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Breaking perceptions: Unlocking capital for impact investing
Note: Originally posted on the MaRS blog.
I am a relative newcomer to the world of social finance and impact investing in Canada. I have spent parts of the last 20 years working with investment funds in emerging markets (primarily in Africa) where, almost by definition, all small and medium enterprise investing is impact investing.
In these markets, the focus is on basic agricultural, manufacturing and distribution businesses with improved employment, training, capacity building, healthcare, education and other community benefits as the primary social outcome objectives.
What I have discovered in the impact investing space in Canada—and in the developed world in general—is that the range of activities that fall into the social finance and impact investing category is much broader. From assisted housing to social services to the environment and from social impact bonds (and other pay-for-performance or outcomes-based financing concepts) to community bonds to social purpose-focused debt and equity funds, the types of initiatives and the instruments and applications are comprehensive and diverse.
Think impact investing means low financial return? Think again
The thing that I have found most interesting, however, is the mainstream financial and investment communities’ perceptions of for-profit companies that operate with social purposes. There seems to be a belief that investors in social-purpose or mission-driven companies cannot expect a market rate of financial return and that there will have to be some tradeoff between social return and financial return.
As a result, investment is often difficult for these types of companies to source, making growth and achievement of their corporate objectives difficult. In many cases, I have found that this is true not only in respect to investors, but also in respect to lenders. Due to the nature and profile of many of these social-purpose businesses, lenders may shy away as they are concerned about the company’s profit and cash-flow focus. Another issue is that, depending on the nature of the businesses, lenders often do not want the public relations issues that may flow from “foreclosing on God” as I have often heard it described.
Huge opportunity for investors
This situation strikes me as a huge opportunity. Many of these social-purpose companies are absolutely profit driven and have professional management teams that are capable of allocating investment capital and other resources efficiently and are more than capable of servicing debt.
These social-purpose ventures are businesses that have payrolls, suppliers and all of the other expenses that any businesses have, and their owners and managers understand that in order to be viable, growing enterprises, their businesses and revenue models need to be profitable and sustainable. They understand the concept of charging for value. Just because their products or services provide social benefits does not mean that they are prepared to charge less than the appropriate price or pay their employees less than market rates.
Social-purpose businesses: Triple-bottom-line values for all
We need to get rid of the perceptions behind the “social purpose,” “social finance” and “impact investing” tags for these businesses. They share the same risks as any other business and deserve to be evaluated by investors and lenders as any other business would. The reasons these descriptive tags are necessary may be the topic of another essay, but perhaps these descriptions are used today to focus attention on the crucial issues that these companies are addressing and that neither market-based nor publicly funded approaches have, so far, been able to address.
If they, and we, are successful in driving change within the existing system and are able to solve social and environmental challenges, we can get rid of these tags and “business as usual” will include these social-purpose companies’ triple-bottom-line values for all.
Hopefully we can break the traditional perceptions of social-purpose businesses and remove the investment sourcing burden that the “social purpose” tag places on these companies, allowing them the same access to financing that other businesses have, thereby providing them the wherewithal to scale their operations and achieve their ultimate potential.