Social Capital Markets: Two Bucket Thinking – Two Bucket Standards?
Guest blogger Graham Macmillan is the Senior Director of VisionSpring (formerly Scojo Foundation). In addition to his work with the VisionSpring team, Graham is pursuing his Global EMBA as part of TRIUM, which is a joint program of London School of Economics, HEC Paris, and NYU Stern. He also holds his MSc in International Management from NYU Wagner and his BA in International Studies and History from Colby College.
By Graham Macmillan Is private equity really making a play in this space? If so, what’s their impact going to be? Those were the questions I asked myself as I sat down at the session “New Private Equity Funds’ at SoCap08. The session’s description piqued my interest enough to choose it over the many other concurrent sessions. I wanted to learn more about the “serious money” being invested in non-microfinance related social enterprises. Well, I am happy to report that I found some good examples, though I left with some lingering questions.
The session’s Moderator, Scott Smith of Hanson Bridgett, did an effective job of facilitating the discussion among ?lvaro Rodr?guez Arregui of Ignia Partners, Wes Selke of Good Capital, Christian Schattenmann of Bamboo Finance, and Josh Becker of New Cycle Capital. For someone that doesn?t spend the majority of his time talking with investors expecting a financial return, I was interested in seeing what the investments in the funds were and what, most importantly, were the expected returns?both financial as well as social. Here is a quick listing of the funds, some of the investments the funds have made, and the expected returns:
Good Capital recently launched a $30 million Social Enterprise Investment and Expansion Fund focused on poverty alleviation, health care, and education in the U.S. While the fund hasn?t closed yet, they have already made two investments: Better World Books and Adina for Life. Wes Selke noted that the targets of the fund’s investors were social mission-led companies that can demonstrate scalable change. One of the differentiating factors in Good Capital’s investment approach is its hands-on, VC-like approach to working closely with the management team and taking a seat on the Board.
Target: 8-10% IRR over the seven-year lifespan of the fund.
New Cycle Capital
New Cycle Capital was new to me, but I was quite impressed with Josh Becker’s presentation on their investment strategy. New Cycle makes early-stage, VC-like investments in energy efficiency/clean building projects and domestic emerging markets. Some of their investments are: Cool Earth Solar, Goalspring, MK: Michelle Kaufmann, Positive Energy, Terrapass, and Sneaker Villa.
Target: Comparable to top quartile of VC funds over nine-year lifespan of fund.
For those of you who aren?t familiar with Bamboo Finance, they came out of Blue Orchard Finance which is well-regarded for its microfinance investment funds. Christian Schattenmann described Bamboo Finance’s strategy as trying to help social enterprises tap into the capital markets like microfinance has. They have set up Oasis Fund to make five investments in social enterprises that provide critical services or goods to the lowest income sectors. Bamboo provides both debt and equity financing in the range of $250,000 to $3 million.
Target: 10-15% on equity investments. 7-8% debt investments.
Ignia Partners hails from Mexico where they are making strategic investments in BoP opportunities in Latin America. Led by ?lvaro Rodr?guez Arregui and Michael Chu, Ignia has established Ignia Fund I which has raised more than $20 million to invest in businesses that are scalable, generate cash, part of the last mile of the value chain, and led by experienced entrepreneurs. Ignia has made two investments thus far in Primedic which is a Mexican healthcare provider and an affordable housing project in Chiapas.
Target: Ignia focuses on hurdle rates and has a target of 25-30% over the hurdle rate.
Overall, I found the presentations from the funds to be quite interesting. Clearly, “real money” is beginning to move into this space and trying to mimic the investment cycle that occurred with microfinance, though there haven?t been any IPOs just yet. While it is still early days, it was evident that this was a trend all four of the funds were trying to push.
While all four of the presenters were essentially on their first funds, it was interesting to note that one of the presenters said that the purpose of the first fund is really to get to the second fund. I took that to mean that there is a credibility and proof of concept stage here. With success breeds success and this is where I became concerned not only for the fund managers but the space itself.
What kind of expectations are we creating? What happens if we don?t realize a financial return on these investments? Does this mean that the money will go away? Or, is there a real pent-up demand for these products? Will history show during these tumultuous days that social capital investments actually provide a stronger, risk-adjusted return than we?re seeing in the traditional capital markets? Lots of questions, few answers.
While the game of expectations is my overall take-away from SoCap 08, my take-away from the “New Private Equity Funds” session was measurement, hence the title of my post?two bucket thinking, two bucket standards. In the session there was a lot of talk about expected financial returns, IRR?s, and hurdle rates. If I were at a VC conference I would have felt right at home.
The trick is that this gathering is about Social Capital and the phenomenon of the merging of two bucket thinking. I think it is safe to say that all the attendees believe in the blending of financial returns and social returns. No longer do we want to live in world where you can?t have your cake (20% return) and eat it too (poverty eradication). While all of the presenters acknowledged that the purpose of their funds was to provide double and triple-bottom line returns, I didn?t see anything other than anecdotal evidence of this being achieved.
For someone who comes from a philanthropic capital-funded organization where rigorous social impact measurement is required and the norm, I did not get a sense that the same rigor was being applied to the Private Equity Funds. I don?t believe this is the fault of the fund managers or the companies they’ve invested in. I truly believe that they feel they’ve seen the evidence of the social impact in their due diligence. Yet, not one of the fund managers could provide quantitative results of impact beyond carbon credit offsets.
So, I left the session in a quandary. If you?re receiving philanthropic capital, are you held to higher standards of social impact measurement than other types of capital? If so, why? Is this somehow an adjustment to risk? If quantitative social impact measurement is the gold standard of social capital investment, how much are investors expecting a financial return willing to spend?
Editor’s note: This post also appears on the VisionSpring blog, Business in a Bag.