Driving Successful Impact Investments

This is a guest blog post by Mission Capital Social Venture Partner Greg Vestri. He is the co-founder of Vestment Global Services (VGS), which was established in 2011 to serve global organizations in the for-profit and nonprofit sectors.

Mainstream thought struggles to believe that financial performance and impact can coexist. Investors nearly universally concede performance expectations, relegating impact investments to a negligible part of their portfolios. Our perspective and experience is much different with doors open to endless opportunities.

Impact investing, or the act of placing capital in enterprises that generate social or environmental goods, services, or ancillary benefits with a targeted range of financial returns - have exploded in popularity. The Forum For Sustainable and Responsible Investment in Washington, D.C. suggests there is over $6 trillion of investments targeting these impact varieties. The volume is staggering already.

But think of the literally world-changing opportunity if investors - who already show a propensity to invest even with a subdued view of financial return potential - actually believed these impact investments could compete with the rest of their portfolio?

We’re talking multiples of trillions unlocked for global good.  Conceding market returns in favor of expectations of social impact is misguided.  At VGS we believe in a methodology that integrates social development and an application of rigorous business acumen.  We are passionate about solving business and social problems in tandem by leveraging our knowledge, network and capital.

For effective impact and financial performance, we have learned to rely on the following principles:

Bridge Critical Audiences

Creative solutions that satisfy appetites for impact and return are successful when a business mindset and social development perspective merge. Case in point? One of VGS’ most successful endeavors is an investor-backed, asset financing program targeting the development (non-profit) community. Take for example the recent activity with Food for the Hungry, a $150M global relief agency. The organization needed new vehicles for field staff safety and also expansion. Utilizing donor funds for the purchase of vehicles was a limited resource and expensive to attain.  

A more financially beneficial approach was seeking investors who could provide capital for the purchase of vehicles while gaining interest on their investment.  Food for the Hungry was able to repay principal and interest using a Kilometer charge for the programs that utilize the vehicles.  This moved the expense from CAPEX to OPEX. The best part of the financial structure for this arrangement is that over the 10 year life of the vehicles, Food for the Hungry is building working capital of 1.5x of the amount borrowed. This accomplishes greater financial self-sustainability for Food for the Hungry.  

Significant! The bridge between investors and the needs of a nonprofit most importantly delivers significant increased social impact. On average, each vehicle touches 16,000 lives each year.  After 21 vehicles financed over three tranches, Food for the Hungry and the investors have impacted over 330,000 lives!

In the impact investing space, investors struggle with who, where, how to invest and make an impact. Nonprofits struggle with applying business solutions to meet their development and financial challenges. VGS believes in bridging a blend of business and development skills.  Our greatest advice to any who pursue this, from either direction, is to find the “Bridger” who has both business and development expertise. It’s absolutely critical for mutual success.

Impact Investments Have To Be “Architected”

The reality is that most impact investments have to be “architected” as they don’t really exist off the shelf.  When you architect an impact investment, it’s helpful to quickly assess the type of asset class that applies (see graphic below).  For example, an asset backed financing investment with a nonprofit or for-profit can be de-risked and structured to be like a CD or Bond.  A more risky investment for a nonprofit typically ends up being philanthropy even if it is architected as an investment.  Riskier for-profit impact investments typically look a lot like a Private Equity investment. Organizing impact investments in this manner can then correlate to typical returns expected from that type of asset class as well as create an understanding of the risk level.

The other aspect of architecting the investment involves assessing and quantifying the impact.  At VGS we have found this to be a real stumbling block for many of our clients. There are proven and reliable models for defining impact that exist in the development world.

Applying those takes some diligent architecting as well as an understanding that this involves trial and error.  Lastly, you have to articulate the story which explains the investment, the financial returns, the risk and the social impact. Quite the package but always worth it when it works.

Impact Investments Require Due Diligence

For too many, the words ‘impact investment’ flip a subconscious switch. Off goes the certainty in time-tested principles of due diligence, diversification and reasonable asset allocation. VGS built a model for due diligence and assessment that places each investment on a multi-faceted grid, shown below.  It blends risk, sector assessment and impact. This has proven very helpful when sharing opportunities with investors who want to manage and diversify their portfolio and merge their particular passion for impact.  It has also opened significant sources of capital for organizations who have a clear need and opportunity for impact.

The inspiring truth is that the volume of dollars committed to impact is growing. Global mindsets are shifting, and there is becoming a normative desire to empower the world with self-sustaining resources. The pursuit to architect, bridge disconnected audiences, and deliver returns and impact simultaneously is worth the endeavor!