Impact Investing and Tri-Sector Leadership - YouTube

Impact Investing is a new term for a practice that has been around for a very long time.

The idea of Impact Investing is that you invest for two outcomes, instead of just one.

You invest for financial return, which every investor does, but you also invest to have

social impact as a result of your investment.

And it’s really interesting – it’s a field that’s been exploding in the past

decade, and it’s in the news every day.

In fact, today there was a piece in the New York Times about CalPERS, which is the largest

U.S. pension fund, that manages 300 billion dollars, saying that they are going to change

the way that they invest some of their money to look at the impact of their money on the

environment, on social factors, and on corporate governance, because they think it’s important

to long-term value.

The impact investing market has been growing significantly over the past few years.

And it’s really interesting to see the diversity of institutions that are interested in impact

investing.

Financial institutions, like BlackRock, which is the largest asset manager in the world,

has just created a new division on impact investing.

Banks, like JP Morgan, institutions like Morgan Stanley, U.S. Trust, Deutsche Bank, all of

them building or expanding units, creating new products, and trying to meet their customer

demand.

What’s also exciting is you see governments looking at this as a tool.

The U.S. government, for example, has an institution called OPIC, which does its impact debt investing

all around the world.

They have never lost a dollar, and they’ve actually paid the U.S. Treasury for the past

30 years.

We also see it in foundations.

There was another piece in the New York Times a little while ago about the Gates Foundation,

that just made a 50 million dollar impact investment into a vaccine company.

So a lot of different institutions saying, “hey, this is a way that we can actually

scale solutions to social problems.”

In terms of the size of the impact investment market, I like to divide it into two parts.

So the first part is the public part of the market.

And there’s an institution that tracks that, and they’ve said the public part of the

market now is worth about 6 trillion, which means that one out of every professionally

managed dollar in the U.S. is screened for social responsibility.

The private part of the market, which is the one that is more relevant to social enterprises

often, because they’re funding at lower amounts and funding directly into companies,

has risen to about 43 billion under management in the last few years.

So we have a lot of people putting their money into instruments where they’re trying to

have impact.

So the increased demand for impact investing is coming from some interesting demographic

trends.

We see among millennials, for example, Deloitte has surveyed them for the past 5 years, and

asked them, “what’s the primary purpose of business?”

And their number 1 answer over that time has been to improve society.

So they’re very interested in getting jobs that fulfill those values, and also investing

their money.

We also see it among Boomers, and the retiring generation of Boomers, who have a lot of cash

to spend, who are interested in using their expertise and their skills to build things

that make a difference in society.

And you see it among the very successful, like Bill Gates, or Steve Case, or Pierre

Omidyar, who have taken their assets, and decided they’re going to put them directly

towards impact investing, and then also turn some of their philanthropic effort to building

the field of impact investing.

CASE, the Center for the Advancement of Social Entrepreneurship, is a center at Fuqua, that’s

focused for the past 12 years on how you can take business techniques and apply them to

lasting social change.

We have been extremely interested in the capital markets as a tool for social entrepreneurs.

And the idea of impact investing has become extremely exciting, because we work with social

entrepreneurs who are non-profit, some of whom need debt.

We also work with social entrepreneurs who are for-profit, and need debt or equity.

So, this idea of investing as a means to help them is really exciting.

So 3 years ago we decided to create a program within CASE specifically focused on impact

investing, and we call it our CASE Impact Investing Initiative, or CASE i3.

And we were the first significant program at a top business school to create an effort

to build the field and the market of impact investing globally.

And we do a bunch of things here that are very exciting.

One, we run a student fellowship, so we are… we have a two-year MBA fellowship for our

students – Daytime MBA students – who are interested in impact investing.

We also do research in the field.

We’re doing projects right now with the White House, with several foundations, and

with some other banks and other funders, and we also work with other academics around the

globe to build the evidence base, so that more people can learn about how this is working.

And I wanted to talk a little bit about a research project that we did over the past

3 years.

So the question we had was: all this interest in impact investing, and more funds, and more

products, and more excitement – how well are they actually performing?

And what we realized is that the evidence base was not really there in an accessible

way.

So we formed our own project, and we spent 3 years studying high-performing impact investing

funds all around the world.

And our criteria were really simple.

We went to the people who invested in those funds, often called limited partners, and

we said, “who is great?”

And our definition of great is: have they met or exceeded your intentions about financial

and social return?

We started out with a list of 300 funds all around the world.

We narrowed that down through those criteria to about 30, and then we ended up studying

12 of those funds in great detail, and basically saying, “what made you special?

What led to your success?”

When we were done with that, we had a group of funds that were managing 1.3 billion dollars,

that were investing in 80 countries all around the world.

They invested in many different impact areas, from health to business development, to financial

inclusion, to education, and they had a broad array of returns as well.

Some of our developing market funds returned between 3 and 22 percent to their investors.

Our developed market equity funds returned between 8 and 12 percent, and then we had

a smaller group of social debt funds that were doing very high impact work, and returning

between 0 and 3.

A lot of people asked us, “well, 0 and 3 percent, that doesn’t sound like success.”

We said no, this is what they targeted.

They promised their investors a 2 percent return, and they delivered it.

So one of the important things to understand about impact investing is people are kind

of saying, “is it always market rate?

Is it… you know, or is it maybe always concessionary?”

We’re saying no, it depends what you targeted, and there’s people blending objectives.

The other thing we learned through our study is we looked across these funds that were

successful, is we identified 4 practices that seemed to come up again and again, when we

talked to the funds, when we talked to their investors, and when we talked to their investees.

One of them is how they actually define themselves, and we called this “Impact DNA.”

That from the very beginning, they built their mission into the investment thesis of the

fund, to the point where it wasn’t an add-on, it was actually why they were going to make

money.

So to give you an example, there’s a fund in the study called Elevar Equity, which is

a fund that operates in Latin America and Asia.

And they invest in disenfranchised populations, who don’t have access to financial services

or healthcare, and sometimes housing.

And they go into those markets and they find very specific services that are going to work

for those populations, and then they scale them up, and they use all the tools – the

people that run this fund were from the microfinance industry and they understand scale – they

have actually, they’re now on their third fund, their first fund, which is the one we

profiled, has a 23 percent equity return, which is the top decile of any fund.

So really, really interesting.

And they built their mission in from the very first step.

The second thing we learned about the funds is that they often have very different stakeholders

than you would think of for normal financial vehicles.

So, that Elevar Equity that I was just talking about, their first investor was actually a

foundation.

It was actually the foundation that Pierre Omidyar set up, and they gave them a program-related

investment, which is a specific kind of investment a foundation can make, because they believed

in the idea of actually purchasing the outcome of more people having access to finance.

And so you see impact investors doing this: identifying different stakeholders who care

about outcomes.

Who cares about education, who cares about energy access, who cares about financial inclusion,

and reaching those people, and getting them engaged as the actual investors in the funds.

The third thing that we found, which is even more interesting, is how they engage with

those stakeholders.

So it is very common across all the different asset classes that we looked at, and we looked

at different asset classes, for the funds to layer the investments.

So, in structured finance, it’s very common that you have a maybe a top layer, who gets

paid back first, then you have a second layer who gets paid back second, and then all the

way at the bottom you have some people who are… you know, they might get paid back,

they may not.

And what was interesting in these funds is that you see there is a whole lot of funds

in the space that have been anchored by catalytic investors.

So, there’s another fund that we profiled, which is a Deutsche Bank fund, it’s a microfinance

fund, and they got the government of the U.S. and the government of the U.K. to anchor this

very successful, very large microfinance fund.

And their whole thesis was if we can get them to put in the loss-reserve layer, so if this

fails somebody is going to pay you back, we can actually get a whole bunch of commercial

players in this fund.

They actually exceeded their expectations.

It was oversubscribed.

And their goal was to show that if that succeeded, they could do a next fund that didn’t have

a loss layer, to show the risk, you know, really wasn’t there.

And they did that.

So a very successful fund.

Nearly every layer got back their return.

There was one layer in the middle that didn’t get back their full return, and we interviewed

them, and we said, you know, “what did you feel about that?”

And they said this was a total win for us, because we were engaged in something that

was important to us.

And it was mostly corporations, and they wanted the value of saying that they were investing

in other countries in microfinanace, so it was a win.

The fourth practice that we uncovered, and this kind of came accidentally when we were

talking to the teams, is we realized that the teams of these funds, not necessarily

the individuals, but the teams as a whole, they had a mix of skills.

They all brought skills from the nonprofit sector, the government sector, and the business

and finance sector.

In our study we called this multilingual leadership.

We have now at CASE started to talk about this as Tri-Sector Leadership, to get away

from the linguistic-only connotations of it, to realize this is experience, this is networks,

this is frames, this is definitions.

And having the ability to talk to these different sectors, and actually understand what they

want from you, and understand what you need to give back to them, turns out is a success

factor for impact investing.

And that’s great, because we as an educational institution can now bring that back, and we’re

training our students about different ways of looking at problems from different sectors.

What’s interesting about impact investing is a lot of people think it’s really only

something that really rich people can do.

It is true that to invest in many funds you have to be what’s called an accredited investor.

An accredited investor is a designation that the IRS has created for someone who has a

certain income or a certain net worth, and they believe that you can take more risk with

your capital if you’re a little bit more wealthy.

But what’s been interesting is a bunch of funds have stepped into the marketplace, and

saying, “you know, we want to actually make this available to everyone.

We want to democratize impact investing.”

A lot of times they talk about it as making retail products.

What’s exciting is that there’s now some really interesting retail products available

to anyone.

If you’re interested in impact investing, for example, you can go to a website called

vested.org, and you can invest online as little as 20 dollars in something called a community

investment note.

A community investment note is a product that the Calvert Foundation, which is also one

of the funds that we studied, has put together, and it’s an instrument that’s been around

for 20 years.

You choose your interest rate.

You can go from between .5 percent to 3 percent, and you can lock up your money for a different

amount of time, depending on the interest rate.

And you can invest in communities.

You can invest in the Twin Cities, you can invest in Denver.

You can invest in women around the world.

You can invest in education.

So you can do it by impact area, you can do it by geography, and then you are an impact

investor alongside everyone else.

And what they do is they take your money and they bundle it up together, and they give

loans to institutions, who then give it to people having impact.

They have never lost any investor a dollar in doing this.

So it’s a safe, easy way, and it might even earn you more money than your bank account.

When I think about impact investing, it’s a really exciting field to be in right now.

We see the demand coming from our MBA students of this idea that I can make money and make

a difference at the same time is really intriguing.

It turns out it’s a really exciting time to be in this field, either as a professional

or as a student, because a lot of things are changing and kind of being created for the

first time.

One of the things I’m most excited about that I’ve been involved in over the past

few years is the creation of this thing called “B Corporations,” which didn’t exist

before, which a bunch of entrepreneurs kind of came together and said, “how do we protect

the mission that people want to build into for-profit companies.

And how do we make it so that companies who are saying they are being impactful so that

people don’t kind of see that all as greenwashing.”

And so we actually created a certification, so a company can become certified as a B – which

stands for Benefit – Corporation, or now they can actually go and incorporate as a

Benefit Corporation in more than 20 states around the country.

So we’re actually changing the legal structure for social enterprises to make them be more

successful, and to help them meet their goals, which is really exciting.

And I do think in terms of kind of what the next 5 to 10 years will bring, the most exciting

thing about this field is how do we actually define and communicate the impact that these

companies are creating.

Many of them are doing amazing work.

We’re starting to see some sort of emerging standards, but to really get to a robust marketplace,

we need to do more, and it’s a great area for people to get engaged in.