available to resolve global challenges.
During a conference in 2014, Pope Francis said the following:
“It is urgent that governments throughout the world commit themselves to developing an international framework capable of promoting a market of high impact investments and thus combating an economy which excludes and discards.” Pope Francis, 2014
During the 2013 World Economic Forum in Davos, the previous Prime Minister of the United Kingdom, David Cameron said the following:
“I want to use the G8 Presidency to push this agenda forward. We will work with other G8 nations to grow the social investment market and increase investment, allowing the best social innovations to spread and help tackle our shared social economic challenges.” David Cameron, 2013
At face value it seems that there is sufficient political and investor support for Impact Investment and it has been identified as a potential solution for resolving the problem of economic exclusion. There are some real challenges though.
It is clear that academics and practitioners are still not sure how to define Impact Investment. It seems that it really depends from what perspective you approach it. If you are a Philanthropist, NGO or Social entrepreneur you will look at Impact investment from a social impact perspective, mostly from a social welfare perspective. If you are a For-Profit investor you will look at Impact investment from an Institutional or Private Equity perspective focusing on high-return equity investment opportunities that may have Social, Environmental or Governance impact. The newly established Impact Funds have a very strong Private Equity flavour. If you are an academic you will probably find it difficult to find empirical evidence on which you can base new research. The speed with which Impact Investment jumped on the investment industry did not allow investment and financial scientists to get their heads around this phenomenon quickly and completely.
Here is a graphical representation of probably the biggest challenge of Impact Investment:
The number one problem of Impact Investment is very complex and extremely difficult to change because it is systemic of nature. It is part of a global investment system. The investment industry, the investors, the intermediaries and every person working for “For-Profit” investors (On the right hand side of the image) think and act in a specific way. The system in its entirety is based and designed on for-profit thinking and principles. Look at all the definitions of investment and it will tell you that investors invest in certain asset classes with the objective of getting the highest return at the lowest risk possible.
Even the asset classes that seem to be adding socio-economic value are largely based on a for-profit philosophy. With the advent of Impact Investment these For-Profit investors started to amend their investment mandates and intermediaries such as Private Equity funds and established Impact funds. Currently there are approximately 400 Impact funds registered and all investors who adopted the principle of “doing good while doing financially well” are increasingly investing in these funds. I categorically state that there is nothing wrong with this. Investors should not throw their stakeholders’ money in a black hole without a return. That the philanthropists will do…
The left hand side of the image represents the philanthropists who passionately decide to donate money to structures such as foundations and non-profit companies to channel some of their wealth to things that are important to them whether that be health, education, social welfare or taking care of the destitute. They do not necessarily expect a financial return but they expect some social return. This is also incredibly important because nearly 2.1 billion people, according to the World Bank, live on less than $3.25 a day.
Approximately a decade ago the NGO sector started to realise that it needed to create sustainable business models and so there was a move to this concept called “Impact investment”. The problem is that the “Impact investment” on the left and the “Impact investment” on the right, established by Private Equity funds are distinctly different in terms of philosophy, systems, perceptions, approach and outcomes.
Ask any early stage entrepreneur what questions he has to answer when he approaches an investor for capital. Most will tell you that they didn’t have a chance. Each For-Profit investor on the right hand side of the image has his own investment mandates and criteria. In reality the investment mandates and criteria applied on both sides of this continuum, by design excludes millions of people from the financial- but more specifically the investment system.
In some countries people even face underlying political and tribal exclusion because they are not from a specific political party, tribe or economical class. In other instances there are even racial discrimination masked by indigenisation and empowerment policies. If we are going to have the debate about inclusion and exclusion here, this will be a very long and tedious conversation.
The projections and trends for Impact Investment in global terms are staggering according to the people who know… Some say that the Impact Investment industry will be a $1trillion industry by 2020. It is massive and it will definitely and undoubtedly have an impact, whether it is approached from the traditional NGO philosophy or from the For-profit philosophy, but let’s put in into context for a moment. Bain and Company published a report in 2012, “A world awash in money” in which their estimates are that in 2020 the world will have $900trillion investable capital. Where will this capital be invested? Mostly in equities, bonds, property, listed and unlisted equities, private equity, alternative investments and a myriad of investment funds- and products sold to the owners of capital and their intermediaries. Mainly with the objective of generating the highest financial return at the lowest risk possible. Will we change it? Not at all; it is a system that will not change. It is the nature of capital and global trade.
Governments have to protect and improve pension systems and the quality of life of their pensioners. According to these statistics, in reality, the total percentage of capital available for Impact Investment will only be approximately 0.11% of available investable capital in the world by 2020. This changes the perspective somewhat…
The truth is that we have to approach Impact Investment from a completely different perspective if we want to have any significant impact in the fight against poverty. We have to get more capital behind it without increasing the risk unnecessarily. These two concepts in one sentence causes nervousness in most institutional investors. “It is not possible,” they say. But it IS…
The current impact investment system is either close to the left or to the right of the image above. It is not going to have the impact we need to fight global poverty and exclusion. Below is a second image of how we can fill the current systemic gap in Impact Investment…
With our proposed model Institutional investors who have most of the available invest-able capital, will be able to increase their exposure to Impact Investment 5 fold, at very little risk, mainly currency risk. Depending on their jurisdictions they may even have no additional risk involved, with capital and returns secured. The model ensures that institutional investors do not have to move out of their investment philosophy and mandates. They also do not have to be concerned with the challenge of sacrificing their financial returns for social returns, because the model is fully integrated. Their boards of trustees will not have a problem because all the necessary fiduciary boxes are ticked and risks are mitigated. With this model we can increase the total capital allocation to Impact Investment without limit, scalable on global scale. We have developed a multi-level, fully integrated, truly Socio-Economic Impact Investment model designed for global socio-economic impact.
If you’re an institutional investor who needs or wants to increase your exposure to Impact Investment; you require a competitive financial return; you need to diversify; you need higher yields… but if you find yourself in the middle of a systemic -, mandate -, expectations -, values -, or investment crisis, give me a call…
Behind the scenes: Dr Marius Joubert is the CEO of Nxt Lvl Southern Africa Pty. Ltd. & Franchise Principle of Momentum Consult Pty Ltd. (An Authorised Financial Service Provider FSP no. 5503)