The Hunt for Impact Investments

If a boat is financial capital, and deals are the fish, investors want to be floating in a river where the fish are jumping.
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Let's talk deal flow. The top investors from Silicon Valley to New York to London know that deal flow is the secret to getting the best returns. If a boat is financial capital, and deals are the fish, investors want to be floating in a river where the fish are jumping.

It is no different in the developing world. After JP Morgan estimated in 2010 that the potential capital market for impact investing -- enterprises that would deliver positive social impact -- was between $400 billion and $1 trillion, many investors began to believe they could do well by doing good. The hunt for those fish was on.

Impact investors surged forward with capital, ready to support the pioneering entrepreneurs creating fortunes and development gains at the base of the pyramid (BoP). They cast their nets wide hoping to scoop up some great deals. But it is becoming increasingly clear that there is a shortage of enterprises that can deliver both the social and the financial returns the investors seek. Today, here's where we stand: a boatload of capital, but too few investment-grade deals. While capacity may follow capital, it can't do it alone.

This week, more than 250 high-level investors, business executives, entrepreneurs, philanthropists, and academics are convening in Washington to ask the important question: how can public and private actors work together to unleash the potential of the impact economy?

Last week, Monitor and Acumen Fund shed light on this problem in a Gates Foundation-funded report "From Blueprint to Scale: The Case for Philanthropy in Impact Investing." The report breaks down the pipeline problem into three constraints investors are currently facing: especially modest margins, long times to scale, and high risk of impact ventures.

The report called for a solution that we at USAID have helped pioneer: putting grant dollars in trailblazing social enterprises to get the good deals flowing. Without initial support from government to test and scale their work, the report argues that, "much impact capital will continue to sit on the sidelines or be deployed in sub-optimal opportunities for impact, and fail to achieve its potential in driving powerful new market-based solutions for the problems of poverty."

We have an opportunity too great to be missed. So, to help impact investors identify winners, USAID, in partnership with the Rockefeller Foundation, Prudential Financial and Deloitte, launched a Global Impact Investing Rating System (GIIRS). The rating system measures the social and environmental impacts of companies and funds, to provide a credible, independent evaluation of impact, as S&P does for credit risk. In just six months, 53 funds with $1.9 billion in assets under management have joined to invest in GIIRS-rated enterprises.

In July 2010, USAID announced the Development Innovation Ventures (DIV) to do precisely what Monitor calls for. DIV is a special USAID mechanism that directly sources and scales a growing portfolio of cutting edge "impact enterprises" -- market-based social enterprises that have the potential to provide financial returns and yield positive social and economic return.

DIV welcomes private companies, entrepreneurs, and social enterprises to apply to DIV for any of the three stages of DIV grant funding: (i) up to $100,000 to pilot a new business model or product; (ii) up to $1 million to do a larger stage market test and prove a business model; and (iii) up to $15 million to scale big -- most often, to multiple countries. From the very beginning, DIV plans to exit, much like DFID exited after early stage grant support to M-PESA, the very successful mobile banking program in Kenya.

DIV's niche of providing direct grant (and early stage) support to impact enterprises to help them prove their business model and scale fills an important gap for the impact economy sector, and helps build the pipeline of viable enterprises that can attract investment capital. Examples from the DIV portfolio highlight the kinds of investments the program is making in impact enterprises that can feed directly into the impact investment pipeline.

With $300,000 of Stage 2 support, private company Mera Gao Micro Grid Power (MGP) will construct and operate 40 new village-level micro grids, and provide its customers with light sources and mobile charging stations. MGP will also evaluate its impact on school enrollment, health, and household income. In 2010, the total number of India's unelectrified households stood at 61 million. Off-grid demand continues to be unmet by modern power services; and communities resort to low quality sources of energy such as kerosene, wood, diesel, candles, and disposable batteries. MGP provides its customers with more than 10 times the amount of light from kerosene. The project will reach 4,000 new customers and 20,000 new beneficiaries in Sitapur districts of Uttar Pradesh, India. MGP was just named one of MIT Technical Review's Top 10 Emerging Technologies.

With less than $100,000 of Stage 1 support from DIV, start up social enterprise Sanergy will expand its award-winning, financially sustainable sanitation service delivery system in Kenya's urban slums. In the 12-month pilot, Sanergy will build and franchise a dense network of 60 low-cost and clean toilets to slum residents. Designed by MIT engineers and architects, the modular hygienic toilets can be assembled in one day and are franchised to local entrepreneurs and local youth groups, who earn income through affordable pay-per-use fees, membership plans, and sales of complementary products. Revenue from the organic fertilizer and biogas energy add to the model's profitability. The 10 million residents of Kenya's slums create a potential $72 million annual market. Within five years, Sanergy plans to expand to 3,390 centers reaching 600,000 slum dwellers -- creating jobs and profit, while aiming to reduce the incidence of diarrhea by 40 percent.

Three out of four people in Sub-Saharan Africa lack access to electricity. In Tanzania, 86 percent of the country's 43 million people are off the energy grid, and instead spend an annual $790 million on lighting and basic electricity needs. Those without grid access depend primarily on imported kerosene for lighting, and expensive, often distant charging business to power their cell-phones. EGG-energy is an award-winning private venture, started by MIT and Harvard graduate students, that bridges the "last mile" power distribution gap to bring affordable, reliable and clean energy in Tanzania. EGG-energy charges small lead acid batteries and rents them out to individual customers, after EGG technicians install electrical and lighting systems. Each battery can power 3 lamps, 1 cell phone charger, and 1 radio for 3 to 5 nights. With support of $100,000 from DIV, EGG-energy will demonstrate the business proposal of its model of franchising modular solar hubs to local entrepreneurs to charge home batteries.

This morning at her Global Impact Economy Forum, Secretary Clinton announced that USAID was partnering to grow this market even faster with of the most important pioneers in the social entrepreneur field. Through a Global Development Alliance (GDA) the Skoll Foundation and USAID agreed together to invest $44.5 million over the next few years to scale promising ventures.

The alliance marries DIV's pioneering approach at USAID with Skoll's decade-long experience cultivating the world's most successful social entrepreneurs. Through the new alliance, Skoll and USAID will identify high-impact entrepreneurs who have demonstrated innovations and sustainable business models that are ripe for scale. We will expect from every grant an evaluation of their impact using cutting-edge methods that will help deliver lessons learned about what works, to attract even more scaling support for the solutions with proven results.

Bill Drayton, the founder of Ashoka, once said, "social entrepreneurs are not content just to give a fish or even teach how to fish. They will not rest until they have revolutionized the fishing industry." Inspired by their spirit, USAID is working hard to revolutionize the way we support the pioneers, giving them the chance to innovate, test, and grow. It is the key to unlocking billions of dollars that lie in wait.

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