Collaboration is in the air.
How best to blend capital to meet the needs of social startups and new markets is a hot topic at the annual Social Capital Markets (SOCAP) conference in San Francisco.
“For what I call ‘deep impact,’ you have to be prepared to blend public, private and philanthropic capital,” Debra Schwartz, the MacArthur Foundation’s managing director for impact investments, said from the conference’s main stage. “Those kind of investments are not just lying around. They’re made, not found.”
Bridging diverse investor perspectives and expectations is not easy. The investment vehicles are new, the policy complicated—but the impact can be great. Public (mainly development finance institutions and aid agencies) and philanthropic funders have subject expertise and can shoulder risk. Private investors have financial expertise and large amounts of capital.
“For USAID it’s about development impact,” says Ricardo Michel, a director at USAID’s Global Development Lab. “We know entrepreneurship is key. So we try to use our grants to “crowd in” commercial capital.”
Since 2014 the Lab’s PACE program has made grants to 10 incubators, accelerators, and seed-stage impact investors with the hopes of leveraging an additional $61 million over the next five years. For example, to test Village Capital’s peer-selected investing model, PACE provided $2.6 million to offset the operating costs of Village Capital’s new $13.2 million fund. The grant helps commercial investors reconcile the economics of the small, peer-selected fund while giving Village Capital the opportunity to prove the model.
Gary Hattem, managing director of Deutsche Bank’s Global Social Finance unit, said corporate investors like IBM and Cisco are invested in its Essential Capital fund to learn more about companies operating in developing countries. The $50 million fund closed is March and attracted a diverse set of investors including foundations, development finance institutions, corporates, pension funds, and private equity funds. The debt fund is intended to help close the gap in early-stage financing for social enterprise startups. Hattem adds, in such deals, it’s “important to harmonize capital, but also people and institutions.”
Like aid agencies and development finance institutions, foundations, using below-market program-related investments (PRIs) are playing an increased role facilitating responsible risk-taking by private investors. Jan Piercy, senior advisor at Enclude, sees, “a sea change in philanthropy. Some innovative structures only work because of foundation risk-taking PRIs.”
Piercy pointed to a Variable Payment Obligation (VPO) program in Nicargua created to expand access to finance for small and growing businesses. Also a USAID PACE-backed project, the program was created by partners including Enclude (an advisor), the Miller Center for Social Entrepreneurship and Agora Partnerships (accelerators), Banco de America Central (BAC) Nicaragua (a local, commercial bank), and the Swiss-based Argidius Foundation (a philanthropic foundation). Arigius paved the way for the facility by funding a three-year capacity building project for local banks in Nicaragua to deliver long-term project finance to small and growing businesses.
Ankur Capital Co-Founder, Rita Verma, called for more first loss equity cushions and guarantees from risk-tolerant investors like a foundations, high net worth individuals, or development finance institutions. The tool, she says, can help private investors take more responsible risk and attract private capital to social enterprises seeking to demonstrate the viability a new product or business model. “First loss equity and guarantees can be leveraged to optimize the cost of capital for invention-based enterprises,” says Verma. The financial tool lowers the risk for more commercial investors—reducing the cost of their capital.
Investors of all stripes are just getting started on the hard, but important work of understanding their role in the impact marketplace. But as Echoing Green’s Pease notes, channeling the firm’s fellows, “we need to figure out blended finance [to match the needs of early-stage impact enterprise] to advance the field.”