for understanding the way capitalism is changing.
Why? Because funds interact directly with hundreds of enterprises and have ultimate responsibility for delivering the blended performance of financial as well as social and environmental returns on which the case for impact investing rests. They are the proverbial canaries in the coal mine of the larger sphere of Collaborative Capitalism. They are test beds and financial R&D labs, where in order to succeed, relationships and communication must be rock solid even while the work remains innovative.
Indeed, when impact investing funds succeed, many important results follow that may positively impact the development of Collaborative Capitalism: investors increase their investment, replicable financial structures emerge for new pools of fund capital, entrepreneurs have clear guideposts of what to expect of investment, and secondary markets more naturally emerge.
Finally, funds are also a crucible of accountability. As Bob Webster has written about the Grassroots Business Fund, where he is chief operating officer, the formal fund structure provides a “clear and transparent picture of fund financial flows,” including management fees, legal costs, portfolio investments, investment interest, dividend, and principal reflows; “clear expectations for financial and social returns and any tradeoffs thereof”; and an “active seat at the governance table.” They also “can incentivize the fund manager through some type of carried interest in the fund's performance.”3
What's Ahead?
The Impact Investor is presented in three parts that examine how we got here, the current state of the market and its emerging best practices, and future implications.
In part 1, “Key Practices and Drivers Underlying Impact Investing,” we describe the development and current state of Collaborative Capitalism and impact investing.
Chapter 1, “Inside Collaborative Capitalism,” explores some of the big-picture trends driving the shift from incidental to intentional impact, including the use of business approaches in solving social challenges, a growing awareness of environmental and economic sustainability, and demand from a new generation of more responsible consumers and investors.
Chapter 2, “Raising the Curtain on Impact Investing,” provides a comprehensive overview of this fast-growing market, introducing our twelve funds in detail, their performance, and the market of which they are a part. We also provide a new estimate of the total size of the global impact investing market, drawing on key subsectors, and propose a new method for categorizing impact investing funds.
In part 2, “Four Key Elements of Successful Impact Investing,” we analyze current practice and delineate the four key elements of successful impact investing – and by extension Collaborative Capitalism – and provide a range of tools for implementing these practices:
Chapter 3, “Impact DNA,” highlights successful funds' core approach to impact investing: a process of establishing a clearly embedded strategy and structure for achieving mission prior to investment, enabling a predominantly financial focus throughout the life of the investment. We call this approach “Mission First and Last.” Knowing early and explicitly that impact is contained in a fund's DNA allows all parties (investors, investees, and the fund itself) to move forward with the investment discipline akin to any other financial transaction, confident that any possibility of mission drift can be effectively managed.
Chapter 4, “Symbiosis as Strategy,” explores the ubiquitous role of government in impact investing, and the multidirectional relationships of trust and support that undergird effective public-private partnership. By nature, impact investors represent a marriage of public and private interests. They seamlessly integrate a commitment to improving public welfare with the power and efficiency of capital markets. Policymakers – who have a vested interest in maximizing the social and environmental well-being of their constituencies and hold massive power to influence the market through laws and regulations – are natural partners for impact investors.
Chapter 5, “The New Deal,” focuses on the rigorous and creative strategies impact investors use to meet the diverse return objectives of a range of capital providers. By bringing different types of stakeholders to the table, cultivating “catalytic” investors, and doing the hard work of financial structuring, impact investors are able to support markets that would not otherwise be “investable,” providing access to capital in some of the most underserved places and sectors.
Chapter 6, “Multilingual Leadership,” discusses the inherently cross-sector nature of impact investing and the diversity of skillsets and strategic approaches needed if one is to succeed. Impact investors are expert at simultaneously seeing the world through the eyes of philanthropy (the “theories of change”), government (market failure and subsidy), and finance (the best use of capital; return on investment), which is a difficult but essential approach to master in the era of Collaborative Capitalism.
In part 3, “Looking Ahead: Trends and Challenges,” we take all that we have learned and pose a simple question about the future. We claim that Collaborative Capitalism is on the march. What then are the signs we should look for to indicate that Collaborative Capitalism is storming the castle? What might still hold it back?
Chapter 7, “The Writing on the Wall” outlines ten trends to watch that will signal the arrival of a broader practice of Collaborative Capitalism on a range of investment and business activities, both mainstream and niche.
Chapter 8, “Concluding Reflections,” brings together the themes and explores seven challenges the field must face to successfully bring forth this new vision.
Finally, we end with an “Impact Investor Resource Guide” that brings together all of the strategies and tools from chapters 3 through 6. This is an easy reference for those eager to move quickly to action.
Impact investing has been called a dark wood in which various new and exciting creatures bustle about and explore a new world of investing and impact. The Impact Investor points to the paths through the wood and confirms impact investors, social entrepreneurs, pension fund fiduciaries, and a host of other actors actually know a lot more about how to “do” impact investing than many have to this point believed. We do not have to wonder how impact investing may have the greatest impact – the fund managers and strategies in this book document how leading funds execute their strategies for high performance. We do not have to ask, “How does impact investing differ from traditional, mainstream investing?” The investors profiled in the following pages show how impact investing is not altogether “new” or different, but rather an extension of the fundamentals of sound investing practices. We do not need to ask, “What will it take for impact investing to go mainstream?” The practices and diverse pool of investors described in this book show that in fact impact investing has gone mainstream and that it is only a matter of time before we are truly able to see the depth and breadth of the adoption of impact investing practices within those mainstream markets.
Every era is an era of change. We need only to lift our heads or climb a nearby hill to gain a different perspective, to see the possibility of the changes taking place within our community, region, or market. This book provides an overview of promising investment themes and practices that portend a global economic transformation. The exponential growth of impact investing is well under way as we continue to see new ideas, strategies, and opportunities brought from the fringe to the center of capital markets the world over.
Webster, B. (2013, December 24). “The Best of 2013: What's Next for Impact Investing? The Value of a Formal Fund Structure to Maximize Impact.” Next Billion. http://www.nextbillion.net/blogpost.aspx?blogid=3159.
