Social Impact Investing

Posted on July 12, 2013

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Social Impact Investing 1

We have been working with one of our clients on the design and implementation of a “social impact fund” to make investments in companies and entrepreneurs in developing countries. This week Private Equity International in its Friday Letter talked about the development of  social investing.  Below is an excerpt from their commentary:

“This week, the Impact Investing Policy Collaborative held an event in the City of London to launch ‘The London Principles’, a set of guidelines intended to help governments around the world create a policy framework around social impact investing – i.e. investments that explicitly target a social as well as a financial return. Given the sort of difficult conversations private equity has been having about regulation in recent years, it was refreshing to see a group of politicians, bureaucrats and financiers all (relatively) united in a common purpose: to facilitate the development of this new alternative ‘asset class’.

Social Impact Investing 2

It would be easy for private equity to dismiss social investment as an irrelevance. Clearly the politics involved are very different: governments have a much more vested interest in the success of social investment, particularly at a time when most of them are reducing the amount of money they spend on addressing social problems.

But the rise of social investing (consultancy BCG reckons social finance, a market that didn’t even exist a couple of years ago, could be worth £1 billion in the UK alone by 2016) shouldn’t be ignored…

First, it highlights investors’ growing interest in the concept of socially responsible investing – something that GPs have been seeing for a while now. So far, most of those investing in social finance have been foundations or other organizations with a philanthropic bent. But over time, as track record develops and different types of products emerge, expect to see more institutions taking a more active interest.

Second, there’s some interesting innovation happening on the product side, in an effort to attract new capital into the asset class – social impact bonds (pioneered in the UK and now happening elsewhere around the world) being an obvious example. That’s something for private equity to think about, especially at a time when some traditional fundraising sources are withdrawing from the market.

It’s also true that the clear dividing lines between financially motivated and socially motivated investing just don’t exist in the way that they once did. In fact, some specialist impact investors argue that by solving big social problems, you can also generate big returns. That’s particularly true in developing markets…”