Monday, October 19, 2009

Does Social Investing’s Success Mean Impact? (II)

See Part I below

Overall, the systemic or macro effect of those funds remains limited today, if not marginal. Despite the publicity that an Acumen has benefited from, the fund’s portfolio does not comprise more than about 25 companies. Root Capital that has grown rapidly over the past 5 years and now has a portfolio of 235 borrowers for $120m disbursed has spread its investments over 30 countries (source: Root Capital’s and Acumen’s web sites), i.e. an average of $4m per country since its inception in 1999. And when looking at a company’s environmental impact, how meaningful can it be – even if that enterprise’s area of intervention is a well-delimited territory – if that entity is the only one in that region trying to improve biodiversity health?

I am the first one to recognize the pioneering role that those funds are playing today. If social investing becomes a much larger industry some day, we will all have to be thankful to those entities. They are pathfinders and not only are they showing the way to those interested in creating investment vehicles but also they offer small- and medium-sized enterprises a better alternative to other forms of financing that generally revolve around less suited options such as microfinance (loans are too small for their size) and commercial banking (rates are high and those banks may not want to take a chance on relatively untested enterprises).

So yes, arguably, the systemic impact is there. But the actual macro effect of those enterprises remains minor because overall maybe a couple hundreds companies have received money from social investment funds so far – does that ever get to one tenth of a 1% of those countries’ GDP?

Now, it is not unheard of that an asset class becomes financially popular before it actually proves its value or merit. After all, the bet of those who invested in venture capital in the 80’s and 90’s was that that industry would be able to generate returns that were way above those of other asset categories.

However, the cause of social investing would be greatly helped if a few things were to happen:
· Set up a mechanism among major social funds to share and consolidate their information around impact: it should be relatively easy to find funders interested to pitch in.
· As a prerequisite, those funds should agree on simple metrics around the “straightforward stuff”: investees’ financial success, social indicators such as average / median household in communities affected or number of jobs created.
· Find a “home” to showcase those aggregate results. Maybe the White House’s Office of Social Innovation could be the right place (visibility would be great) - or some prominent foundation interested in the matter.
· Accelerate the pace of strategic investments: this is the way the impact magnitude issue could be addressed. Most funds organize their work by sector but there is a difference between supporting enterprises here and there and having an explicit strategy of - for instance - focusing only on innovative solutions that cover the whole gamut of existing and emerging technologies in energy or sanitation.

Being in the social enterprise trenches (sic), I feel that social investing will be successful, both money and impact wise. But let’s not get ahead of ourselves and let’s make sure we put in place the key ingredients that will bring about success before marveling about the “next big thing”…

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