By Scott Laband
Investors who are looking to do well for themselves while doing good in the world are getting more options these days, with alternative investments such as private equity becoming the new trend in impact investing.
Social impact investing, sometimes called double-bottom-line investing, is different from philanthropy, the rich giving away their riches out of noblesse oblige, a sense of duty. It’s also different than socially responsible investing, or mutual funds cutting off capital to publicly traded companies considered irresponsible by some investor groups. No nukes here. No tobacco there. And so on.
Unlike those mutual funds, social impact funds include private equity, venture capital, debt, working lines of credit and loan guarantees. The funds are operated both as for-profit or nonprofit entities. Terms of the investments are multiyear and sometimes made without an exit strategy.
This kind of direct investment helps wealthy investors give back, and has developed into a potentially powerful philanthropic force in recent years. Social impact funds create pools of capital that provide market-rate and below-market-rate investments in fields with pressing social needs, such as education, green technology, and community development.
So the investment might be a venture capital-type investment in a new curriculum for at-risk preschoolers. Or it might provide the capital for a low-cost loan for a charter school.
In most cases, the investments are still limited to the wealthy or accredited investors, but that is changing, and crowdfunding is expected to alter the playing field even further. Calvert Investments, for example, offers a high social impact investments program in which investors can put as little as $20 into local projects.
“Massive competition exists among entrepreneurs, Wall Street and philanthropists to seize this opportunity,” said Bruce Hoyt, senior vice president of Gary Community Investments, a five-year-old education-based impact fund in Denver. “We’re no longer a nascent industry.”
For non-accredited investors looking for other options to invest for social impact, Hoyt mentions Kiva.org, which offers peer-to-peer lending through zero-interest notes and CuttingEdgeX, a clearinghouse listing direct public offerings for social enterprises needing to raise capital.
Hoyt says some investments might make a full market rate of return: A private-equity investment that is expected to drive social change could see returns in the high teens to low 20s. GCI also makes investments that are intentionally below the market rate of return investments, like the Denver Social Impact Bond with an estimated return of just 5%.
Those of us at organizations working to improve schools are excited to see this trend, as it can allow for community improvement projects to harness investors’ needs to diversify beyond stocks and bonds.
GCI makes investments that are intentionally below the market rate of return investments, like the Denver Social Impact Bond with an estimated return of just 5%.
Notably, several trends are spurring impact funds to focus on education. They include the growing acceptance of charter schools and other innovative models; increased investment in corporate training and worker preparation; greater understanding of the role of early education; the growth of learning software and services; and the rise of blended or hybrid, classroom-online learning.
Created about 10 years ago, social impact funds are a more sustainable and less capriciously managed alternative to other aid programs, with the idea of investing in projects that can create positive change. They are in a big growth mode now. Impact investments deployed have increased from just over $10 billion in 2014 to an estimated $17.7 billion for this year.
“Impact investing is going to grow substantially, especially as wealth transfers to younger generations,” Hoyt said. “Millennials, in particular, tend to increasingly use a social lens alongside financial expectations when making investment decisions.”
Social impact investing has somewhat different connotations for each of its many constituencies.
Wealth managers, such as J.P. Morgan and Goldman Sachs, have demonstrated the ability to earn market-rate returns while investing in companies and funds that produce positive social outcomes. Philanthropists have used below-market-rate-return investments to catalyze change in the nonprofit community by replacing 100% losses on grants with impact investments that recycle capital, so to speak.
Nonprofits, meanwhile, especially under new “pay for success” funding models, start looking at their beneficiaries as their customers, instead of catering more exclusively to donors. This leads to greater service and impact because it teaches nonprofits to become sustainable and scalable without relying on philanthropy. Social impact investing pushes organizations to think about outcomes and measurement instead of just inputs.
GCI, founded by oil man Sam Gary, has a just under $400 million endowment; its impact investments include a pilot program in the Westminster, Colo., public school system for full-day preschool and a quasi-“pay for success” (PFS) funding approach to support the pilot of a full-day pre-kindergarten program in six classrooms for an initial two years. Earlier this year, the fund invested $1.1 in seed capital in JoyBox Studios to help develop its early childhood curriculum system for new parents.
Perhaps, the key takeaway from all this comes from Bill Gates, the world’s biggest philanthropist (and an impact fund investor through his foundation), who once said: “Any of society’s problems that can be solved with market-based solutions must be solved that way.”
That’s exactly what impact funds do, and why we should all embrace them.
Scott Laband is president of Colorado Succeeds, a Denver-based, nonprofit think tank that focuses on education and business issues.