Scott Anderson

NextThought Monday: Trading on the Social Entrepreneur Asset Class Idea

What makes for a well-rounded investment portfolio? Stocks, bonds, real estate and … social investments?

Why not? Creating an asset class for social entrepreneurship not only engenders an aura of solid ground for investors, both institutional and private, it could formally connect social entrepreneurs with a far wider scope of capital markets. Though not necessarily a new idea, over the course of the last few months, it would seem many minds are acquiescing around the concept. And when there’s agreement behind terms and their meaning, often tangible action follows.

In a summary of the SOCAP 2010 conference, the Bay Citizen quoted Kevin Jones, founding principal at Good Capital, as saying: “There is a changing investor mindset. There is a true moral hunger for a new asset class.”

Then there was this from venture capital champion Sir Ronald Cohen last month:

“Really the aim here is to create a new asset class of social investment,” Cohen was quoted as saying by Social Enterprise. “If trustees (of financial institutions) see they can get a ten percent return on a Social Impact Bond, and that they are doing good, they will say why not allocate one percent of our investments to it. This is an initial small allocation but the sums of money involved are huge.

“As capital flows this will add momentum to the sector because social entrepreneurs can plan the growth of their organizations and get capital to finance it,” he added.

The market acceptance of such an asset class could well be put to the test through the creation of two new funds. Vinod Khosla’s new venture will target companies focused on health, energy and education products and services to the poor in India and China, a move that Rob Katz analyzed here. Secondly, was the announcement from USAID Director Rajiv Shah of a new Development Innovation Ventures (DIV) Fund.

“Borrowing from the venture capital model, DIV was created to promote high-return and sometimes high-risk ideas and projects, catalyze game-changing innovations and create new portals of entry for social entrepreneurs to work with USAID,” Shah said.

Expectations for a social entrepreneurial asset class likely would be rooted in the patient capital model, that is, a much longer-term and lower-return form of investing than many are accustomed. Implicit in patient capital is a greater tolerance for risk than some traditional investments and the sacrifice of maximum (but certainly not all) financial returns in favor of social or environmental advancement. The concept has been championed most notably by Jacqueline Novogratz, founder and CEO of Acumen Fund, as a “third way” of investing, which borrows from the venture capital and philanthropic buckets of support via equity or debt placement in startups, but with the probability that financial exits could be at least five or ten years out.

There are considerable challenges to creating this asset class. But if we’re reading these tealeaves properly, the market sentiment might not be one of them. In its January 2009 report, Investing for Social and Environmental Impact (executive summary is here), the Monitor Institute analyzed impact investing in the wake of the 2008 financial crisis:

“Given how seriously the market has mispriced risk, the expectations of appropriate return for appropriate risk may be changing, and this may render impact investing more attractive.”

Two years after the crisis, that still rings true. It would appear that slower but steadier, and most importantly, (verifiable) socially focused investments, might just be attractive to fund managers, not to mention investors.

Social Enterprise