“I thought you were an impact investor.”
This is a frustrated refrain that we have heard more than once over the years, particularly when things have turned contentious with an investee. It is most often invoked when we are not consenting fully to an investee’s request or are trying to be assertive about our rights as an LP or a lender, in a manner that would be routine in the commercial finance world, but is culturally frowned upon in the impact sector.
As a vocal flag bearer for the impact-first investing movement, we often highlight the need for flexible, risk tolerant, sub-market capital in difficult sectors. Given this orientation, we understand that we are a visible target for scrutiny. But being an impact-first investor should not mean being an undisciplined or undiscerning investor. For too long, impact-first practitioners have been tarred as “pushovers” by the chest-thumping double bottom line crowd.
We try hard to strike a very fine balance. On one hand, we exist first and foremost to use our capital in pursuit of impact in vulnerable and marginalized places. On the other hand, we are a firm with a rigorous, clear-eyed approach to financial analysis with a goal of preserving and recycling our capital. We like to lean in and over the impact cliff, but only when we are sure that we are harnessed and roped in.
In hopes of limiting future confusion as to where we stand, we thought it would be useful to enumerate some of our core beliefs as it relates to being an impact-first lender:
Impact-first investors, particularly those of us in the lending business, are still investors, not grantmakers
To be clear, we love and appreciate grantmakers. Much of our work would be impossible without their thoughtful support and subsidy. But unlike those that specialize in grants, we must see a clear, believable path to exiting an investment. This does not mean that we get repaid only if everything goes right. That would better be described as a recoverable grant, venture philanthropy, or venture equity when the upside potential is significant. This is not the perspective we take. We seek situations where we are able to be repaid even in scenarios where things are going “just okay” or even “not great.”
We find that for market-based business models (i.e. social enterprises that have some form of earned income), there is a healthy discipline that comes from working with a blend of grant/equity and debt. Given the potential for boom and bust cycles in both philanthropic and venture funding, borrowers that develop an ability to prioritize profitability, measured growth, and debt service are often built to weather inevitable headwinds.
It is also worth noting that our push for recycling and preserving our capital does not come from our love of counting money. It is a bet that our capital will have its greatest impact if continuously deployed over decades or longer. We are not deaf to the argument that the world’s most pressing issues require urgent, focused cures, but we are realists who believe that inequality and poverty are intractable conditions that will need support far beyond our lifetimes.
Even though we are not grantmakers, we are still a patient, constructive, impact-focused partner
When things head south for a borrower with a traditional lender, or even a finance-first impact lender, the only concern of the investor will be recovering capital. When times are challenging for our investees, we are genuinely working our best to find a path that gives the fund or business the best chance at survival while also protecting our investment.
This can be delicate and controversial. Our view on giving an enterprise a reasonable runway for recovery might be shorter than what they have proposed. Partnership often means finding a workable solution that does not mean shutting down an enterprise and liquidating assets – the natural preference of a commercial lender – but also does not give them an unlimited time frame to work things out.
For example, we recently exited our position with a financial intermediary focused on equipment leasing in East Africa. The firm faced significant headwinds during Covid and required close cooperation with lenders to patiently extend payment terms. While the situation was at times tense, we, together with the other impact-focused lenders, were able to give the firm time to find alternative financing for growth. While we are no longer a lender with this institution, we feel that they have weathered the hardest times and are now on a successful trajectory.
Asking an investee difficult diligence questions is not evidence that we are predatory capitalists
There is nothing worse than wasting an entrepreneur’s time with a stretched-out diligence process, particularly when it leads to a “no.” Are there times that we have failed to be as efficient as possible? Yes. Are there instances when we learned something late in a diligence process and decided to step away from a deal where we had expressed previous enthusiasm? Yes, we are guilty of this, too, on rare occasion. We acknowledge that there is an unavoidable power imbalance between investors and borrowers. This tension has existed since the Babylonian King Hammurabi codified the first loan terms sometime around 1750 BCE.
All of us with integrity in the impact-first space are working to be constructive partners with our borrowers. That said, there is a dangerous, yet thankfully niche, movement of activist asset owners, primarily in the coastal US impact sector, who are advocating that investors should pose fewer questions to an investee. This philosophy suggests that probing for more information or seeking on-site diligence meetings is somehow “extractive.” And while the intent of these activists comes from a good place, the advice they are giving is not preparing funds and enterprises for the real world.
If asset owners want to give away their money with few questions asked, by all means, go for it. There is no shortage of organizations that will make excellent use of this grant capital. But, coaching investees that impact investors who lower their diligence standards are signaling purity is a terrible precedent for the sector. By expecting funds and enterprises to face professional questioning, we are preparing them for future funders.
A standardized and professional approach to financial forecasting, management and reporting is a prerequisite for a positive relationship with investors and lenders
We have endless respect and admiration for our entrepreneur partners that work around the clock in challenging places scrambling tirelessly to build business models that deliver benefit to vulnerable communities.
That said, we do hope there will be mutual respect for the job we do as impact-first investors. The raw material for much of our work is timely, accurate financial information (we’ll save impact reporting for another day!). If an organization is looking for a loan in October of 2024 and the last financial snapshot that we have is October of 2023, we are flying blind in our analysis. In the words of the Mulago Foundation’s Kevin Starr, a longtime collaborator, “numbers are the closest thing we have to a universal language, and as such they contribute to a more level playing field between doers and funders … numbers work the same in Zambia and California.”
Investing in an organization’s finance function often takes a backseat to more urgent, pressing priorities that drive the day to day operations of a business. However, viewing financial reporting as an afterthought is not a recipe for long term success. We appreciate that finance resources and talent pools can be thin in certain geographies, which is why we are a big fan of outsourced support from folks like Do Good CFO. A number of our recent borrowers, including GrainPro, Onyx Coffee, and Uncommon Cacao, have prepared themselves well for professional investors through working with this type of fractional CFO. This is certainly an area where practical, catalytic grantmakers could have a big impact on capacity building.
In supporting our investees, we have more to offer than just the lowest-priced capital
The universe of lenders willing to consider modest rates of return in vulnerable geographies is small. However, our goal is not just to make a one-off loan. We want to see our investees thrive, engage other co-investors, and professionalize their finance functions. As we mentioned in our last Annual Report, through co-investor partnerships, we helped source nearly double the amount of capital that we alone deployed last year. Over the years, we have actively evangelized and supported the fundraising efforts for firms and funds such as Global Partnerships, MCE Social Capital, Candide’s Afterglow Climate Justice Fund, Lendable, Black Vision Fund, One Acre Fund, and many others.
For this reason, we are hesitant to price investments at rates of return that we know few, if any, would match. The lowest possible cost of capital might have some short-term value, but is often not setting up an enterprise for scale. Similarly, we recognized that many of our early pilot loans written with loose or limited covenant restrictions were happily received by enterprises, but did not build a foundation for good practice. Now when we put certain covenants in loan terms, it is because we know others will expect these in the future and we know it will be valuable for an organization to get experience in complying with them.
Finally, after more than a decade doing this work, we have seen lots of good and bad patterns and have evolved based on these learnings
For those of you who got to know Ceniarth in our earliest days when the team was small and we – Diane and Greg – knew every investee personally, some of these conclusions might be surprising. Having read this far, you might be muttering the phrase that started this: “I thought they were impact investors.” You might be inclined to think that we have hardened or become too preoccupied with preserving capital. The truth is that we often ask ourselves those same questions. We are eyes wide open to the changes we have made to our origination, diligence, and decision-making process. We recognize that we pass on funding things that we might have taken an experimental chance on in our early days.
Our perspective is not that we have gotten more conservative, but rather we have seen enough patterns to have a more refined view on what may or may not work. We are obviously not always right, but we try our best. Regardless, we maintain the same North Star at Ceniarth that we have had since our founding in 2013: We exist, first and foremost, to deploy impact investment capital that improves livelihoods in vulnerable and marginalized communities. Our tactics may evolve over the years, but the purpose of our work never wavers.
Diane Isenberg and Greg Neichin are Ceniarth Managing Directors
