Investment for Social Enterprise: From Open Arms in Rio to Stampede in Calgary?
India Wardrop lives in London and is an Advisor on Social Enterprise Initiatives for the Queen's School of Business's Centre for Responsible Leadership. She is Founder of the NESsT Wardrop Fellowship to develop leaders in the field of social enterprise. She attended the 2012 Social Enterprise World Forum October 16-18 2012 in Rio de Janeiro, Brazil, and prepared this special report on the event.
The Social Enterprise World Forum 2012 (SEWF) hosted by NESsT Inc. in October was upbeat and filled with optimism about the growth of the social enterprise sector. Nearly 700 delegates from around the world attended the three-day event held in Rio de Janeiro, Brazil, to explore instruments and strategies for attracting new investment capital for social enterprise.
SEWF, hosted annually in a different country, is an event that focuses exclusively on the field of social enterprise and seeks to build global awareness of the effectiveness of social enterprise in solving critical social problems. NESsT, a pioneer celebrating its 15th year in the field, develops sustainable social enterprises in South America and Eastern Europe.
For SEWF 2012, NESsT chose the theme of Impact Investing. Keynote speaker, Antony Bugg-Levine, co-author of "Impact Investing: Transforming How We Make Money While Making a Difference", asked: "What will it take for social enterprise to reach its potential?" and gave an uplifting perspective of the sector asking the audience to consider four questions:
- Who are we?
- What are we trying to do?
- What is the context in which we are doing our work?
- What are we all doing to make sure we are helping the whole?
Inspiring to the audience of social entrepreneurs and others vested in the field, this address was a good preamble to exploring how to really access the big bucks.
Social enterprise, with rapid expansion this past decade, has gained popularity as a means for socially conscious organizations to become self-sustainable as opposed to solely reliant upon charitable or government donations.
The United Kingdom estimates that social enterprises contribute at least £24 billion to the UK economy. Nell Edgington of Social Velocity says "social impact funds are becoming commonplace with experiments like the US Social Innovation Fund (which combines government and private money to fund the growth of proven nonprofit models), Village Capital Fund (seed funding for social entrepreneurs, determined by social entrepreneurs), social investment funds like Good Capital, and venture philanthropy funds like New Profit and SeaChange Capital Partners."
Impact investing is more popular than ever. Social enterprise may be an emerging asset class, but it's a long way from being a funded asset class. Will it ever really capture its fair share of the trillions of dollars invested by mainstream investors?
One of the greatest challenges to growth is accessing investment capital. The core tenet of financial investment is to achieve the highest return on capital relative to risk. Putting social return into the mix shakes this up - and traditional investors are far from embracing this type of blended return.
The head of a major charitable foundation, whose mission includes "˜harnessing innovation to improve the living standards of the poorest of the poor', told me of a recent meeting with executives of other like-minded pension funds and endowments where they debated at length whether or not they should invest their assets in mission-related enterprises. They couldn't reconcile the risk-return ratio of their mission-related opportunities with that of their traditional asset investments. The conclusion: they decided to continue to fund mission-related businesses out of the "˜charity' pot rather than with their investment assets.
According to an article published in Harvard Business Review, in the United States alone, charitable foundations hold $600 billion in investment assets but donate less than $50 billion each year which highlights the current gulf between investment and charitable funding of social enterprises and the huge untapped potential for impact investing. When you consider that US venture capitalists alone placed $22billion in 2010 social enterprise has a lot to gain from accessing investment capital.
However, today even funds dedicated to impact investing often struggle to find acceptable investments. Challenges include: large minimum investment size mismatching with smaller average investment size in social enterprise; blended financial/social returns below desired risk/return rates; investment timelines notably longer than those of pure growth companies; and an abundance of entrepreneurs focused more on social return than on efficient business management and financial accountability.
Antony Bugg-Levine, Bruce Kogut and Nalin Kulatilaka call this the "˜financial-social return gap' in their recently published article "A New Approach to Funding Social Enterprises". They assert that financial engineering could be the transformative key to capital access for social enterprise. Through creative financial structuring, the enterprise "can offer different risk and returns to different kinds of investors instead of delivering a blended return that holds for all investors but is acceptable to very few." They propose enterprises do this by recalibrating their balance sheets and using various social financing innovations such as loan guarantees, quasi-equity debt, pooling, and social impact bonds. In addition, professional investors will seek standards and ratings, measurements as well as legal and regulatory structures that codify their social enterprise investments in terms they can put into an asset allocation context.
That's a lot to digest for gaining proper status as an asset class in the investment arena. At SEWF 2012, financing innovations, education and structure were themes but the onus was upon the delegate to piece together the whole in a coherent fashion. I suspect this challenge spans the sector. For those who have access, publications like those from Ashoka, NESsT or the Harvard Business Review provide a sound framework for advancing the field. But in reality there appears to be a gap between practitioners and financiers. Closing that gap will help move the money.
TRICO Charitable Foundation will host SEWF 2013 in Calgary, Canada. Maybe in October SEWF 2013, Canada can drive the stampede of investment so greatly needed to fuel social enterprise.