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Impact investing is investing in enterprises that work
in the market typically charge for their services, but
where the investor is seeking social outcomes as well as a financial return.
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The answer is yes, but the answer is also, it depends.
And you can do good in private equity and
venture capital in areas where you're bringing capital to
an enterprise that it otherwise wouldn't happen.
You could also do good if you're making what sometimes called sacrificial or
concessionary investments,
where you're expecting a below market risk adjusted return.
The one area where you can't do good
is investing in large cap publicly traded markets.
Because your investment just doesn't make any difference in those markets.
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You have to decide what area you wanna have impact in.
Whereas financial returns are basically the same, whatever you invest in.
Impact investing, on the social side, requires a degree of intentionality.
It's, what do you care about?
So I may care about improving mobile telephony, probably not in the US, but
in Bangladesh.
You may care about clean water in Africa, and
somebody else may care about improving poor communities in the US.
So each of us would find different areas,
if there are social enterprises in those areas that we think are impactful,
each one of us would find investments in those areas.
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If you're doing pure philanthropy,
you do due diligence to see whether it's a good non profit organization.
If you're doing pure investment, you do due diligence to see
if it's solid and it's going to bring a financial return.
If you're doing impact investing, you have to do due diligence for both of those.
So it's a tougher task.
Whenever you try to optimize on more than one outcome, and in this case it's both
social impact and financial return, it's just harder to find good opportunities.
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One of the things that makes an impact investing fund or fund manager or
individual good at it, is they have the same knowledge of a particular market,
take sanitation in Africa or health in India, they have the same knowledge
that John Doerr at Kleiner Perkins has of high tech social media investments.
So it requires great knowledge of a domain.
And then you see things that the world at large doesn't see.
You see opportunities.
And that's where the trick is.
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The social impact bond, it's a terrible terminology.
I think one might better call it sort of investor backed pay for success scheme.
Because it has two parts.
The first part is government contracting with a service provider.
For example, somebody who provides homeless service or
reduces recidivism among youth let out of prison.
Contracting with them not to perform the service, not to counsel the people, but
for actual outcomes.
So it's a performance.
It's a performance based contract, and
that in itself is fairly unusual in government contracts.
Government tends to support somebody just providing the services,
and not measuring whether they actually achieve outcomes.
So that's the easy part, relatively.
The second part, which is why it's called a bond,
is that if you're paying an organization to provide services,
then you can pay them by the week or by the month or by the quarter.
If you're waiting for outcomes, it's going to take
years before you actually know whether they achieve the outcome.
So, the question is,
how is the organization going to have working capital during this period?
And here is the other part of the social impact bond.
There are investors, who will put money into the organization
during the period that it's, before it proves success and then
the investors get paid back, depending on whether the organization succeeds.
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The investor or organization only gets paid if it meets agreed upon metrics,
so the measurement of outcomes is in fact built into that scheme.
So if you take an example in Massachusetts,
the state entered into a contract with an organization called Roker and
Investors to reduce recidivism below the existing baseline.
Right now, if you;re a young man live out of a prison in Massachusetts,
the chances are 60% you'd be back in prison within five years.
So the goal of this particular arrangement is to reduce that rate.
So you know the standard rate is, the base line rate, and what
the organization dose is they agree that they're gonna reduce by some fixed amount,
and you only get paid if reduce it by that fixed amount.
So the outcome is really part of the deal, and I think that's a terrific way for
governments to work and I think it's a terrific way for non profit organizations,
which are often pretty sloppy about outcomes, to work as well.
I think it brings a terrific discipline to all the organizations.
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I think that both impact investing and the subset, social impact bonds,
it's early days, and I think that it's quite possible that
these are both kind of flash in the pans, they're fads and
it'll turn out that you can't sustain investments in this area,
that you can't find investments that are going to make a return and
that the investors are willing to take a concession.
There're not enough of them or they might be do just as well making grants.
So I regard both of these as really interesting experiments.
But I'm not a booster of these things.
I wanna see where they go.
I'm an enthusiastic student.
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If it works, you're going to find new ways of financing social enterprises, and
allowing them to scale in a way that philanthropy alone can't do.
And if social impact bonds work, you'll find a new way of government being
attentive to outcomes and organizations being more attentive to outcomes.
So I don't know how great the upside probability is.
>> But if it eventuates, the upside is terrific.
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