Weekly Roundup 10-9-15 : Exits and Entrances: Two reports shed light on getting out and getting into impact enterprises
To capitalize on the chatter and excitement around impact investing that the Social Capital Markets (SOCAP) conference creates, many organizations and companies made announcements and issued reports this week. Here are two biggies that caught my eye.
Meeting the Market
The skeptics who say you can’t create social impact and pocket market-rate profits through impact investing might need to consult their accountants.
The Wharton School of the University of Pennsylvania unveiled a study that tracked 53 impact investing private equity funds. The researchers looked at 557 individual investments within those funds. The results: social impact and market returns are closer to peanut butter and jelly than oil and water.
According to the study's authors, certain market segments of funds in the sample yield returns close to those of public market (Standard & Poor’s 500 Index and Russell 200 Growth Index) indices) between 2000 and 2014.
“The tension between profit and social purpose may not be as pronounced as people suggest,” Christopher Geczy, an adjunct professor of finance at Wharton who supervised the research, told The Wall Street Journal. “The impact space can be aligned with market performance. Impact investments may be competitive.”
Of course, the study was focused on private equity, just one asset class within many that have a social impact makeup, and its sample size was unsurprisingly small given the time period in which the portfolios were scrutinized.
The researchers also explored another delicate issue for private equity investors in social enterprises: financial exits. According the Journal:
“Sixteen of the companies that saw successful exits were believed by their original backers to have an impact-focused mandate that persisted even after sponsors sold their stakes. This group saw more outperformance against public market equivalents than all 32 successful exits over the period between Sept. 30, 2001, and Sept. 30, 2014, according to the study.”
(Not) The Final Frontier
You can’t have a return on an investment unless you (or someone else) make the very first investment in a venture. And just how to do so, particularly at the pioneer (or early) stage, remains a bit of a space walk for investors.
This week Omidyar Network introduced a tool kit of sorts for emerging market investors that highlights strategies for providing frontier capital to companies developing products and services for people making between $2 and $8 per day. (Although that consumer income level doesn’t mean the poorest of the poor, it’s definitely close, and does represent a big and growing segment of the populations of many emerging markets for whom purchasing power is expanding.)
The paper, "Frontier Capital: Early Stage Investing for Financial Returns and Social Impact in Emerging Markets," looks at three key areas of investing and makes suggestions for (potentially) happy returns. These include:
“1. The Frontier. The Frontier strategy is effective with traditional VC financing tools and invests in businesses that directly target low- to lower-middle-income populations. The report uncovered two factors in particular that are strongly correlated with scaling quickly and profitably: a "mixed-income" model that allows the company to serve both middle- and lower-income populations, and an asset light business model. The most prominent sectors in this category are financial technology (fintech), education technology (edtech), and consumer, Internet and mobile.
2. Frontier Plus. The Frontier Plus strategy is for investors with more patience and risk tolerance because companies in this category are more asset intensive, target only poorer income segments or operate in countries with less-developed capital markets. Frontier Plus companies such as Rangsutra (consumer crafts), Servals Automation (sustainable rural energy products), Shree Kamdhenu Electronics (electronic milk collection services), and RuralShores (rural business process outsourcing) produced 5x or greater returns to investors.
3. Replicate and Adapt. This strategy reflects where the bulk of existing VC funding in emerging markets already flows and yet there are opportunities to do even more. It focuses on companies replicating business models that have been proven elsewhere and adapting them to an emerging market context.”
Catch up on SOCAP15
In case you missed it, here is our coverage of day one and day two of SOCAP15. Our editors have fanned out this week to interview many of the leading thinkers in attendance this week. Watch for our video interviews, starting next week.
Scott Anderson is the managing editor of NextBillion.