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Analysis > Analysis and Strategy

The Rise of Return-First Impact Funds

Dmitry Fotiyev, Managing Partner, Brightmore Capital
Sept. 18, 2017, 10:39 p.m.

Word count: 1118

Walk into any conference involving emerging or frontier markets, and the subject of impact is on everyone’s mind. While some organizations have engaged in this type investing for decades, impact investing as a formal discipline developed only over the past 10-15 years. The concept itself is simple: investing into companies, organizations, and funds with the intention to generate financial returns as well as measurable social or environmental impact.

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Walk into any conference involving emerging or frontier markets, and the subject of impact is on everyone’s mind. While some organizations have engaged in this type investing for decades, impact investing as a formal discipline developed only over the past 10-15 years. The concept itself is simple: investing into companies, organizations, and funds with the intention to generate financial returns as well as measurable social or environmental impact.

What started as a collection of isolated firms has now grown into a full-fledged industry, with $114bn under management among the 208 investors responding to GIIN’s annual survey alone. GIIN, the Global Impact Investing Network, founded in 2009, itself is a young organization growing along with the industry.  Its directory of impact investors, ImpactBase, now lists more than 2,000 ultra-high net worth and institutional investors. World-class investment firms such as, BlackRock, Bain Capital, Goldman Sachs Asset Management, and TPG recently announced the formation of new units focused exclusively on impact investing and it seems like there is an impact investing event or workshop happening every month somewhere in the world.

Combatting Misconceptions

Despite the entry of Wall St.’s giants into the field, impact investing is still perceived by many as philanthropy or social work. Old stereotypes cast a cloud of misconception on the industry, causing many mainstream investors to shun away from intentionally targeting achievement of positive impact, since they presume that it cannot be combined with realizing strong financial returns.

Others see impact investments as identical to Socially Responsible Investing (SRI) and Environmental Social Governance (ESG) investments (themselves growing domains, with over $6.6trn invested and 1/6th of US assets under professional management). The distinction can be summed up as SRI/ESG focusing on avoiding harmful outcomes from investments made (i.e., primarily risk management), while impact investing involves going a step further by intentionally seeking positive outcomes.

Common questions arise upon acquaintance with impact investing:

  1. Can an investor actually realize satisfactory financial returns while intentionally doing significant good?
  2. In generating good, does one forfeit some of the financial returns that would otherwise be achievable?

The response of the first question is simple and affirmative, as evidenced by the growth of the industry and the ever-increasing number of success stories of investors fostering meaningful impacts such as job creation, gender equality, and environmental benefits while obtaining significant returns on their capital. Meanwhile, the second question has created segmentation of the industry into impact-first and return-first funds that differ in their philosophy in approaching this trade-off.

Impact-First Funds

The initial generation of impact investment vehicles sprung out of a realization that traditional philanthropic vehicles are not always best suited for poverty reduction and socioeconomic development. Aid not only requires recurrent inflows of donor capital to continue, but often has low effectiveness and stakeholder engagement, creating a vicious cycle of dependency. To address these issues, organizations such as Acumen have been created to invest capital in sustainable projects based on the principles of social entrepreneurship: businesses that improve lives in low-income countries. Rather than spending donor capital outright, the projects return invested funds back, so that the fund can reinvest capital into new initiatives also aimed at positively affecting millions of livelihoods. 

The first generation of impact funds revolutionized the world of philanthropy in that they significantly magnified the value of every allocated dollar through continuous re-investments, and that they provided affordable basic services, rather than direct charity, to alleviate poverty. These steps allowed investors to spur economic development while avoiding risks of creating dependency.  However, the main downside of these funds remains in the fact that they provide investors with concessional IRR: nominal below-market returns, usually single-digit %, or zero returns at all. Hence, while impact-first funds are an attractive alternative to charitable giving, they are not competitive compared to traditional financial instruments and, thus, less interesting to the wider financial community.

Return-First Funds

The second generation of impact funds focuses primarily on the principles of prioritizing financial returns while generating significant development impact. Rather than the traditional model of a foundation or endowment spending 5% of its capital annually on grants and program-related initiatives while reinvesting the rest solely for capital preservation and growth, an investor can now have the “other 95%” of their capital also work towards achievement of the same goals, with no penalty on financial returns. One may ask – can one really have the best of both worlds: both a high IRR and impact at the same time? As experience has shown, particularly in fast-growing frontier economies, doing both simultaneously is indeed possible.

Organizations such as Capria, a global investor advancing this next generation of emerging market impact funds, have been launched to leverage global best practices and successful experiences of fund managers around the world who are leading the way with their own return-first funds in developing countries. Around the world, and particularly in Sub-Saharan Africa, numerous businesses have opportunities for fast growth and high operating margins while, by the very virtue of their operating activities, also generating impact.  Among the many examples are private schools and clinics, rural solar installations, and projects in the food value chain that present compelling investment targets and do not require a compromise between generating profits and doing good. 

As return-first funds continue to grow in number and AUM size, it will be important to combat the old notions that impact cannot be combined with attractive opportunities for capital appreciation. As the impact investment industry continues to drive towards the mainstream, return-first funds will be the driver of increased mass acceptance of impact investments as means for everyone, from large institutions to retail investors, to align their activities with their values. 

Coexistence of Both Fund Types

The new generation of return-first funds opens up the impact space to traditional investors who would not have previously considered impact investments.  Nowadays, these investors can capture sough-after risk-adjusted market financial returns, while also obtaining a “bonus” of generating meaningful impact with their capital.  

However, despite the many opportunities in frontier markets like Africa for making investments that are “the best of both worlds” in terms of returns and impact, not all impactful investments are able to generate the profit margins or scalable growth that enables a high IRR. An important niche still exists for impact-first funds, as they are able to tackle projects vital to the economic and social development that return-first funds simply would not be able to take on due to hurdle rate commitments.  Thus, return-first Africa-focused impact funds like Brightmore Capital continue to welcome the development of the industry’s impact-first funds, and jointly working towards achieving UN’s Sustainable Development Goals (SDGs) in a manner that favors business enterprises over dependency-creating aid mechanisms. 


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Africa Global Funds (AGF) is a monthly magazine for asset management professionals and institutional investors worldwide interested in the African continent. AGF was created as a relevant and engaging resource that can provide readers with an insight of what is going on in the African asset management space. Drawing on an intense dialogue with a constantly expanding group of key decision-makers in the industry, we cover traditional and alternative asset classes of African asset management. From this dialogue we work hard to produce a compelling blend of hard news, incisive commentary, detailed sector and regional reports, exclusive interviews and proprietary data.

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