Philanthropy's New Frontier - Impact Investing

11/10/2015 |

Impact investing, which promises both financial returns and intentional, measurable social returns, is attracting more and more money—most of it from private investors. Foundations are hard-wired for social purpose and would seem to be natural candidates for impact investing, but so far they are behind the curve. Today, foundations account for only 6 percent of the approximately $60 billion in total impact investments under management worldwide. In India, foundations account for an even smaller portion, just 2 percent of impact investments, according to a recent report by Intellecap, an India-based research and consulting firm.

The bulk of impact investment has been made by private investment fund managers and development finance institutions, which together have put up more than 80 percent of the money flowing into impact investing. It’s not surprising that most private investors (55 percent) seek to earn “competitive, market rate returns,” according to the most recent J. P. Morgan impact investor survey. Another 27 percent aim lower but still hope to achieve returns “closer to market rate.”

Enterprises that provide social returns and are highly profitable don’t have much trouble raising money from impact investors. But enterprises with an unproven business model, or ones that focus on serving the poorest of the poor, find that the vast majority of these dollars are out of reach. These types of enterprises—capital-starved social businesses with strong growth prospects but little chance of producing market-rate returns anytime soon—are, however, ideal candidates for philanthropic impact investment. Deploying “repayable capital” in this way has distinct advantages. Social enterprises get much-needed growth capital, and funders get some or all of their money back—sometimes with interest—to reuse for another social investment. And all of this can be done without having to achieve market-rate returns.

Perhaps nowhere in the world is the opportunity for this type of below market-rate impact investing more striking than in India. Nearly 75 percent of the country’s 1.2 billion people live on less than $2 a day, and much of this population lacks access to basic services, such as clean water, sanitation, energy, and education. Providing these services creates opportunities for social entrepreneurs to develop bottom-up enterprises, but few of these businesses will generate competitive market-rate returns, at least for the foreseeable future.

Read more about the promise of impact investing on Stanford Social Innovation Review.

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