Secondary markets key for Impact Investing growth
While Mission Markets and Impact Investment Exchange Asia have pioneered private platforms for sourcing and channeling deals to investors, GATE Impact now plans to provide a trading platform that will allow investors to trade shares of the companies listed, much like any other stock exchange.
President William Davis is focusing on investors—mostly big institutions—that can bring their impact investing portfolios onto the platform with them. At launch, Davis says, GATE Impact will list available impact investment deals of between $500 million and $1 billion. By comparison, the social enterprises on Asia IIX’s Impact Partners platform have sought to raise a total of about $70 million. [Source]
But do impact investments need “hot money”? It’s hard to know what the trading behavior would be like on such an exchange, but there is an advantage to being a private company, the ability to look long- rather than short-term chief among them.
I do think a secondary market will be very important to the industry, especially given the fear of many that there will be limited opportunities for exits. At the same time, I wonder if what the industry needs is an active private equity secondary market, with secondary buyers purchasing stakes in existing investments or funds themselves, allowing the initial investors to achieve at least partial exits.
Given the concern about exits, I would think that a secondary buyer could play a catalytic role in the industry, increasing the confidence of concerned potential investors and providing exits for initial investors that will allow them to make additional investments in the space. The role of the secondary buyer is indeed to provide an exit for the initial investor before the investment itself achieves an exit (e.g., M&A, IPO, etc.), and given the patience required for “patient capital” impact investing, the off ramp provided by secondary buyers could prove crucial to getting mainstream institutional investors on board. Unlike the proposed stock exchange, it won’t expose the businesses themselves to hot money.
In addition to a secondary private market, capital could be channeled through a trading exchange that listed social investment funds rather than the investments themselves. There are legal concerns given the non-profit status of many social investors, but it’s an idea worth considering.
The $400 billion to $1 trillion question is how to translate investor interest into active investments. An active secondary market and a platform for funding the funds may help (responsibly) tap those resources.
If you have any thoughts or comments, please send me an email at: cdp283 at nyu dot edu.
Previous Posts on the challenge of Social Performance Measurement:
Cost-effective Impact Assessments for the Impact Investor
This long post is available as a PDF.
Impact investors can better estimate their impact on growing businesses and, in turn, the impact of supported businesses on communities without a significant increase in evaluation cost. While impact investors rightly regard randomized controlled trials (RCTs) as inappropriate for day-to-day performance measurement, impact investors can use low-cost alternatives (specifically, control groups and Best Alternative Pro Formas) to construct counterfactuals in order to estimate what would have occured in the absence of their investment. While these methods will not meet the standard of RCTs, they can offer a significant and meaningful improvement in the measurement and management of social performance. Read the rest of this entry »
Separating the Gold from Pyrite: Analytical Rigor and the Potential of Impact Investing
This post addresses two questions raised in the recent discussion on impact evaluation and investing: to what extent is the burden of proof lower for impact investing than traditional philanthropy, and what type of analysis does the industry itself need to separate social enterprises with goods intentions and significant social impact from those that struggle to translate the former to the latter.
Acumen Fund’s Sasha Dichter recently responded to Dean Karlan’s critique of the lack of rigorous analysis of social investments by differentiating between the social investment and the “purely philanthropic intervention”:
No matter what scale a pure philanthropic intervention reaches, the total marginal cost of delivering the nth “thing” (any intervention) is always positive, so you’re in the business of figuring out how the impact relates to that cost and how the impact relates to other similar interventions. Not so if you find the “next cellphone” – except it’s not a cellphone, it’s safe drinking water or a bio-mass powered light on a mini-grid or a safe and affordable place for a mother to give birth. Read the rest of this entry »
Impact Investing in Rigorous Analysis
In a recent interview with Fast Company, Dean Karlan noted:
The social entrepreneurship world is in a weird spot, to be honest with you. It’s a world full of rhetoric about impact investing, yet I have very rarely seen an investor actually take that seriously. When you look at the actual analysis it lacks rigor.
Ouch. Some readers will surely dismiss Karlan as a ‘randomista’, but his critique is fair, and one that I have made before. Read the rest of this entry »
Judging Aid Agencies by Streetlight
The DRI team at Aid Watch just released its second installment of The Best and Worst of Official Aid, wherein Claudia Williamson and Bill Easterly assess myriad agencies according to “aid transparency, minimal overhead costs, aid specialization, delivery to more effective channels, and selectivity of recipient countries based on poverty and good government.”
The authors candidly admit that their analysis only assesses performance on these “best practices”, rather than aid effectiveness. When reading the report, I was struck by the degree to which academia and the general public have been made to be like a drunk looking for his keys:
A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, that he lost them in the park. The policeman asks whey he is searching here, and the drunk replies, “this is where the light is.”
While we know it’s outcomes that matter, not overhead, for example, we look to overhead, just as the drunk looks to the curb by the streetlight. It may be better than nothing, or it may actually be detrimental (as many, including myself, would argue the fixation on overhead is), but it’s all we’ve got!
Humble Grad Guide to getting Hard Skills
When I was considering graduate programs last year, I found there to be a dearth of information on what to expect from your graduate school experience and how to make the most of it in the context of my interests in international development, monitoring and evaluation, and social venture capital. Read the rest of this entry »
Catalytic Class: More than Just Capitalism
After CGD’s Nancy Birdsall pointed to an emerging bourgeoisie middle class as an understudied ally for poverty alleviation (i.e., the “catalytic class”), Ranil Dissanayake rejoined:
I’m afraid that the catalytic class may already be studied under a different name [ed note: capitalists!]. In fact, this guy might argue that this research might be coming some 144 years after the definitive study of this group. I’ve been talking for a while about how they’re a crucial but neglected part of the development process.
This is a curious riposte. Yes, the emergent bourgeoise are capitalists, just as they are humans, and doubtlessly countless other things, but what makes them (potentially) a special ally of the poor is that they economically support a new set of public interests to compete with those of the existing elite.
To the extent this new class’ power benefits from public goods that benefit the poor, the emergent bourgeoisie may indeed catalyze positive change that would not otherwise occur.
Mr Dissanayake might object that entrenched economic elites and their progeny don’t qualify as capitalists, and therefore the catalytic class is no different than capitalist.
Yet I’d object once more. The catalytic class are a special subset of bourgeoisie: bourgeoisie that happen to have interests that align with the poor. It is a happy accident that they benefit from the same public goods. It is a happy accident that their source of wealth increases demand for labor from the poor. To call them simply capitalists is to lump them with the bourgeoisie that make a fine living virtually detached from the poor. It is not even sufficient that the emergent bourgeoisie are emergent to guarantee that their interests align with the poor in any meaningful way.
Still it may be that we acknowledge the catalyst class as distinct from capitalists, or even the emergent bourgeoisie, but find that we can’t target assistance to the catalytic class. We might not know who they are ahead of time. Or we might not be able to help them outside of more general support for capitalism, in which case, Mr Dissanayake’s conflation of the catalytic and capitalist terms is operationally correct.
Indeed the challenge of identifying the catalytic class is complicated by the fact that there is no single catalytic type of enterprise or group of people. Catalysts aren’t universal. There is no law to be found that dictates a new agricultural producer association always creates catalytic change. It would be folly to think that a study of catalytic classes would produce a formula for industrial policy.
At the same time, there’s no reason to suppose that catalysts are entirely idiosyncratic. It’s not naivete to suggest that certain types of enterprises might increase demand for the labor of the poor more than others, or require well-maintained roads that connect rural areas to urban hubs, or create a large amount of wealth in the hands of a few new tycoons who might see profit in the liberalization of the airwaves and have the independent power to demand it. These are different types of catalytic change, and they are more or less likely to emanate from enterprises with different dependencies on capital, land, and labor, and which produce different distributions of wealth.
While we should not suppose that there is a magic catalyst class or industry, we should be eager to study how entrepreneur/enterprise characteristics make them more or less likely to create different kinds of catalytic change in different environments. As international organizations are already subsidizing capitalism in developing economies, they might as well incorporate an estimate of the positive externalities for the poor, rather than simply supposing that financial results in non-functioning markets are adequate signals of societal value.
Making an impact through SMEs
The advent of impact investing is only the most recent milestone for the broad movement to ensure that private enterprise engages the poor in a meaningful way. Just as the microfinance industry has matured, small and medium enterprise development has gained momentum. Investment vehicles and business development services have multiplied as for-profits and non-profits alike try to figure out to best tap this undeserved market. At the same time, development organizations have provided technical training and assistance to move small producers up the value chain and engaged corporations to integrate small producers into their supply chains. Read the rest of this entry »
Development without Aid in Somaliland
In “Peace-Building without External Assistance: Lessons from Somaliland,” Nicholas Eubank explores the second-order effects of state-directed foreign aid on political and economic development. Because foreign aid has worked its way into nearly ever corner of sub-Saharan Africa, there are few controls available to estimate these effects. Eubank isolates one such control in Somaliland, which has remained untouched due to the international community’s decision to make the state ineligible for aid after its unapproved secession from Somalia in 1991.
Eubank posits that because the Somaliland government did not benefit from aid revenues, it had greater incentive to reconcile with the local commercial interests, which, in turn, had a vested interest in peace and stability that served the country well. Somaliland indeed appears to have taken major steps forward since its decimation by civil war, rebuilding cities and towns, and increasing schooling and commercial activity. A UNDP/World Bank survey finds that Somaliland has significantly higher average income than Somalia proper, a reversal of the prewar distribution, with superior health statistics as well. Read the rest of this entry »
