NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, February 1, 2012

For all the hoopla, the definition of impact investing is still a dog’s breakfast. Inclusive definitions throw in everything from small donations (huh?) to investments that provide a market rate of return or above (which sounds a lot like plain vanilla investing). Here’s our—the Mulago Foundation’s—working definition: impact investing is the practice of putting money—loans or equity—into impact-focused organizations, while expecting less than a market rate of return. Investments that provide a big return don’t count: the market will take care of those, and we don’t need conferences to get people to put money into them.

On its face, impact investing seems like a great deal—organizations get cheap money (er, “patient capital”) and investors get real impact. It’s great when it works that way, but the case for impact is often dubious, and there is a lot of confusion about when impact investing works and when it doesn’t. What worries us in that not-for-profit organizations in our portfolio are under increasing pressure to take loans, and some have even lost donors to the impact investing camp.

Both philanthropy and impact investing are valid ways of doing good, but applied in the wrong way, either can do harm. For us, the right funding structure is the one that provides maximum impact for the target population. Mulago works to meet the basic needs of people in some of the poorest countries on Earth, and we’ve ended up with a portfolio that is 95 percent philanthropy. Here’s why:

1) Few solutions that meet the fundamental needs of the poor will get you your money back.

Scalable rural livelihoods, basic health care, basic education solutions, clean water—with very few exceptions, you don’t make money off this stuff, sorry. For example, the one education organization in our portfolio is Bridge International Academies, a remarkable for-profit company that provides a high-quality education to Kenyan kids for $4 a month. While they hope for market rate of return, it’s going to be a long time at best, and there are multiple levels of uncertainty. Investors are piling on, though, and why? Because there are very few deals like this out there! Fully unsubsidized clean water for really poor people? Essential services to millions of one-acre farmers? Saving lives from the most common diseases? Forging new distribution channels? Forget it—you’re not going to make any money. These represent profound market and government failures.