Rockefeller’s High-Impact Investment

The provenance of the term “impact investing,” according to the official founding myth, was a 2007 gathering of leaders on Lake Como, high in the Italian Alps, at Bellagio, the Rockefeller Foundation’s spectacular retreat center. The group reconvened the next year, and Rockefeller’s board approved a $38 million impact investing initiative.

It was not quite a present-at-the-creation moment, because social investing, social enterprises, social entrepreneurs and a whole world of community development finance had existed for decades. But after grants and investments to 30 core allies, it can be said that the two Bellagio meetings launched much of the network of organizations and activities that now define impact investing.

Rockefeller’s impact investing initiative was slated to end about now, but earlier this year the board extended it through 2013. With sunset approaching, the foundation has issued two self-assessments of the initiative’s impact, prepared by the consulting firm E.T. Jackson and Associates. “The initiative succeeded in defining the field of impact investing, thus enabling collective action from diverse stakeholders,” concludes Unlocking Capital, Activating a Movement, the foundation’s internal report.

Indeed, if impact investing grows as rapidly as the projections made by Rockefeller’s own grantees, the impact investing initiative may well become a case study in philanthropic leverage. The external report, Accelerating Impact, cites:

• A 2011 report from J.P. Morgan, based on surveys by the Global Impact Investing Network (GIIN), suggesting that approximately 2,200 impact investments worth $4.4 billion were made in 2011, up from 1,000 deals worth $2.5 billion the year before;
• A 2008 estimate by the Monitor Institute estimated the industry could grow to $500 billion within five to ten years, representing an estimated 1% of global assets under management;
• Another J.P. Morgan report in 2010 estimating a profit potential ranging from $183 billion to $667 billion, and invested capital in the range of $400 billion to nearly $1 trillion, in just five key areas.

There are of course significant caveats and footnotes on all of those projections, and all standard disclaimers about forward-looking statements, and more, should apply.

But what may be more noteworthy is that the GIIN, the seminal Monitor Institute report (Investing for Social and Environmental Impact) and even the two J.P. Morgan reports were all financed by Rockefeller. As are the Impact Reporting and Investment Standards (IRIS) and Global Impact Investing Rating System (GIIRS), the two main reporting and data-gathering efforts. Acumen Fund, the pioneering social venture fund that itself was originally spun out of Rockefeller Foundation, was instrumental in IRIS as was B Lab, the nonprofit certification body that annoints “B-Corps.” B Lab is also managing GIIRS, and rolling out an analytics platform to rate companies and funds, all backed by Rockefeller. Rockefeller also finances the valuable policy work conducted by Insight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard University. And dozens of other mutually reinforcing projects and research efforts.

That makes one of the biggest ‘if’s in the future of impact investing, what happens if — more like, when — this whole network loses the cachet, not to mention the funding, conferred by Rockefeller. The most widely read section of Accelerating Impact may be Appendix  C, which makes recommendations for the remainder of the funding. The appendix makes clear that the gravy train is over: one recommendation is to help in “smoothly and constructively winding down and handing off” even the most successful projects. The GIIN (“continued active support”), along with IRIS and GIIRS (“active promotion”) are called out for some level of ongoing engagement. But the action is already shifting to the targets of Rockefeller’s “two-year transitional phase.”

Those targets include “platforms and networks” in places like Kenya, India, Hong Kong and Mexico and new investment products and distribution platforms , particularly that can engage “larger investors that have shown an appetite for making impact investments.”

Perhaps most significantly, if a bit cryptically, Rockefeller is seeking to “test ways of improving investment readiness on the demand side.” That’s impact industry-speak for expanding the pipeline of investment-ready ventures with management teams, business plans and the ability to scale up operations. That reflects the new conventional wisdom that the supply of capital may have outstripped demand in the form of attractive deals (see Impact IQ’s very first post, “Social Bubble”). Expect a raft of organizations to try to pivot from accelerating investment to accelerating entrepreneurship and operational capacity.

There are worse legacies Rockefeller could leave than “too much money” for social and environmental ventures. But the full assessment of Rockefeller’s impact investing initiative will have to await its actual exit, when the new investment marketplace it helped spawn will grow, or not, on its own.

Publish What You Fund

A movement is afoot to liberate global-development investment data to provide not only accountability, but opportunity maps, market research and effectiveness indicators, providing new visibility into possibilities for collaboration and innovation.

Though much of the current development data is public, from foreign-aid budgets, development agencies and public-sector sources, the effort provides something of a roadmap for “open data” in impact investing, including efforts to track the mostly private equity and debt deals to provide financing for social ventures.

The data-for-development movement is fueled by cheap new data-processing technologies, open-data licensing and nifty new approaches to data visualization that can put the projects in context with easy-to-grasp displays. And by a gritty crew of advocates, analysts, data geeks and other hackers who are prying loose the largely public-domain data sets that have been hiding in plain sight.

“No one had objections to making this data public, it just took a nudge and a platform through which to open access to the data.” writes Scott Gaul, director of analysis at Microfinance Information Exchange, or MIX, which provides performance information on microfinance institutions serving low-income clients.

What good is data? For just one example, any entrepreneur or investor considering an innovative financial service or product will want to know a lot about the 2.5 billion potential customers — including two-thirds of South Asians and three-quarters of sub-Saharan Africans — who currently have no formal accounts, not to mention the financial institutions already trying to reach them.

“Practitioners and policy-makers often need to know more about the dynamics of financial services providers within markets to identify gaps between supply and demand,” Gaul says.

One place to start is Mix’s terrific new set of maps of financial services in Kenya, Rwanda or South Africa, which were created by Development Seed, who have done a raft of interesting data projects.

The new maps  build on the World Bank’s “Global Findex,” funded by the Gates Foundation, which attempts to measure how people in 148 countries save, borrow, pay bills and manage risk. There’s more World Bank information at Mapping for Results and Open Financial Data.

Last month’s Development Data Challenge, a global hackathon, brought together a loose collection of hackers and backers who are prying loose public financing data and, increasingly, correlating it to effectiveness. The hackers are taking advantage of a new raft of open-source tools, such at MapBox’s TileMill design studio for interactive mapping.

It’s been a long effort, stretching from the Paris Declaration of 2005 to the Accra Agenda for Action in 2008 to the commitments made in Busan, Korea in 2011. “Generally, the level of information available is disappointingly low,” concludes the 2011 “aid transparency index” compiled by PublishWhatYouFund.org, which is backed by the Hewlett Foundation and the Open Society Institute.

Publish What You Fund has three recommendations for action: Political will and action to implement the “aid effectiveness agenda” agreed-upon in Busan; organizational commitment to publishing the data they have, collecting what they don’t and making it all accessible; and increasing the reach of the International Aid Transparency Initiative (IATI) which provides agreed-upon common, open and international standards for the publication of aid data.

Indeed, some public investors are making fast progress. The report commends the Netherland, Sweden, the UK, the World Bank and, most recently, the United Nations Office for Project Services for major releases of data in the past year.  The World Food Program recently became the 33rd major donor organization to sign up for IATI.

And the beat rolls on. The next Development Data Challenge is set for September 20 at the Open Knowledge Festival in Helsinki.

Risk and Reward in Taking On Homelessness and Recidivism

Shifting the risk for delivering measureable social progress from government to private investors is supposed to be one of the key features of “social impact bonds,” a promising new way to finance programs tackling nitty-gritty challenges such as homelessness and prison recidivism (see “How Financial Innovation Can Save the World”).

But investors have been wary of shouldering such risks on their own. The two social impact bond programs announced this week, in Massachusetts and New York City, will provide early evidence of what the market might bear.

In New York, Goldman Sachs will provide a loan of $9.6 million for a four-year program to reduce the rate at which young men at Riker’s Island return to prison. If recidivism goes down by more than 10 percent, Goldman stands to gain a profit of $2.1 million, paid by the city’s Department of Correction out of savings it captures from a reduced prison population. If it drops by 10 percent, Goldman will get only its principle back. But if it drops less than 10 percent, Goldman will lose only $2.4 million, not the full amount, the result of a $7.2 million loan-guarantee provided by New York City Mayor Michael Bloomberg’s personal charity, Bloomberg Philanthropies.

That’s a shift from the original structure of social impact bonds, sometimes called pay-for-success contracts, in which private investors were to bear the full risk of unsuccessful programs.

“The objective of the government is to transfer the risk. The objective of the investors is to have someone share the risk,”Steven Godeke, a financial advisor who has been working with the Rockefeller Foundation to assess investor interest in the new financing mechanisms, told Impact IQ even before the recent announcements. “Early deals will have some risk-sharing. Social impact bonds will be about risk sharing, not risk transfer.”

The details of the Massachusetts offering are still being worked out, in particular the metrics to be used to determine the repayments to investors and the agencies carrying out the program. Philanthropic investors are the most likely candidates, given the likely deal structures. “There will be profits, yes, but always at a very modest level,” George Overholser of Third Sector Capital, which will manage the offerings, told the Globe. “The returns are well below the market rate, compared to the risk.”

In that regard, the New York City program may be more interesting in terms of gauging the commercial market for such offerings.

“The goal should be for there to be risk-sharing, to lure in the commercial investors, so they learn how to underwrite and assess these transactions,” Godeke said. “Down the road, they will need less and less credit enhancement, and they will be able to do it without the government and philanthropies having to provide the risk-transfer.”

(Note: For a terrific primer on social impact bonds, see Laura Callanan’s report from McKinsey & Co., “From Potential to Action: Bringing Social Impact Bonds to the U.S.” And there’s a wealth of information at the Nonprofit Finance Fund’s Pay for Success learning hub at http://payforsuccess.org/.)

Sizing the Impact Investing Market

A new crop of private equity investors are seeking — and measuring — social impact in their portfolios without lowering their expectations for financial returns.

Such “double bottom line” investors fueled the growth of private equity impact funds, to a total of $4 billion in assets under management, according to a new survey by PCV InSight, the research arm of Pacific Community Ventures in San Francisco.

InSight’s team surveyed 300 private equity funds and identified 69 that can be considered impact investors — defined as explicitly seeking social impacts as well as financial returns and  tracking and reporting such impacts to limited partners or publicly.

The total of $4 billion indicates fast growth in the last decade but still represents a tiny fraction of the $1 trillion private equity market in the U.S.

InSight identified social impacts that included the delivery of products and services with intential social or community benefit such as in health care and education, as well as job creation, economic development in underserved areas, supply chain impacts and responsible contracting, employee wealth creation through shared ownership and other measures.

The biggest growth came in so-called “double bottom line” funds, which tripled in the past ten years, and grew in size, suggesting, according to InSight director Ben Thornley, “that funders are more convinced that the strategies of recent arrivals can concurrently deliver market-rate financial returns and documented social benefits.” Such funds represented $1.5 billion in assets.

Explicitly “impact first” funds, in which investors are willing to take a financial discount in pursuit of social goals, represented $400 million of the total and did not increase substantially in the last decade, the survey found. Conversely, “financial first” funds, at $2.1 billion, are more conventionally focused on financial returns and seek social outcomes as a secondary consideration.

Transparent Deal Data for Impact Investors

Everybody is in favor of open data, it seems, except when it comes to their own.

So it is in impact investing, where many investors say limited information about financial results and social and environmental impacts is keeping significant capital on the sidelines. But that doesn’t mean they’ll disclose their own results or deal terms.

“Privately owned enterprises have not been legally required to share any impact performance data. And their investors are not required to do so either,” Cathy Clark, Jed Emerson and Ben Thornley write in The Impact Investor, the background document for a collaborative research project that is documenting the practices of impact investing funds. “The resulting lack of clarity about financial performance goals and results across the field’s players, big and small, is a barrier to the field’s development.”

Impact IQ is gearing up to tackle that information deficit

But Impact IQ itself faced the same inherent contradiction as other companies when it came time to push the button early this morning and make our financing proposal to the Knight News Challenge public on their website. Did we really want to telegraph all of our moves? Knight favors open scrutiny and review, so we took the plunge and put our strategy online.

Because the application rewarded brevity, the document serves as a decent primer for Impact IQ. Here are the highlights:

What do you propose to do?

Impact IQ will provide data and analysis of deal financing and impact metrics to open the marketplace for investments that combine social, environmental and financial returns.

How will your project make data more useful?

Real-time deal data will catalyze private capital for social impact by providing proof points — beyond anecdotes! — of the emerging market for “impact investments.” Impact IQ will dig out and aggregate data and add editorial context to help investors account for social and environmental returns in their capital-allocation decisions.

How is your project different from what already exists?

Private data about impact deals is not broadly available. Data from intermediaries is partial and proprietary. Static impact directories don’t capture real-time deals. Data on other “alternative investments” ignores social and environmental impacts. Impact IQ is an openly licensed, inclusive, dynamic resource for all stakeholders.

Why will it work?

Impact IQ will pioneer a new kind of business reporting. Investors increasingly are seeking an information edge through nonfinancial social and environmental indicators. Combined with aggressive reporting, open data provides the transparency buyers and sellers need (even as they guard their own information). Disclosure of social-impact data allows investors and companies to distinguish themselves; non-disclosure can signal trouble. Impact IQ’s founding partners include investor networks, industry leaders, and financial intermediaries seeking to accelerate dealflow and expand the circle of impact investors through increased transparency. The broad business news audience wants richer detail and more rigorous analysis of companies’ social and environmental impacts.

Hedging with Impact Investments?

I was intrigued by a line in the piece in the  Financial Times by Alex Friedman, the chief investment officer at UBS and Patty Stonesifer, the former head of the Gates Foundation that urged investment managers and banks to step up their impact investing activity:

“In today’s low-yield investment climate, impact investing is becoming more attractive because it is relatively uncorrelated to the broader market.”

I hadn’t previously heard the non-correlation point raised in the discussion of impact investing’s risk/reward equation, and it’s particularly salient coming from UBS (since it doesn’t sound like something Stonesifer would have written). UBS is increasing its own impact investing activity under Friedman, who was previously the Gates Foundation’s chief financial officer.

Non-correlation is part of a broader argument gaining currency that impact investments, especially those that focus on basic needs such as food, water, health care and education and on real assets, such as agricultural land, may have lower long-term risks than otherwise comparable investments.  But correlation is important argument in its own right. Turmoil in global stock markets means stock across industries increasingly rise and fall together. I found data from Bloomberg:  The 30-day correlation coefficient between the MSCI World Index and its members in that industry is 0.92, compared with the average since 1995 of 0.73. A reading of 1.0 would indicate total lockstep. (MSCI World, according to Wikipedia, is a stock index of 1,600 world stocks that is a benchmark of global stock funds, but is something of a misnomer as it excludes stocks from emerging and frontier economies).

Post-2008, hedge funds and other “traditional alternative investments” have turned out not to be as uncorrelated to the broader market as previously thought, part of the trigger for the rash of hedge-fund liquidations.

Is it really possible that impact investments are becoming the safe bet for mitigating market risk?

New details of $25 million JP Morgan-Gates-Rockefeller African farm fund

The $25 million African Agricultural Capital Fund was billed as “first of its kind” when it was announced last year, but backers were a little hazy about exactly what it was the first of.

A new case study of the five-party negotiations that led to the fund, issued by the Global Impact Investing Network, usefully illuminates what’s special about the fund, which is seeking to invest $25 million in deals of between $200,000 and $2.5 million, intended to improve the lives of 250,000 smallholder farm families in East Africa by increasing their annual income by at least $80 each over the next five years.

The AACF’s  backers specifically intended the deal’s structure to be replicable by other investors. Most interesting is the fund’s two-tier structure: In one tranche, J.P. Morgan’s $8 million in debt-financing (50% guaranteed by the U.S. Agency for International Development) means the bank is “forsaking upside in exchange for more downside protection,” said Amy Bell, vice president of J.P. Morgan’s social finance unit. It was the first time J.P. Morgan had taken advantage of a USAID guarantee, “so we needed to learn and appreciate its nuances,” Bell said.

For the other tranche, The Gates and Rockefeller foundations, which put in $10 million and $2 million respectively, made program-related investments – for-profit investments on their grant-making, not endowment, side. Under U.S. tax law, PRI’s must be targeted on charitable purposes and not primarily designed to generate income.

The report notes that two tranches earn different rates of return aligned with the risk profile and capital structure, but it doesn’t break out the two rates of return. A person familiar with the deal structure confirmed that the equity investors expect net returns of 15 percent, while J.P. Morgan’s can expect 6 percent from its partially guaranteed debt instrument. Overall, the fund is targeting a 12.5% net return, after 3.5% in costs and fees. (Note: this paragraph was updated with new information July 22.)

Another area of negotiation concerned measurement of the impact on smallholder farmers in East Africa, in line with the fund’s investment thesis that improved access to markets, goods and services can boost farm family incomes. Pearl Capital Partners itself proposed that its fund managers’ compensation be tied to the measureable impact on small farmers.Pearl, along with the Gatsby Foundation, has published a useful study of the social impact of five investments in African agriculture by their previous fund.

According to the new case study, it was the fund investors who said no to such strict impact accountability. Concerned about the quality of data around small farm operations, and AACF’s limited influence as a minority investor, they opted instead for a more traditional metric: investee business growth.

The investors did set overall portfolio targets – improve the lives of 250,000 smallholder farming households, increasing annual income by $80 each over five years and created an impact committee to screen potential investments. To help ensure its investments are used for their stated purpose, AACF uses an “intent vs. use” clause that allows the fund to withdraw their investments if they are used in ways that undermine smallholder farmers.

The case study also provides detail on the fund economics: Pearl Capital’s fund manager’s fee is 2 percent of committed capital or 2.5 percent of invested capital, whichever is greater. Pearl also receives carried interest of 20 percent of distributions after return of the principal, and a preferred return of 6 percent per year.

Both Justina Lai of Rockefeller and J.P. Morgan’s Bell said part of their motivation was simply demonstrating that such a deal could be done. The negotiations were time consuming, Bell said, but added, “Any deal we created together could serve as a precedent for the impact investment industry by illustrating how investors with different risk/return profiles can come together to create a new investment solution.”

$1.5 million for mobile app to boost African farm incomes

Virtual City, a mobile-technology company based in Nairobi, is redesigning its agricultural supply-chain system to help small farmers raise their incomes, through $1.5 million in convertible debt financing from Acumen Fund.

The deal, announced last week, is an example of how financing from impact investors can help ventures in the developing world re-focus their existing products for low-income producers and consumers through lower prices and simplified systems that are available via low-cost phones. Virtual City has previously targeted its mobile products to up-market customers able to pay higher prices for its systems.

John Waibochi, Virtual City’s CEO, said Acumen’s investment will help Virtual City serve more than 3 million farmers in the next five years, up from 300,000 to date. Virtual City’s Agrimanagr is used by agricultural cooperatives and processors to track crop and dairy purchases from farmer to processors and coordinate mobile payments to farmers.

“This redesign represents a game-changing innovation that will connect farmers to markets, allowing them to increase their income, build records of farm production and payment and receive the appropriate reward for increased attributed yields,” said Maurice Nduranu, Acumen’s East Africa portfolio manager.

In a follow-up email, Nduranu said Acumen did a convertible note to provide a measure of security in the first two years of the investment as the product is developed and rolled out, after which the debt would be converted to equity. He said Acumen would take a board seat and hold the company to certain “impact” covenants, including information and other rights around processes and decisions.

The redesigned system will make it easier for smaller farmers to participate in networks of agricultural processors and aggregators and bypass so-called “gate brokers.” Such networks have been shown to help smallholder farmers increase their earnings between 40 and 100 percent. The Virtual City “app” is expected to boost those earnings an additional 10%, or more than $100/year.

(Note: this post was updated with additional information on June 14.)

Entrepreneurs in Africa 1 of XX

The Kauffman Foundation is bullish on entrepreneurship in Africa and will push it at the African Innovation Summit at the end of the week:

Governments in the region seem to be valuing bottom-up movements for entrepreneurship in their efforts to set in motion a long-term economic growth strategy. According to the 2012 Doing Business report by the World Bank, 36 of the region’s 46 economies implemented regulatory reforms making it easier to do business between June 2010 and May 2011. Several African countries are among the top reformers, namely Cape Verde, Sierra Leone and Burundi. And these are on-going efforts. During the past six years, Rwanda (45th) has made more progress than all but one country in the world, pushing it to the third spot in the region—behind Mauritius (23rd) and South Africa (35th). By other measures, the same performers stand out, leading the way for its regional neighbors. In the Index of Economic Freedom, for instance, Mauritius is ranked among the top 10 worldwide. In the 2012 Index, Mauritius became the first sub-Saharan African country ever to advance to that height in the rankings, thanks to the island’s continued commitment to structural reforms and policies that promote integration into the global marketplace. By intent at least, people in the region are reacting positively to their government’s efforts. According to an October 2011 Gallup poll, sub-Saharan Africa has the highest percentage of adults (20%) planning to start a business in the next 12 months.

Can the African Lions follow the Asian Tigers? A  partnership to promote pro-entrepreneurship public policy in Africa, Lions@frica, was launched at the World Economic Forum last month.

Impact IQ in The Atlantic: How Financial Innovation Can Save The World

Financial innovation got a bad rep in the financial crisis. But inside the well-barricaded Federal Reserve Bank in downtown San Francisco last month, the financial engineers were at it again.

Teams of financial statistical whiz kids pitched complex new bonds, loan-guarantees, and hybrid structures of debt and equity. Their target? It wasn’t mortgages. It was women’s economic empowerment. It was energy efficiency improvements and ranchland conservation. It was small businesses in Africa.

The Occupy movement has tarred Wall Street with a broad brush, while economists like Yale’s Robert Shiller have tried to rescue finance from the consequences of its excesses. At the Fed, the MBA students competing in the second International Impact Investing Challenge were part of a new crop of financial engineers taking a different tack: tweaking risk and reward to directly tap at least a small part of the $60 trillion private capital markets for positive, measurable social impact.

(Editor’s note: This was published by The Atlantic on May 31.  The article can be found at http://www.theatlantic.com/business/archive/2012/05/how-financial-innovation-can-save-the-world/257920/.  Copyright © 2012 by The Atlantic Monthly Group. All Rights Reserved.)

The contest winners, who come from Stanford, have a plan to bring electricity to remote Indonesian islands — and 5 to 7 percent returns to investors — by financing local micro-grids through special-purpose vehicles owned jointly with community co-ops. The runners-up, from the Kellogg School of Management at Northwestern, aimed to help slum dwellers in Mumbai get higher-paying jobs, financing job-training by offering private investors 7 percent of graduates’ paychecks for two years.

“These are not idealistic kids,” the mastermind of the contest, David Chen, CEO of Equilibrium Capital Group LLC in Portland, Ore., said of the student financiers. “They are making a judgment call on the future. This is the equivalent of investing in hedging strategies or emerging markets, or high-tech 25 years ago. In each of those cases, the market efficiency and information efficiency gains went to those that were first.”

HIGH FINANCE FINDS A HEART

“Impact investing” is catching on among investors who want to use finance to make more food, cleaner water, better health care, smarter children, and a richer bottom-of-the-pyramid. Morgan Stanley has an “investing with impact” offer for its wealthiest customers, and AOL founder Steve Case told The Economist that impact investing was the hottest topic of conversation among a group of billionaires gathered in Santa Barbara.

In the broadest view, impact investors are simply betting on fundamental trends. In a volatile and resource-constrained world, investments to provide food, water, energy, health care, education and sanitation to a growing and increasingly affluent global population arguably have lower risks and higher long-term returns. But on the ground, even innovative efforts to meet basic needs often are hampered by inefficiencies and market failures that prevent those who create value from getting paid for it.

Enter the financial innovators.

If J.P. Morgan can use credit default swaps to bet that corporate credit ratings would rise in a volatile economy, why not let other investors use newfangled investment vehicles to bet that job training can keep ex-offenders from returning to prison or that transitional housing can reduce the ranks of the chronically homeless? The savings to governments in unbuilt prisons and unfilled beds in homeless shelters could be significant.

HOW FINANCE CAN REDUCE CRIME

A British import offers a way to collateralize such win-wins. “Social impact bonds,” sometimes called pay-for-success contracts, let private investors buy low-interest bonds to finance preventive efforts and get repaid, with a small premium, from those government savings. The new bonds effectively leverage the value of prevention, an ounce of which, Benjamin Franklin taught us, is worth a pound of cure.

If the social interventions meet its benchmark, a government agency pays off the bondholders out of the substantial savings from lower costs associated with jail-time, nursing homes and emergency room costs. If the programs flop, too bad. Budget-crunched agencies pay only for what works.

So far, exactly one such bond has been issued, to be repaid by the U.K Ministry of Justice if re-entry services for released prisoners lowers their recidivism rate by at least 7.5 percent. But Massachusetts is getting ready to back bonds to finance housing and other services for the chronically homeless, to improve their well-being, and reduce Medicaid costs. The Labor Department is committing $20 million for pay-for-success contracts for state-level workforce development; the Justice Department is backing contracts for prisoner re-entry programs.

“We hope to show that you can securitize a new form of cash flow out of government savings based on the spread between prevention and cure,” says Tracy Palandjian, who heads Social Finance, the Boston-based nonprofit that is organizing a number of demonstration efforts.

If it sounds sketchy, consider that financing methods we now take for granted were once edgy as well. The 30-year amortized mortgage was introduced by the Federal Housing Administration in the 1930s to unlock bank lending during the Depression. In the late 1970s, federal regulators let pension fund fiduciaries invest in venture capital, fueling the tech explosion.

CAN “MORAL” FINANCE REALLY MAKE MONEY?

Now there’s a rush to “crack the code” for unlocking private capital to meet the needs of the world’s poor. For example:

— The government’s Overseas Private Investment Corp., or OPIC, agreed to put down $285 million last year in a half-dozen “impact” funds that pledged to raise another $590 million in private capital.

— The Small Business Administration has committed $1 billion over five years to finance job-creation in low-income communities and clean energy projects, matched by private capital.

— In the UK, the Big Society Fund launched recently with 600 million pounds (more than $950 million) to invest in social enterprises. Two-thirds of the money comes from dormant bank accounts reclaimed by the government and the rest from four big banks.

“There are all these funds trying to prove that certain types of investments are not as risky as traditional investors perceive them and that commercial money can get into the sector,” says Christian Schattenmann, CFO of Bamboo Finance, which has raised $250 million and is now focused on solar power in the developing world. “In 10 to 15 years, mainstream and impact investing will merge and become one sector again and everybody will be looking at environmental and social impact.”

A GOOD BET IS HARD TO FIND

Suddenly, everybody seems to be looking for “impact” investments that promise measureable social and environmental benefits along with financial returns. But it turns out such ventures are not that easy to find. An increasing number of companies around the world are seeking “the fortune at the bottom of the pyramid,” as the late C.K. Prahalad put it, but most are too young or too risky to be “investable” by investors’ criteria.

For example, the new $25 million African Agricultural Capital Fund provides a hunting license for Pearl Capital Partners in Kampala, Uganda, to find 20 agribusiness deals that can together raise the income and productivity of at least 250,000 East African households. “Even putting aside the impact thesis, there are some really interesting opportunities in the market to address the needs of low-income people,” says Amy Bell, head of J.P. Morgan’s social finance unit, which brokered $17 million in equity investments – not grants – from the Gates, Rockefeller and Gatsby foundations, and itself made an $8 million commercial loan. But J.P Morgan’s assessment of the risk was aided by a guarantee by the U.S. Agency for International Development for half of its loan.

In Nairobi, M-Kopa LLC is creating a way for low-income consumers to use their mobile phones to pay-as-they-go for solar power systems, farm equipment, sewing machines and other productivity-enhancing equipment, was swarmed by impact investors eager to help it move from testing to rollout. That was partly a function of its pedigree: the venture was incubated by Signal Point Partners, the mobile-services incubator started by Nick Hughes, who as Vodafone’s head of global payments in 2004 launched M-Pesa, a mobile payments system now used by more than 10 million Kenyans to pay bills and transfer money. The rush was also spurred by risk-insurance from USAID, which mitigated some of the local currency risk for international investors.

Jacquelyn Novogratz, head of Acumen Fund, a pioneering impact fund that put $1.1 million into M-Kopa, is unapologetic about the need for risk-reducing subsidies. “The dirty secret is, I’m not seeing a lot of people making money in this field,” she says. “There’s so much desire, so much talent, so much money. What we don’t have is deals on the ground.”

Acumen, along the consultancy Monitor Group, recently issued a report calling for even more subsidies. Unlike angel investing in advanced markets for technology or health care, investments in new ventures for the poorest of the poor can’t promise outsize returns to outweigh the early risk. “With an iPod, there are some early adopters who will pay through the nose for it, says Monitor’s Ashish Karamchandani. “There are no early adopters will to pay through the nose for a low-cost irrigation system.”

‘I DON’T WANT TO BURY MODERN CAPITALISM’

To mitigate low and volatile returns, the report calls for “enterprise philanthropy,” in which foundations play the role of seed investors and market-makers, staking entrepreneurs to startup capital and stimulating customer demand for new approaches or whole new categories, plowing the ground for for-profit ventures.

“There’s a lot of interest from investors and there are certainly social needs that need capital, but the market is not clearing,” says Antony Bugg-Levine, co-author of, “Impact Investing: Transforming How We Make Money While Making a Difference,” who as a program officer at Rockefeller Foundation made early grants to build up the field. Bugg-Levine, who now heads the Nonprofit Finance Fund, argued in a recent article in Harvard Business Review that different types of investors can get paid in different types of currencies — charitable investors into a social venture can reap their returns in lives saved or girls educated, for example, leaving higher financial returns for more profit-oriented investors. You can think of that as a subsidy, he says, or as a high-leverage strategy to bring in additional capital and reduce the charitable outlay required to get the equivalent result.

Just as in high-tech investing, many early-stage social investments will fail. But the few that succeed may present opportunities for truly sizeable investments in new products and services for a global market.

There’s a fine line between the “breathless maximizers” who champion private impact investment as the cure for all global ills and the “derisive minimizers” who dismiss the whole opportunity, Elizabeth Littlefield, OPIC’s chief executive, said at the Global Philanthropy Forum in April. The appropriate comparison for impact investing, she said, is not to the entire global capital market, but to the pittance that now goes to foreign aid and economic development. A one percent shift in asset allocation toward sustainable development would generate $2 trillion, she said, 10-times the global budget for foreign aid

“It’s not just new money. It’s new money tied to newer, more efficient, more innovative generations of technology and infrastructure and services,” Littlefield said. “I don’t want to bury modern capitalism. I want to cultivate it.”

David Bank, a former reporter for the Wall Street Journal and vice president of Civic Ventures, is developing ImpactIQ, a news and data service for impact investors.