The Real Impact Investing Market

Tom Kostigen's latest blog entry on the Financial Advisor website references an article in the Stanford Social Innovation Review.  Kevin Starr of the Mulago Foundation sets down four factors that limit the profitability of investments in impact-focused organizations.  In summary, the costs structures of impact organizations required serving a very large number of "customers" with financial resources to pay for the product or service.  Adding a cost of capital on top of the cost structure aggravates the situation.  Driving the organization to meet the bottom line expectations will further drive the organization away from its intended target market to one that can better achieve the financial objective of the organization.

Kostigen also points to a posting on NextBillion.net.  It is is an account of an interview with Felix Oldenburg, a director with Ashoka, a social change organization.  Oldenburg describes the forces giving rise to the impact investing movement in market driven terms.  Social entrepreneurs search for the cheapest capital with which to fund their impact enterprises.  Philanthropic grants have become scarce, and business plans are cheap and easy to prepare.  Impact investing is a cutting edge social model.  But it does not necessarily deliver the results in the most effective manner.

Mr.Starr's foundation defines impact investing specifically with a less than  market rate of return.  As he puts it,
"Investments that provide a big return don’t count: the market will take care of those, and we don’t need conferences (or industry cheerleaders - C.F.) to get people to put money into them."  Mr Olenberg notes an estimate of $500 billion of capital available for impact investing over the next decade.  This despite low deal flow of enterprises meeting investing criteria.  So there is a gusher of capital chasing a trickle of deals in an arena in which profitability is acknowledged to be difficult and limited.

Kostigen, however, continues to insist that this capital can do double and triple duty, earning market returns and fulfilling social and political agendas.  He rejects the notion that an investment able to generate a market return be considered a mainstream investment, even if tat is where it is most likely to get funded.  Ironically, it is also the enterprise that is most likely to drive the positive social development for the affected constituency in the long run.