CELEBRATING 30 YEARS OF GLOBAL PARTNERSHIPS

Thinking Differently About Capital: Unleashing the Power of Impact-First Investing

By Rick Beckett, CEO Emeritus at Global Partnerships

Over the past two decades, Global Partnerships has invested nearly $1 billion in microfinance institutions and social enterprises focused on agriculture, education, energy, healthcare, housing, and economic resilience that work to empower millions of people in poor and marginalized communities to earn a living and improve their lives.

Along the way, we have come to understand that to fulfill our mission of expanding opportunity for people living on a few dollars a day, we must set aside conventional thinking about the role and purpose of capital in driving economic and social progress. In doing so, GP has been at the forefront of the development of impact-first investing, a new category of capital that prioritizes creating high levels of social impact over maximizing financial return.

Below are key lessons in impact-first investing that we’ve learned along the way.

Rethinking Capital for Impact

The way people usually think about capital is too limiting. Conventional wisdom says “make as much as you can and then give some away.” The result is a binary approach that couples traditional investing that aims to generate the greatest-possible financial return with traditional philanthropy that channels some wealth to efforts that make the world a better place. But for all its strengths, traditional investing has helped create a global economy where almost 4 billion people live on a few dollars a day. If we want different outcomes, we need to address these market failures. And while philanthropy has a critical role to play, there will never be enough philanthropic funds available to solve challenges like global poverty.   

To address global challenges, we need to broaden the way we think about capital. Instead of this binary approach, we need to think about capital as a continuum, with each point representing a different balance of financial return and impact. Because each category has its own strengths and limitations, it enables investors to think strategically about their goals and which forms of capital are best suited to achieving the outcomes they value most.

Rethinking Social Enterprise Financing

Investing in social enterprises can generate high impact, but financial return expectations need to be modest and realistic. The work of addressing the challenges that people living in poverty face comes with high customer acquisition costs and difficult and costly operating environments. Customers have limited purchasing power. There are powerful economic incentives to move upmarket and target customers with more disposable income and to cut back on training and product features that are essential to driving impact but that reduce profits. Investments in these social enterprises rarely generate high financial returns, but they can achieve high impact.

Social enterprises working at the front line of global poverty need impact-first capital to succeed. The most appropriate form of startup funding for social enterprises begins with patient equity that seeks capital recovery with minimal return. This aligns underlying financial incentives with efforts to realize the organization’s impact goals. The balance sheet can then be gradually strengthened through modest levels of retained earnings, with growth funded and sustained by low-cost debt. The challenge is that despite the pioneering work of Acumen, Global Partnerships, and others, a market for this kind of equity and low-cost debt that values impact enough to accept modest financial returns has yet to fully emerge.

Rethinking the Path Forward

Transparent measurement and reporting about who is served and the impact achieved is essential. For impact-first investing to be a viable market with a growing supply of capital, investors must have access to clear and reliable measurements of impact so that they can make informed decisions about how to allocate their capital. It’s the only way the market can work efficiently and effectively.

Blending capital has great potential. Impact-first capital can be blended with catalytic philanthropy to create innovative investment vehicles that support large numbers of high impact, social enterprises in multiple markets. We see this as one of the truly promising ways to help the social enterprises that are the engines of positive impact in developing economies start up, grow, and sustain the critical work they do to help people living on dollars a day lift themselves and their families out of poverty. We also see it as a powerful way for investors to activate multiple forms of their own capital and, in doing so, realizing more of their hopes to create a better world.

Practical Steps to Getting Started

At Global Partnerships, we have seen firsthand the positive change that is possible when impact-minded investors commit a portion of their assets to evidence-based approaches that address the complex issues that keep people trapped in poverty. If you believe in the value and importance of ending global poverty and creating a healthier more livable planet, one of the most powerful and effective things you can do is activate assets already earmarked for philanthropic purposes, or a piece of your overall investment portfolio, to impact-first investing.

If you are one of these people, here are some practical steps you can take that may help you get started:

1. Make sure impact-first investing aligns with the specific issues you want to tackle: Not every social challenge can be addressed through impact-first investing. Some issues—like disaster relief, humanitarian aid, or access to healthcare in rural markets—do not have an economic model that supports recoverable investment. For these challenges, philanthropy and public funding are almost always required. 
2. Find kindred spirits who are active in the field. While impact-first investing is relatively new, there’s a strong, if small, community of knowledgeable peers and professionals, including fund managers, leaders of impact-first social enterprises, and directors of community development financial institutions. Many of them are excited to share information, insights, and opportunities for collaboration.
3. Explore investing through intermediaries or funds that have a proven record of delivering measurable impact and preserving capital. The complexity of impact-first investing means direct investments in social enterprises often don’t make sense, at least not out of the gate. Better to start by working with impact-first investment managers who are aligned with your causes, have shown they can be successful, and demonstrate strong capabilities in impact measurement.
4. Decide how conservatively you would like to begin. There are ways to begin impact-first investing that have significant impact, including cash deposits and lending transactions that come with low risk to capital preservation and reasonable liquidity. Investors who want to play an even more catalytic role can leverage their assets to inspire others to commit capital by, for example, accepting higher risk through first-lost investments in impact-first funds. Or blend the approaches to get the best of both.
5. Consider activating assets already dedicated to philanthropic purposes. It’s common to have philanthropic assets that are sitting idle with respect to addressing global poverty because they are stuck in traditional investment models. Assets held in private foundations or donor advised funds (DAFs) may be a good starting point because well-executed impact-first investing can create opportunities to deploy more capital, create more impact, and then recover and recycle that capital and do it over and over again.

This is the penultimate part of our 30th anniversary series, where we share reflections that guide our work today and inform the path ahead. Read more of the series here.