What makes a successful impact investment fund successful? Where's the secret sauce?
That's what Cathy Clark, Ben Thornley and Jed Emerson set out to discover. Their new book The Impact
Clark is lead faculty member at the Center for the Advancement of Social Entrepreneurship (CASE) at Duke University's Fuqua School of Business, among other posts; Thornley, founding partner of ICAP Partners; and Emerson, senior impact strategist at ImpactAssets.
I recently talked to Clark about the keys to success that she and her colleagues pinpointed. She discussed four crucial elements:
1) Ensuring that key investors are on the same page--and viewing them as stakeholders and collaborators. "A really smart impact investment fund figures out who cares about the social impact you are trying to achieve and puts together an assortment of investors who are in it for the same reasons," says Clark. This is no easy process and can take several years to pull off. It also requires that the fund's mission is an integral part of its DNA. ("Mission first and last" is what this is called in the book).
2) Making government a major player in the process. This ingredient wasn't something the fund managers necessarily wanted to emphasize; they preferred to be seen as embracing the market, not government. But the fact is, according to Clark, many of the funds either have public sector money or were started by a government group behind the scenes. For example, in Bridges Ventures Sustainable Growth Fund 1, the UK government provided a one-for-one investment match for very pound raised in the 40 million pound fund.
3) Using creative strategies to meet the financial return goals of a variety of investors. Generally, these funds include different stakeholders, from foundations to corporations, with very different financial expectations. The answer is to devise savvy financing structures with multiple layers of equity and debt that make room for parties with a variety of appetites for risk and return.
Take Deutsche Bank's multi-layered Global Commercial Microfinance Fund. The UK's Department for International Development (DFID) provided grant capital and the United States Agency for International Development (USAID) provided a loan guarantee, functioning as loss layers, thereby reducing risk for all other investors and also allowing Deutsche Bank to increase the potential interest rate. As important,the various layers targeted different organizations' various goals and interests. For example, some banks and insurance companies came in as note-holders with a higher level of interest than other layers, to be paid out before equity holders received their return. It all led to the fund closing at over $80 million , instead of the originally-expected $50 million.
4) Engaging in multilingual leadership. These funds must deal with people across sectors and, thus, need to speak the language of the very different worlds of philanthropy, government and conventional finance.
Clark emphasizes that the funds she and her colleagues studied are 10 or 15 years old. "The big question is, are these the factors that will be required for new impact investments to thrive," she says. "It might be that things get easier--or they grow increasingly complex as more companies think about how they can intersect with impact."
