Originally prepared for Euclid Network, see here.
There is an increasingly divergent interpretation of what constitutes a Social Investment, from low-level positive screening of Socially Responsible Investments (SRI’s) through to philanthropic funds which maximise social impact. With the publication of JP Morgan’s seminal paper “Impact Investments: An emerging asset class” (29 Nov 2010), it may be most appropriate to begin by focusing on funds which could be classified within this context as Impact Investments i.e. “investments intended to create positive social or environmental impact beyond financial return”. Even within this narrow band, there is subtle variation between Impact-First Investments – which optimise social/ environmental impact with a minimum specification for financial performance – and Financial-First Investments – which optimise financial returns with a minimum specification for social/ environmental impact.
The 5 Funds selected for this review range across various geographic regions and sectors. They reflect wide-ranging variations in response to the socio-political and economic environments in which they operate as well as investor requirements, and therefore highlight some of the possible diversity and scope. A common analytical framework for study is to chart Social Investment Funds against the type of organisations (or deals) they invest in and the form of capital provided. This typically results in a broadly linear distribution as per the green band in the diagram below. The 5 sample funds have been anecdotally plotted onto the graph to assist in the analysis.
(summarised from Investing for Impact: Case Studies Across Asset Classes by Bridges Ventures)
1) JP Morgan Urban Renaissance Property Fund ($182 million, Financial-First)
USA | Multiple investors | Equity investment | Multiple urban renewal deals | Target return >15%
Invests in real estate projects, predominantly affordable and key-worker housing, retail, mixed-use development or hospitality sectors. The fund undertakes new development and/ or redevelopment and hopes, when feasible, to invest in projects with ‘green’ specifications.
2) BelAir Sustainable Alternatives Fund ($345 million, Financial-First)
Global | Multiple investors |Private equity | SRI compliant funds | Target return >LIBOR +300bp
This fund-of-hedge-funds screens hedge fund managers against an internally defined Social Responsible Investing (SRI) policy. Investors are guaranteed not to be exposed to investments and countries which are not SRI compliant.
3) Aavishkaar ($ undisclosed, Impact-First)
India | Multiple Investors | Venture Capital | Social Enterprises in rural poverty | Below market rate return
A venture fund providing micro-equity funding (deal size of $20k to $500k) in exchange for common equity in commercially viable companies. It also provides operational and strategic support and targets business which provide goods and services to rural or semi-urban communities, or organisations which increase income in those communities.
4) Bridges Ventures Social Entrepreneurs Fund ($8 million, Impact-First)
UK | Multiple investors and donors | Quasi-equity or mezzanine debt |Social enterprises | Target return 3-5%
Provides capital to social enterprises seeking to scale up and unable to obtain commercial finance because they cannot deliver market-rate returns or offer the usual exit opportunities. Investment is via equity or quasi-equity instruments with flexible structures such as subordinated debt with royalty payments. Bridges also provides operational support to enterprises which is supports.
5) Root Capital ($200 million, Impact-First)
Africa | Multiple investors | Senior debt | Gap between micro and commercial Finance | Target return 2.5%
Targets the ‘missing middle’ between micro and commercial finance and bridges this gap by providing long-term or short-term loans against factoring agreements or signed purchase orders. It also provides financial education and strengthening market connections for small agricultural and food-stuff processing businesses.
Extensive investigation is underway by numerous global actors who are seeking to develop layered funds which are able to utilise philanthropic capital (private or public) as a first-loss tranche within a structured fund, and to ring-fence higher than normal risk in order to leverage the philanthropic capital with mainstream investment and debt capital – this is the subject for a separate discussion.