Identifying the worlds most pressing issues can be a challenge. At GCP Solar we focus on providing safe and sustainable light solutions to the 400 million people living in Africa without light. The Head of Impact Investing Initiatives at the World Economic Forum (May 2014), Abigail Noble discussed the challenges of impact investments. Currently the average private equity deal is around US$36m and the average investment impact deal is around US$2m. For private equity firms to fully engage in impact investing it costs more to do. There is the bottom line measuring their fiscal performance financial profit, and then the second bottom line measuring the performance in the terms of positive social impact. Moreover, as the size of the deal is smaller, more consideration is needed in the terms of fee structures and due diligence.
Should impact investors anticipate market returns? Yes – a range of returns can be expected such as patient capital, whereby an investor will be willing to make a financial investment in a business with no expectation of turning a quick profit, substantial rewards will come further down the road. The Acumen Fund, a non-profit global venture fund that uses entrepreneurial approaches to solve the problems of poverty, are cautious about stating that they’re opting for the long-view, some investors only make 0-1% returns. Impact private equity firms like LeapFrog make +20% quartile of returns. Leapfrog invests for the NextBillion, investing in high-growth companies in Africa and Asia, as well as delivering financial services to emerging consumers. These investors need to consider their priorities in the terms of social impact and legacy; are there equity needs in the short-term? Or can a longer perspective be taken?
One could then argue that if impact investments focus more on financial returns, could less profitable investments with strong social impacts be left behind? Noble argues that there is a risk. Given positive selection bias impact investment deals that target the highest returns will receive the most capital and the most effective investors in juxtaposition with those with lower returns. Noble describes how philanthropic capital and development is integral, once investors start to realise that targeting social and environmental returns can actually boost and make more long-run, stable, financial returns. For example, when looking at climate change, the Arab Spring, social unrest, youth unemployment or social inclusion, these can all affect the financial market. By the by, the more stability in social or political institutions, the better the business climate. Noble indicates that the “real way” to create a stable market economy would be to focus on social and financial returns in the long-run. GCP and GCP Solar’s basic focus towards Africa and African investments identifies that investments are long-term opportunities as well as a socially responsible and ethical investments.