The world has taken notice over the last few years of a new investment wave known as “impact investment”. This asset class is designed to provide investors with both a financial return and a broader benefit to society. This is often referred to as investing with double or triple bottom line e.g. providing environmental and social benefits in addition to the financial returns. Impact Assets provides here a list of the largest 50 players in this space. As you can see many of the funds focus on developing or emerging economies but very few are based in those markets. I believe this trend is changing and there are more and more innovative Impact Investment vehicles emerging across the world every year. I would like to profile one which was started by a few friends in Colombia. It is called Banca de Inversion Social or BIS for short.
WHAT IS THE BUSINESS ABOUT?
BIS acts as a bridge between investors and social enterprises and projects. It does this by providing a combination of advisory and innovative finance tools to help larger investors to enter impact investment opportunities for the first time in Colombia, support existing investors to scale up their investments, provided needed capital to entrepreneurs and to help identify and grow social enterprises or entrepreneurs with high potential for impact. Its focus thus far has been on affordable housing, associative agribusiness and reforestation and education but plans to grow its portfolio building upon successes in those areas.
HOW DID IT START?
Officially BIS began operations in 2011. But the idea for BIS was long in coming. The General Director a former investment banker had long been thinking about how he could use his knowledge of capital markets and investment banking to make a difference in Colombia. So he teamed up with two others with experience building similar organizations and in private equity. You can find out more about the team here – btw they are still growing.
WHAT IS THE SOCIAL NEED IT ADDRESSES?
The overarching goal of the fund is to reduce poverty and improve the environment through the promotion and investment in inclusive businesses in Colombia. This is rather general since as an investment vehicle it has a wide purview of potential social projects it could invest into. So far it seems like the three areas it has actually worked in are agriculture, affordable housing and education.
WHAT IS THE BUSINESS MODEL?
Essentially “impact investors” and BIS is no different make money in the same way that any other investment project makes money. It provides capital up front with the expectation that the capital will be returned with interest in defined amount of time. The difference with traditional financial returns is that impact investment also demands social returns. Money and interest is returned to investors on the condition that social goals are achieved. In addition as BIS provides advisory services so in some cases they receive a fee for services rendered.
WHAT ARE SOME CONCERNS I SEE WITH THE MODEL?
- Non-profit status? – Should an impact investment asset class vehicle be a non-profit? It seems to run counter to the intuition of the very idea of having such an asset class.
- Lack of focus – It would seem to have the greatest potential impact it would be useful to focus on a few areas and sectors with the greatest potential for impact in Colombia. At the moment it seems the small team and the fund is willing to look at a broad range of sectors; from agriculture, education and housing. It might be useful to start with one or two prove success and scale. On the other hand by casting a wide net there can be some trial and error and learning along the way which may help the team down the road.
- Tensions between business and social principles – There will be moments where potential financial returns are hampered by social concerns – for example cost cutting by firing staff. There needs to be some clear guidelines for outsiders to understand how the fund operates so they can fee comfortable with how the money is being used.
- Measuring social impact – It is very difficult to find reliable quantitative indicators of social impact and this will be crucial to make sure the fund is successful. Because if we can not prove the social goals are being met, how can we know that the BIS money is any different from a normal banks capital.
- Providing returns to investors – what happens when social impacts are not achieved? Will investors still be paid? Does this make sense considering its non-profit status.
Despite these concerns, I am very impressed with BIS and what it has achieved so far and am certain it will continue to grow and more funds like it will continue to sprout up around the globe. And I am sure this will be the first of many such impact investment business models I will profile on this page.
WHAT IS YOUR VOTE?