The impact investing industry is gradually imprinting itself worldwide. Several types of capital, such as private equity, venture capital, debt, and philanthropic donations, can be found in the industry. There are numerous notable leaders, such as Acumen Fund and Calvert Foundation, in the industry as well.
When an industry passes the initial start-up stage and enters the growth phase, the classic question of performance comes up. How has the impact investing industry performed so far? Has any impact investor ever lost money?
As per the 2008 track record of Canada’s Renewal Partners, their overall internal rate of return is 12.2%. However, all companies they invested in did not turn a profit. Renewal Partners experienced a loss rate ranging from 14 to 40% and had 8 write-offs. Moreover, earlier in the 1990s, the company lost $1 million in the media sector due to misjudgement of the publication industry’s potential.
Since its 2002 initiation, UK’s Charity Bank has been earning returns around 6% through loans to social enterprises and non-profits. The bank has, however, lost some money which amounts to 0.3% of their loan portfolio.
Calvert Foundation’s Community Investment Note has also experienced some negative returns. In the last 15 years, Calvert’s Community Investment Note incurred losses less than 1%. Fortunately, with a minimal loss rate and strong industry foothold, Calvert’s investors have not lost their investment money.
The eminent Acumen Fund has also experienced negative returns in its investments. The average return rate of a company in its portfolio has been negative 20% after tax. While, the average returns of its most profitable investments is 6%. The stark difference justifies the 53% drop in Acumen’s “blueprint” company investments over the past 10 years.
The picture painted here may display a dim view of the impact investing industry. But that’s not the case. The examples above show one side of the story.
Along with unprofitable impact investments, profitable impact investments can also be found in the industry. An example of that would be Rockefeller Foundation’s Disability Opportunity Fund, which has experienced no losses or delinquencies so far.
Nevertheless, witnessing lossmaking impact investments brings us to the question of how to ideally deal with losses.
To not dissuade entrepreneurs from new initiatives and investors from impact projects, philanthropic venture capital can be used as first-loss equity. The first-loss philanthropic capital will assist businesses in testing out the waters, and developing a profitable business structure that will potentially attract non-philanthropic impact investors.
Another philanthropic support model could be the partial guarantees of potential losses. This model is used by the Global Health Investment Fund. Under this fund, any loss incurred from vaccine sales is partially covered by the Bill & Melinda Gates Foundation.
Although the inclusion of philanthropy may initially seem counterproductive in the social enterprise and social finance spectrum, it has a huge role to play in the impact industry development. With 65% of impact investors demanding market rate return, philanthropic capital assists in meeting those investor expectations by tackling losses and improving investment potential.
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