MICROFINANCE PAPER WRAP-UP: “From Blueprint to Scale: The Case for Philanthropy in Impact Investing;” by Harvey Koh, Ashish Karamchandani and Robert Katz; Published by Monitor Group and Acumen Fund

By Harvey Koh, Ashish Karamchandani and Robert Katz; published by Monitor Group and the Acumen Fund; April 2012; 68 pages; available at: http://www.mim.monitor.com/downloads/Blueprint_To_Scale/From%20Blueprint%20to%20Scale%20-%20Case%20for%20Philanthropy%20in%20Impact%20Investing_Full%20report.pdf

This paper summarizes the findings of research performed by the Monitor Group, a US-based management consulting firm, and the Acumen Fund, a US-based nonprofit venture fund, on impact investing. Monitor Group performed research into approximately 700 impact investment businesses in Africa and India and completed a three-month study of companies in the Acumen Fund portfolio to understand trends in impact investing. Monitor and Acumen also worked together to draw on the experiences and observations of impact investors, grant funders and academics.

The report explores the gap between what the authors call the high aspirations and disappointing reality of impact investing, an industry that invests in companies, organizations and funds to generate social impact as well as financial return, and typically has larger-sized investments and deals than microfinance. The report also examines the role of “enterprise philanthropy,” a form of philanthropy that supports businesses rather than specific goods or services in order to create positive change, in catalyzing impact investment firms.

In theory, according to the authors, the impact investment industry has strong potential to be successful. According to a November 2010 report by JP Morgan, a US-based financial services firm, and by the US-based nonprofits Global Impact Investing Network and the Rockefeller Foundation, the profits for impact investors across just five subsectors of the industry could range between USD 183 billion and USD 667 billion over the next ten years, with invested capital ranging between USD 400 billion and USD 1 trillion. Because impact investing promises “effective models for generating social benefits that can become sustainable without relying on donations,” governments and businesses reportedly hail the industry as having an “exciting prospect of achieving market-rate returns and social good at the same time.”

However, the authors find that in practice, impact investing is still a young, unproven field, and its hype may be obscuring the difficulties faced by investors seeking to deploy capital. A study performed by Monitor in 2009 identified three main challenges:

  1. Lack of efficient intermediation during investment. Impact investment firms must overcome high search and transaction costs caused by fragmented supply and demand, small and complex deals and a poor understanding of risk by investors. This generally leads to low and volatile net operating margins.
  2. Lack of enabling infrastructure. People and governments are still accustomed to viewing poor people as a charity rather than an investable market, so impact investment firms lack the necessary infrastructure to appropriately function.
  3. Lack of sufficient absorptive capacity for capital. This means there is an imminent lack of impact investing opportunities into which large amounts of capital could be placed at investors’ required rates of return. Acumen Fund’s investing experience reflects this reality; it has considered more than 5,000 companies in the past ten years and has invested in just 65 of those because of difficulties in attracting and retaining human capital, achieving economies of scale, creating trusted brands and accessing a hard-to-reach customer base with severely limited resources and low loyalty due to cash flow needs. Additionally, of the 439 promising inclusive firms studied by Monitor in Africa, only a third were commercially viable, meaning they had the potential to be profitable, and only thirteen percent were actually at scale, meaning they could efficiently optimize their resources.

The report also identifies problems with unfriendly and inefficient governmental regulation as well as firms involved in “push categories,” which include industries like preventative healthcare that require high levels of awareness-building and education and are thus less likely to turn a profit for investors, as opposed to “pull categories,” which include industries like mobile phones that customers already desire.

In order to overcome these challenges, the authors say that impact investment firms must innovate on multiple dimensions simultaneously, often pioneering new business models that are tailored to the particular needs and constraints of the their particular market. The report labels this process as “overcoming the pioneer gap,” and the authors give four suggestions for firms:

  1. Blueprint. This stage involves creating a business plan to connect the capability for corporate and often technical innovation to address the needs of customers or suppliers.
  2. Validate. Pioneers need to validate the commercial viability and scalability of the business model described in the blueprint, which includes running market trials and testing financial feasibility.
  3. Prepare. Pioneer firms need to prepare the conditions in the market and within the firm in order to support sustainable scaling, including customer awareness on the demand side and capabilities of suppliers on the supply side.
  4. Scale. This involves increasing outreach to more customers and suppliers as well as making efforts to enter new geographies, control costs, exploit efficiencies and manage a more diverse and sophisticated group of investors and stakeholders.

The authors conclude by giving their suggestions for improving social enterprises in the future by advocating an enlarged role of “enterprise philanthropists” who support businesses rather than specific goods or services in order to unlock the potential of impact investing. Much like the early, unprofitable years of the microfinance industry, the report notes that impact investment firms require subsidies in the form of grants, soft loans and guarantees from philanthropists and aid donors – all of which the authors claim will allow for the early pioneers to refine their models through trial and error until they establish commercial viability. Without such philanthropic support, the report warns that “the next microfinance model is unlikely to get very far” in “closing [the] pioneer gap.” The report continues that this “combination of philanthropic foresight, ambition and courage” will be the “key to truly realizing the ‘impact’ in impact investing.”

By Michael Averell, Research Associate

MicroCapital story, July 30, 2012, “MICROCAPITAL BRIEF: Goodwell West Africa Microfinance Development, Adlevo, Omidyar, Acumen, Caprocorn Fund Expansion of Paga Money Transfers Across Nigeria,” https://www.microcapital.org/microcapital-brief-goodwell-west-africa-microfinance-development-adlevo-omidyar-acumen-capricorn-fund-expansion-of-paga-money-transfers-across-nigeria/

MicroCapital story, January 20, 2012, “MICROCAPITAL BRIEF: Acumen Fund Loans #1m to Indian Microfinance Institution Gramalaya Urban and Rural Development Initiatives and Network (GUARDIAN),” https://www.microcapital.org/microcapital-brief-acumen-fund-loans-1m-to-indian-microfinance-institution-gramalaya-urban-and-rural-development-initiatives-and-network-guardian/

MicroCapital story, May 16, 2011, “MICROCAPITAL BRIEF: Acumen Fund, Grameen Foundation Make $1.7m Quasi Equity Investment in Kenyan Microfinance Institution Juhudi Kilimo,” https://www.microcapital.org/microcapital-brief-acumen-fund-grameen-foundation-make-1-7m-quasi-equity-investment-in-kenyan-microfinance-institution-juhudi-kilimo/

MicroCapital story, November 27, 2006, “MICROCAPITAL BRIEF: Four Microfinance Organizations Win 2007 Fast Company/ Monitor Group Social Capitalist Award,” http://www.microcapitalmonitor.com/cblog/index.php?/archives/490-Four-Microfinance-Organizations-Win-2007-Fast-CompanyMonitor-Group-Social-Capitalist-Award.html#extended

MicroCapital Universe Profile: Monitor Group https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Monitor+Group

MicroCapital Universe Profile: Acumen Fund https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Acumen+Fund#

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