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Impact Investing

Impact investing has become the new hot topic in the social impact world. Similar to social entrepreneurship and social enterprise, impact investing attempts to amalgamate social good and more traditional models of finance arrangements. Rather than dividing the world into the classic for-profit/non-profit dichotomy, impact investing is another example of the trend that attempts to build a new path.

Impact funds span a range of investment philosophies. Lok Capital, for example, puts a high value on base of the pyramid companies that “have clear alignment with [investors] in terms of profitability and growth.” [1] Acumen Fund, one of the earliest impact investing funds, puts a higher value on portfolio companies’ social impact, viewing their financing as supporting growth in a market that takes longer to show impact and return.[2]

Closer to home, the University of Michigan Ross School of Business Social Venture Fund approaches investments based on a nuanced balance of social and financial returns, with the exact details largely dependent on the focus of the investment. [3] These three funds represent only a small fraction of the variety in this sector. Additionally, the space consists of numerous organizations that help seed organizations, but view themselves more as incubators than as any type of investment vehicle.

Traditional private equity and venture capital funds have a relatively clear principle mission – provide support for and help create more value in companies in which the fund invests. This takes the form of financial investment and control through different ownership tools. Impact investment, however, is based on the thesis that the social impact of a company is as important to foster as the financial returns. While this is a wonderful vision, the reality of balancing financial and social returns can get very messy.

Just as traditional investment vehicles put a high value on thorough due diligence, impact funds attempt to apply tried metrics to understand the impact and potential return of a social company – one that is likely to move more slowly in terms of financial returns, but with potentially life-changing impact for customers and clients.

Many of these funds focus on base of the pyramid customers due to the sheer number of these customers and the clear lack of service that has been provided to this market segment in the past. Rather than viewing individuals making less than two dollars a day as customers, many governments and companies see this group as a massive charity case – give them more and their lives will be better.

Impact investors, and a multitude of international conglomerates and new start-ups, see these billion-plus individuals as potential consumers who can contribute to the local and the international economy and through this process, can be pulled out of the most extreme poverty. This thesis, that poverty can be eliminated and social problems can be solved through the market, is not new but it remains somewhat radical. The challenge many impact funds encounter is how to balance the breadth and depth of impact with the opportunity cost of not applying a good business model to new customers, who may not be quite as needy as those who were originally the target market.

Impact investing is continuing to evolve and have a range of success. As companies, governments, and non-profits see alternative forms of activities, this space will grow and the potential value of the base of the pyramid market, and viewing opportunities in a combination of social and financial returns will become increasingly important.

[1] Lok Capital Investment Thesis, http://www.lokcapital.com/investment_approach.html (last visited Oct. 13, 2012).

[2] See David Bank, Acumen Fund’s Transparent Experiment, Impact (Oct. 13, 2012), http://impactiq.org/acumen-funds-transparent-experiment/.

[3] See Social Venture Fund, http://www.umsocialventure.com/philosophy (last visited Oct. 13, 2012); University of Michigan Social Venture Fund, YouTube (Oct. 13, 2012), http://www.youtube.com/watch?feature=player_embedded&v=1oNdU9mJ8L0 (describing the Social Venture Fund’s investment philosophy).

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Perry Teicher

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