Notes from the Sharp End
By George Watson, Head of Finance for SEFA
Two recent articles in the Stanford Social Innovation Review and the Huffington Post concerning the value of impact investment have brought to the surface the often-dormant debate as to the true outcome of impact investment. Having spent many years at the sharp end of impact investing, here are some thoughts:
The impact goes beyond the investment
For me and for many people there is the clear understanding that the greatest impact of impact investing is at one remove from the investment itself. The impact of creating a good job is not just in the job itself but in the spin-off benefits: the investment of the job holder into the community economy, the creation of support services for any enterprise which is the subject of investment and the ability of beneficiaries to access fundamental service like education and healthcare that result from the investment. Any real discussion and any analysis of the impact have to take account of that.
Don’t look only at funds
The analysis in these two articles is of funds. Funds tend to be part of a wider portfolio such that there can be a cross-subsidization of costs and returns. Direct investors whose sole function is impact investment don’t enjoy that luxury. To understand impact,we also need to apply the criteria of impact set out in these papers to direct investors whose sole function is impact investing.
Sustainability is key
The world of microfinance has engaged in the debate between sustainability and developmental impact. Sustainability has become the keyword. Those practitioners who have sought financial and institutional sustainability are those who survive and flourish. That debate hasn’t really taken place in impact investing. It still needs to happen in a serious way.
Distinguish between “charitable” donation and sustainable investment
This is necessary if we want to adequately assess the success of impact investment. Sustainability must mean market returns because surely impact investment seeks to be a sustainable investment class itself.
Define the risks
There needs to be definition of the nature of the risks that constitute impact investment. Is simply filling the gaps in an under-developed or under-resourced capital market really impact investment? For me impact investing goes where no-one has gone before, where conventional funds are unwilling to go because of risk and then to successfully manage that risk. Many of the examples given in the two articles seem to be the product of more sophisticated markets intervening rather than taking risks and managing them.
Scalability is the holy grail of impact investing, I believe, and we need to develop platforms and models that enable growth and hold down the excessive costs. The microfinance industry has to some extent achieved this and the remainder of the impact investors need to do the same. In doing so we also need to consider the size of each end user investment.
Define to measure impact
The definition of impact investment is wide and various, and needs closer definition, not just in terms of objective, impact and return, but also in terms of who it is that impact investors seek to ultimately serve. Until that is done it will be hard to measure impact.
In my opinion impact investment works, but is still in its infancy and still too much a by-product of mature markets. It needs to develop its own range, products, goals, results, and orientation. By doing the things laid out in this post, impact investing will have a chance to realize its true potential.
About George Watson George Watson is a lawyer with more than 40 years of experience in micro, small and medium enterprise (MSME) finance. He worked first in the UK and later in South Africa where he built a number of businesses,the last of which was sold to Small Enterprise Finance Agency (SEFA). He is now head of credit at SEFA, specializing in start-up and early-stage owner-managed businesses with strong developmental impact. He works with clients at the very high-risk end of the market, those who aren’t able to access conventional funding sources for economic or social reasons, lending without collateral and to people lacking business skills.
About SEFA SEFA’s mandate is to foster the establishment,survival and growth of Survivalist, Micro, Small and Medium Enterprises and contribute towards poverty alleviation and job creation. SEFA has a regional footprint of nine offices around the South Africa.