All power to philanthropy?...

By: 

Cheryl Chapman

Managing Editor, Philanthropy UK

Paul Cheng

Do philanthropists have a special role to play in social impact investing(SII)? Many think so and here CAF Venturesome’s Paul Cheng explains why a propensity to ‘give’ rather than ‘invest’ means philanthropists have more power than most and a ‘golden opportunity’ not just to play a role, but to have a say in how the market might be shaped.

Paul Cheng, of CAF Venturesome which pioneered social investment in the UK, believes philanthropists are the most powerful of all players in the social impact investment market.

The view is based on early experiences of the now 30-year-old microfinance industry the UK, which Cheng has documented and evaluated in The Impact Investor’s Handbook[1] It provides a roadmap for the development of the social investment market.

Cheng says: “We point to the pivotal role of some leading pioneers in the microfinance industry who proved the concept of microfinance by demonstrating high repayment rates, replicability and market demand. The model was quickly exported and adapted to several geographies. Subsidies and guarantee funds provided these early pioneers with the flexibility and patient capital required to prove their business models. A process of transforming non-profit organisations into commercial businesses was a model promoted by some, which led to a wave of industry professionalisation.

“The role of private donors and forward-thinking philanthropists has been significant for not only providing access to capital, but also for bringing into the sector skills and expertise gained from the mainstream finance industry.”

He uses the example of the founding shareholders of Unitus Capital who came from the private equity and investment sector, and were drawn to the idea of a boutique investment bank for Micro Finance Initiatives through their prior involvement with Unitus.

Cheng says social impact investment should embrace and support such sector pioneers.

 “Muhammad Yunus was instrumental in establishing Grameen and microfinance, but his strong allies both inside and outside of Bangladesh assisted in exporting microfinance to the world. While ACCION and BRAC deserve credit for advancing a highly scalable model of microfinance, early visionaries such as Martin Connell, Calmeadow and international aid organisations also poured in financial resources, and secured hard-won early victories, to prove the concept.”

The co-ordination of sources of early grant capital in order to prove experimental models was also crucial, says Cheng.

“Grant funding was critical for absorbing the early stage risk of high potential microfinance models that remained too uncertain and unknown to attract alternative sources of financial support. Governments, foundations, and other grant funders should be the primary drivers of change in creating beacons of success and momentum for models that need time to both reduce costs and increase scale.”

Angel investors

In exploring the role of philanthropy in social investment, The Shell Foundation (SF) identifies ‘angel philanthropists’ as vital cogs in the economy’s new wheels, just as ‘angel investors’  helped so many of today’s for-profit global corporations get off the ground. 

Angel philanthropy provides early-stage capital and support to nurture new social enterprises through the rocky early days. It is by nature ‘high risk’.  But SF has proved it can achieve high reward.

Chris West, foundation director, explains:  “In our inception phase (from 2000 to end 2002) – where we largely provided short-term project based support to multiple not-for-profit organisations – 80% of the initiatives we supported failed to achieve scale or sustainability. This reflected either poor execution or lack of market demandfor the proffered products and services.

“Having changed our strategy to focus on co-developingand implementing new business models with a few carefully selected strategic partners, we now find that 80% of our grants meet our criteria for having achieved scale or sustainability.”

Today, two of its strategic partners (EMBARQ and GroFin) have achieved verifiable global scale and sustainability and two others (Envirofit and The Better Trading Company) are well-advanced in this respect.

The foundation, which has disbursed $111.9m (£70.4m) since 2000 to “catalyse scalable and sustainable solutions to global development challenges”, acknowledges that angel philanthropy requires “focus, patience and flexibility”.

West says: “We acknowledge that it represents a high risk approach given the time needed to achieve developmental returns. But we believe that more angel philanthropists are needed to catalyse and support the growing number of social entrepreneurs until they are ready to source second stage finance from others. Opportunities exist for syndication between angel philanthropists and such impact investors,” he says.

So there are great expectations of philanthropists as market builders, prospectors and pioneers.

But what do philanthropists receive in return?

After all ‘investing’ funds is unlikely to garner the kinds of honours that giving money away does, and it returns lower than market returns. One could see it as the worst of both worlds.

Fiona Ellis, who has held many key foundation roles and currently chairs NCVO’s Funding Commission, offers a view: “It is true that initially social impact investments may not bring the approbation that straight gifts do, nor can they be expected to bring a strong financial return. But for the philanthropist who genuinely wants to make change there are other rewards. Moreover, as this sort of investment becomes more common there will be a greater understanding of its benefits for the VCS and thus a proper recognition of those pioneers who put their money in early without the expectation of wide public acclaim.”

 Dawn Austwick, CEO of Esmée Fairbairn Foundation which has been actively involved in social investment, launching a £20m Finance Fund in 2008 that aims to draw other investors into it and to demonstrate the potential of blended returns, says: “Social investment can offer the canny philanthropist the opportunity to make their money go further, creating real social impact and the chance of returnable funds that can then be re-invested for further charitable benefit. As an early developing market it does carry risk so any propositions need careful consideration by potential investors but over time it can be a great way to increase the overall flow of funds into charitable activity.”

 And Cheng argues against the ‘worst of both worlds’ idea:  “Philanthropic investors have a golden opportunity to shape the future of a new impact investment economy. Impact investment is set to change everything. Philanthropists who get involved now have the chance to be part of a long-term strategic solution, the impact of which will be felt globally and for years to come.

“Philanthropists by nature are looking for high-risk, high- impact opportunities and more willing to deploy their money through “minus 100%” opportunities than finance-first investors. This makes them the most powerful of all players involved in impact investing because they have capital that can in effect absorb infinite risk.”

 Philanthropists, such as Bill Gates and Michael Dell, are essentially trying to “find and fund the Microsofts and Dells of the non-profit sector,”says Harvard Professors Robert Kaplan and Allen Grossman[2].

 As Cheng says: “Those who do not engage now might be missing a trick.”

 Footnotes