Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
transitioning the business as it grows or changes ownership. For many impact
investors, the path to exiting a private equity investment in an emerging market can
be less clear than say for a venture capitalist operating in developed markets. While
these risks will introduce challenges to the growth of impact investments, they will
hopefully be manageable with local management teams who can more easily
maneuver within the local regimes. This again points out the value of having a local
team that is fluent in the legal framework (and the politics that might change that
framework) within which the business will be operating.
Reputational risks: Profiting from the poor?
While the impact investment marketplace is growing mostly out of a combined value
set of financial gain and positive social impact, there will be those that identify
impact investors as profiteering from the poor. The recent global financial crisis will
no doubt provide further evidence to support the claims of skeptics that capitalism
left unchecked can be more destructive than constructive toward economic growth.
An impact investment must constantly balance the dual imperative of generating
positive social impact and profit. Some impact investment business models,
especially those employing high-volume, low-cost approaches are able to drive
financial return and social impact together with impact and profit correlated as the
business expands. But it would be naïve to believe that these two imperatives are
never in tension. In pursuit of more profit, a business may be inclined to target
relatively better-off customers, raise prices to take advantage of the lack of
competition often encountered in underserved markets, or take cash out of the
business rather than reinvest in innovation to enable even broader customer reach.
Indeed, within the microfinance sector, some concerns about mission drift are
already beginning to appear. As purely commercial investors (that may not be
committed to “double bottom line” business) take stakes in impact investments,
observers fear that the companies may succumb to pressure to prioritize financial
returns over social impact. When Banco Compartamos SA, Mexico’s largest
microfinance institution, went public in 2007, many market participants expected the
social mission to become a secondary priority for the new set of shareholders, and
consequently for the management. Similar questions arose when Sequoia Capital, a
traditional private equity investor, took a stake in India’s SKS Microfinance Ltd., and
when the company went public in July 2010.
The proliferation of microfinance has also resulted in increased rates of
overindebtedness in some countries. Referencing this and the high interest rates that
some microfinance institutions charge, some observers will claim that these finance
institutions pursue growth at the expense of the financial health of their customer
base.
Beyond microfinance, many impact investments that seek to deliver basic services
such as clean water, healthcare or electricity to poor populations will encounter
opposition from those who believe that access to these services are human rights that
government, and not private markets, are obliged to provide. These rights-based
principals have been enshrined in numerous international covenants; most recently
the UN Declaration in July 2010 that access to water and sanitation is a human
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