The Critical Role of Non-Commercial Capital in Funding of Impact Investments

On September 19^th, the World Economic Forum hosted a panel discussion in New York to introduce its just-published report, “Fromthe Margins to the Mainstream – Assessment of the Impact Investment Sector andOpportunities to Engage Mainstream Investors”.  The panel included Goldman Sachs, Morgan Stanley, Equilibrium Capital and Social Finance USA.  The discussion and the report itself made a number of points of relevance to microfinance and other impact sectors targeting low income populations.

Among the good news:  a survey of the “millennial generation” finds them most often identifying  the purpose of business as “improving society”, albeit followed closely by generating profit; both financial intermediaries, like those represented on the panel, and advisors like Cambridge Associates appear to increasingly incorporate impact sectors into their portfolio constructs for clients. 

Among the challenges:  family offices / HNWIs and Development Finance Institutions continue to be the leading source of capital for impact investments, but these sources represent just a small proportion of total global asset ownership:  2.5% compared with 48% and 39% held by pension funds and insurance companies, respectively.  And these institutional investors continue to find impact investments challenging, due to scale, standardization and in some cases, risk adjusted return mismatches. 

Evolution of Pricing Transparency in Microfinance

For the fifth anniversary of its founding, MFTransparency traces the evolution of the pricing transparency movement in microfinance with the help of four industry leaders: Chuck Waterfield – CEO of MFTransparency, Mårten Leijon – CEO of  Microfinance Information eXchange (MIX), Paul DiLeo – Founder and Managing Partner of Grassroots Capital Management PBC, and Rupert Scofield – CEO of FINCA.

A turning point for pricing transparency in the industry, according to Chuck Waterfield, was the Compartamos IPO in April 2007, which called attention to the high profits possible from small loans to the poor. In early 2008, MFTransparency was established as a facilitator for the industry to collect and process data on pricing in a standardized way and report them transparently to help the industry mature and evolve.

For Paul DiLeo, more than just a natural evolution of a maturing industry, the focus on pricing transparency goes beyond information and consumer education to what differentiates microfinance from other industries: microfinance not only realizes a latent market opportunity, it looks to generate some improvement in the conditions, products and prospects of clients. MFTransparency, and the whole pricing transparency effort, has become part of a larger effort to examine microfinance and whether it is indeed providing benefit to clients.

Please click the following link for more on the points of view of these four industry experts: http://vimeo.com/74194251. 

What to Expect When Impact Investing (by Paul DiLeo)

This past Thursday, September 5, I attended a panel discussion on Impact Investing organized by CGAP in Paris.  Unfortunately, I arrived late, left early, and didn't catch all the discussion in French. With those caveats, though, I did find a few interesting themes in the discussion I did catch.

At various points during the discussion, the moderator posed questions that attendees could vote on using individual clickers that had been distributed.  In response to one question, 67% of participants either agreed or strongly agreed that “expectations for impact in impact investing are too high.”

While there was no opportunity for respondents to specify how exactly their expectations had been disappointed, one reasonable inference in light of critiques of recent years is that the ability of impact investing to achieve impact had been oversold and it was necessary for us to moderate our expectations with respect to possible impact on poverty, gender equality, and other social ills.

If correct, this conclusion would seem to raise an obvious question:  why would we not have high and indeed, rising expectations for impact investing?  In other businesses we expect continuous quality improvement.  Road builders need to build safer, more durable roads; appliance makers more efficient, useful appliances.  Why for a business where “impact” is the product do we seem to be lowering rather than continuously raising expectations?