Doing well by doing good.
Talk to an investor about investment, and you'll end up hearing a lot about returns. Ask an investor how they benefit the world, and they'll talk about social impact-- saying that the money they invest ends up benefitting both economy and society, or the environment. But while many have invested to benefit others for a long time, there has been a renewed interest in the specific branding of 'impact investment' in the last few years.
At the WEALTH Arabia Summit 2016, a few of the true leaders in the 'impact' space sat down for a discussion on how they have worked towards impact investment, and how to find returns while also benefiting society.
But it's not enough to just talk about benefit. "When we're talking about the definition of impact investment, the word that stands out is 'measurable', the question is, how do you measure your impact?" asked Reza Dari, Chief Executive Officer, Global investment Bank.
"We have to be best in class, we have to be profitable, and we have to create socio- economic growth," said Shainoor Khoja, founder of the Better Business enterprise. "A great example of this is the last 14 years we've spent in Afghanistan, investing in the second telecom operator in the market. We went when nobody wanted to go. We bid $5 million for the license when no one else was willing to bid above $1 million. We've invested over time more than $600 million, we've paid $450 million of taxes, we represent six per cent of the GDP, and we've created 40,000 indirect jobs, with a workforce of 12,000 of which 20 per cent are women."
Besides those figures, Khoja also offered insights into how her investment has benefited society. "We have various community engagement models--we also have social relevance as we have used our skills and expertise to bring much-needed products and services to the beneficiaries to bring them into the economic cycle. What excites me about this model is the fact that it is based very much on where business originally started. If you think back a long time ago, business was for the community, and it helped lift the community. I think somewhere along the way there was a disconnect. What I love about the model that I practice is that it brings all of that together and it provides the fishing rod and not the fish--it moves away from dependencies."
Peter Vanderwal, Strategic Growth & Innovative Development Financing Lead, The Palladium Group, also believes that measuring your impact is an important part of social impact investment--but it has to be within reason. "The work that Palladium implements particularly for governments and donors is all tightly measured. Traditionally, you'd see somewhere between seven and twelve per cent of your entire contract budget being devoted to monitoring, evaluation, and learning. The reality is, that's just too expensive for the investor space. So it's really about looking at the key indicators that are the must-have measurements, and bringing that cost to around two per cent because otherwise you're just eating into returns. Impact investing does not necessarily mean that you take any sort of reduction in your return--in some instances, certainly, particularly if it's a very low-risk investment, but in many cases you're looking at least a market return. Too much monitoring, too much measurement, eats into return. So we work very closely with our team to put bespoke measurements on each of the investments we do."
In Khoja's eyes, a fundamental part of social impact investment is investing to stay, not to get a quick return. Their history is a testament to that. "The key message for me is that what you need as a mindset as investor is the ability give the execution team to innovate and try new things, and a very long term perspective. When we invest, we invest to stay in the long term. We look at impact investment in the longest duration. We've been doing this since 1967, so impact investment is just a new title for what we've been doing," said Khoja.
Getting investors interested in that, however, is a different story. "Trying to persuade investors to have a longer term perspective is difficult in this region,' said Heather Henyon, Founding Partner, Athena. "We look at three to five years for an exit, and some investment groups will talk about eight years. It's challenging in a market where people are looking for quick flips."
Even as investors continue to chase a quick return, the broader culture is changing, and investors are going to have to change with it. "It seems like we're talking about a cultural revolution--a revolution that is capable of aligning interests across a common utility, that includes all the stakeholders across the board," said Dari.
The next generation will change investment, whether purely return-focused investors want them to or not. "I think millennials are changing the scene, and customer engagement is changing the scene. We're coming into a world where people care--they care about what they buy, what they spend their money on, and how they invest. Research shows that there are many more younger people giving than the older model of large families giving in a large chunk. I think that is really important to look at. The second is that I think the world is just much more global. We can no longer build a wall around our wealth and live happily ever after. The discontent and needs of the outside world will overspill into our world, and I think the youth of today are really recognising that and wanting to make a positive contribution to that," said Khoja.
Bringing in more women, too, is very important. "The number of women in the finance sector needs work. The blended teams that are emerging now are an interesting trend that will shake the future of private engagement," said Khoja.
Dari believes that women can help guide a more intuitive, left-brained world. "We're going through a period where human society is moving away from the more left brain rational thinking of perceiving the world to a more right brained world where we include intuition in our decision making and investment. Women are naturally positioned to lead the way when it comes to making that shift happen."
In Henyon's view, though, including women is not just about moral guidance--it's about the bottom line. "Women have always generated better investment returns. Women do take a longer-term view--they're not as likely to get excited about the latest gadget or stock. There's a different mentality. Women are quite analytical. In the two investment groups I'm in, one has far more women, and the way those two groups make decisions is very different. The women might overdo it on due diligence, but the men underdo it and get very excited by a cool idea. A lot of guys that I know invest in women-led businesses because the performances are better--not because they want to empower women, but because they make more money that way."
As much as investors want to talk about how their investments benefit society whether they mean to or not, Khoja believes that it must be intentional from the get-go. "You have to be intentional about wanting to have impact. It's very much a mindset. We don't invest with just a social intent in mind, but if you want to be healthy, you have to make sure that your employees and communities are healthy. If we didn't, how would we protect our business for decades to come? We need a stable community and a prosperous community to be our customer, and that's where the mindset comes in."
"It's about creating quantative value and extracting quantitative value by first creating quantitative social value," said Dari. "I think that's very powerful--the power of a common-shared utility between stakeholders and shareholders hasn't been fully understood. With the rise of millennials, if we're really able to create structures, products, and investment solutions, that are genuinely capable of redistributing wealth around the world, that creates a shared common value between the manager, investor, and the stakeholders you're impacting over the longer term."
Microfinance might be one way in which investors can aim towards impact. "In microfinance, the return on equity is well over twenty per cent. Other microfinance retail products sold through private banks see returns of five to seven per cent annually. They're decent returns. We're not talking about double digits, but if you do it over time and you're looking at private equity investments, in five to seven years, you can make a sizable return," said Henyon.
Palladium offers even better numbers. "Seven to 12 per cent is about what we're targeting with these investments," said Vanderwal.
Dari offered even higher numbers. "You can have a commercial business that is capable of chasing yields above 15-20 per cent."
Clearly, while impact needs to be intentional, there are huge returns to be made for investors.
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