What is impact investment and how can it help NGOs to enlarge their social impact? In our efforts to achieve the Sustainable Development Goals, mobilising capital aside from official development assistance is crucial. In our last Community of Practice on Innovative Finance of Tuesday December 10th, we dove right into the subject of impact investment. Managing Director at Cordaid Investment Management Hann Verheijen and Mark Joenje CEO at Capital 4 Development Partners guided us through the inspirational and informative conversation.
A journey to find your position
According to the Global Impact Investing Network, impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments are made by impact investment funds that receive their capital from governments, NGOs, private foundations and private investors, among others.
Hann Verheijen kicked off the session with his presentation on Cordaid’s investment strategies. With his experience at Triodos Bank and Oikocredit Hann is responsible for their investment fund, especially operating in fragile contexts. Since the 1980s NGO entered an intensive learning cycle in search of private capital. Through loans, Cordaid invests in microfinancing institutions and directly in small and medium-sized enterprises. As a rule of thumb in 50% of their invested projects they are the first international donor, stressing the local character of their investees. Find Cordaid’s presentation here for more detailed information.
Next up was Mark Joenje, who runs the investment fund manager C4D Partners, which arose from ICCO Investments. After an intense transition period, C4D separated itself from the NGO and continued as an autonomous entity which provides loans and equity to SME’s. According to Joenje, there is a need to define what a successful investment means. Is this when you have your money back, a ten per cent revenue, or after some social impact? Not losing money is always at the core of the investment mechanism and thus brings other rules of the game. Find out about ICCO’s challenging journey from NGO to global fund manager here.
The missing middle
Impact investment is mostly either aimed at micro-financing initiatives or at matured companies with large financial capacity. In emerging markets, many small entrepreneurs are looking for seed capital but in reasonably small ticket sizes (e.g. 20.000 dollars). We are talking here about the so-called missing middle, in which only a few funds can manage the high costs of investing small sums of money. There are only few organisations that effectively create this ‘pipeline’ which targets small entrepreneurs. Care Nederland and Lendahand are one of the most promising actors in this field. The Dutch government is actively searching for strategies to provide the pipeline towards SME’s. They try to mobilise money from pension funds and other large global investors. As the most important function the government absorb risks for large capital providers which might have a catalytic effect on other governments to support emerging markets.
Consider this when starting investments:
- What risk do you want to take? Position your organisation on the scale of financial risk to determine your type of investments. Specify the average interest rate that you need to be effective and thrive.
- What to invest in? Be concise, and choose your investment portfolio carefully. Conduct in-depth research, collect local knowledge and gain experience to know where you want to invest in.
- What role to play? Running development programs within an NGO is a fundamentally different task than managing an investment fund. Those two things are not to be combined easily. Your NGOs can be the gatekeeper of genuine social impact, that must be realised by the fund. Do you want to start investing as NGO? It is recommendable to find an external fund manager but strictly define the investment criteria.
Do you want to know more about measuring impact and your role as NGO? See the full report of this session to find important specifics of impact investment strategies. Do you have any specific questions, requests or recommendations? Get in touch with the facilitators of this session or reach out to The Spindle mailbox. On January 27th, 2020 we will launch an overarching publication on all topics discussed by the community of practice of innovative finance. Keep an eye on our agenda to stay tuned!