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Tag ‘ social return ’

Jacqueline Novogratz on Social Return

August 21, 2009 | Comments Off | Guests

If measuring financial return on an investment has becoming a common practice, measuring social return still faces several issues and there is no global consensus yet on the way it should be assessed. To invest with impact, it is however a key information; on the first hand for the investor anxious about the impact generated by its capital and on second hand for the investment fund to evaluate their objectives, improve their practices and communicate the outcomes. Social return, being at the heart of the debate on impact investing, Fair Street has investigated how social investment funds measure the social impact of their investment.

Fair Street had the great privilege to interview Jacqueline Novogratz, founder and CEO of Acumen Fund, a major social investment fund mainly active in Asia.

Jacqueline Novogratz started her career at the Chase Manhattan Bank. After obtaining a MBA at Stanford University, she decided to go to Rwanda and founded a microfinance institution called Duterimbere. Consultant for the UNICEF and the World Bank, she then joined the Rockfeller Foundation where she created and managed key programs focusing on development. In 2001, together with main international organizations, she founded the social investment fund Acumen Fund.

In 2009, she wrote the book “The Blue Sweater” and she often shares her optimistic and inspiring vision at difference conferences such as Ted Talk or WEF.

In the following interview, Jacqueline Novogratz answers Fair Street’s questions on the role of patient capital and the challenges of measuring social return.

Fair Street: Could you shortly describe Acumen Fund? More precisely, could you tell us how it differentiates from other social investment funds?

Jacqueline Novogratz: Acumen Fund exists to help end poverty by changing how the world addresses it. We do this in two ways. We invest patient capital to identify, strengthen and scale business models that effectively serve the poor. And we champion and spread this approach as an effective complement to traditional aid, which can create dependence, or pure market approaches, which can bypass the actual needs of the poor.

Acumen Fund focuses on a market-oriented approach to addressing problems related to poverty in the developing world, and in its use of debt and equity, as well as an investment model that relies on intensive due diligence and the use of metrics to ensure that each investment yields measurable social returns. We actively listen to understand who the poor are and let markets indicate what they need, in an effort to help people make their own decisions and solve their own problems

Our long-term vision is that one day every human being will have access to the critical goods and services they need – including affordable health, water, housing, energy – so that they can make decisions and choices for themselves and pursue lives of greater purpose. This is where dignity starts – not just for the poor but for everyone on earth.

FS: Could you explain what a social return is? What are the different tools to measure it? What are the challenges in measuring it?

JN: It’s the measurement of this « social return » that is so difficult – not just for Acumen Fund but for the nonprofit sector overall. We have a clear commitment to accountability and metrics, from ourselves as an organization and from all the investment enterprises with whom we work. So we continue to work to develop systems that help us better understand the real impact of our work, and how we can better support our investees. At the level of our individual investments, we assess our investments along four criteria: Financial Sustainability, Social Impact, Scale and Cost Effectiveness. We expect quarterly metrics from each enterprise on the corresponding financial, operational and social impact metrics.

We employ an analysis called BACO (short for ”best available charitable option”), which is our tool for assessing the cost effectiveness of our investments. We designed it as a way for us to better understand and improve the effectiveness of our own work, not necessarily as a tool for the sector, although we are happy to see that others find it applicable.  We developed the framework because we found that absolute measures of social return are too hard to implement in practice, but we needed something to help us think about the marginal use of our philanthropic capital.

Over time, we would love to see a world where the “output per dollar input” of a range of activities is made transparent and comparable. The question of standardized metrics is an incredibly difficult one, given subjectivity in values. With Google’s support, we have built a web-based tool to share portfolio performance data across our four international offices. Called Pulse, this system allows us to keep metrics data and insights reliable and available. We can then analyze this aggregate pool of data to identify cross-cutting principles—and to explore and communicate breakthrough insights into how to reach base-of-the-pyramid markets. Pulse is currently being beta tested by a number of peer organizations, and along with a standard set of definitions, has the potential for allowing for greater comparison and transparency across the sector.

FS: You said in the “Ted talk” that patient capital plus management support are more efficient than market and charity alone. Why is this combination more efficient in generating social return in the long run?

JN: Poor people seek dignity, not dependence. Traditional charity often meets immediate needs but too often fails to enable people to solve their own problems over the long term. Market-based approaches have the potential to grow when charitable dollars run out, and they must be a part of the solution to the big problem of poverty.

But the marketplace alone isn’t the answer either. Very low-income people are too often invisible to businesses and society. Building new models that provide these critical services at affordable price – in the face of high costs, poor distribution systems, dispersed customers, limited financing options and, at times, corruption – requires imaginative business solutions and partnerships supported by investors willing to take on a risk/return profile that is unacceptable to traditional financiers.

Our approach is to invest “patient capital” – typically below-market investments that are accompanied by management assistance in enterprises with the potential to reach hundreds of thousands of individuals. We regard low-income as individuals as customers (even if they have no ability to pay) rather than as passive recipients of charity. We start with the market because we believe it the best listening device we have. From our investments, we gain insights not only about the poor as consumers but about where the market fails entirely. In these cases, we believe we can bring deeper insights about more efficient ways of delivering needed services to the very poor.

FS: In classical financial models, people usually build their portfolio looking for the highest expected return given a certain level of risk. Do you think social return will become a key investment driver in the future? Does paying attention to social return necessarily imply renouncing to some financial return?

JN: I don’t think the financial model that’s changing — what’s shifting is the way many investors consider the definition of return. I think social return is already a driver for many people, who are seeking the highest expected return that combines both the financial and social. For Acumen Fund, while we operate as a venture capital fund, we seek to make a social impact with investments while achieving financial sustainability. With our earlier investments, we have generally sought the return OF our capital as opposed to a return ON our capital – however, our more recent investments have the potential for far greater returns.

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Blue Orchard is the main commercial investor in the microfinance sector. Created in 2001 and headquartered in Geneva, Blue Orchard supported in the year 2008 more than 140 institutions in 40 countries .

Blue Orchard’s mission is to empower the poor world-wide and improve their quality of life by promoting income-generating activities through private investments in microfinance.

Practically, Blue Orchard creates a bridge between the international financial markets and the microfinance institutions (MFI) by investing in them through debt or capital.

Using innovative placement solutions and innovative financial tools, Blue Orchard favours the flow between the private capital markets and microfinance institutions. This enables Blue Orchard to generate an attractive return on investment while supporting the growth of millions of microenterprises. 53% of Blue Orchard’s clients are women and receive microloans oscillating between $50 and $8000.

Blue Orchard considers its investments in the MFIs as long-term partnerships and wants to be present at all their development stages. During our visit at CRECER, we observed that microfinance institutions strongly appreciate this approach as their capital needs vary along their evolution.

In order to be able to inject more capital within the microfinance sector, Blue Orchard launched its own private equity fund in 2007. On December 31st 2008, this fund managed $130m originating at 80% from institutional investors and at 20% from private investors. The fund’s results have been excellent up to now. This trend should maintain and enable Blue Orchard to remaining the reference institution supporting MFIs financially.

For more info, visit www.blueorchard.com

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E+Co: Energy through enterprises

June 12, 2009 | Comments Off | Financial Agents

E+Co supported Sobre La Roca in 2005 with a loan of $20,000. This financial support has triggered Sobre La Roca’s recent impressive development during which the company saw its sales increase by 300%.

Created 15 years ago, E+Co is an American venture fund that exclusively supports entrepreneurs active in the clean energy business in developing countries. E+Co is convinced that there is a demand for clean and affordable energy in developing countries and that this demand can be satisfied by local entrepreneurs. Furthermore, this fund is a great example that an efficient financing in clean energy can have a significant impact on the environmental situation of our planet.

Today, E+Co invests in more than 200 companies. For a total of $28.8m, 88% of its investments are debt whereas the remaining 12% are in equity. E+Co’s investments vary between $20,000 and $1,000,000.

The majority of these investments is in Africa and in South America. On the technological side, solar energy constitutes the main field of investment focusing with 32% of the portfolio.

E+Co has a very clear investment strategy guided by the following principles:

The business idea of the activities in which they invest:

1) Must be well defined and involve capable people

2) Should employ approaches to energy production, use or finance using established affordable, reliable technologies that move communities up the energy ladder

3) Must offer clear social and environmental benefits, while being competitive with conventional alternatives

4) Must have the potential to be economically self-sufficient and offer growth potential


For E+Co, capturing the impact of the investments is critical to demonstrating the effectiveness of its approach. To calculate the return on investment, E+Co measures its clean energy businesses across 34 social, environmental and financial indicators. E+Co collects data from each investee company biannually and then compiles the results into an organizational summary called an Impacts Table.

Since its creation, E+Co has enabled 4.8m people to use clean energies. E+Co’s investments have also made possible the reforestation of 335,000 trees as well as a reduction of 4.6m in CO2 emissions. Everything put together, all E+Co’s actions saved $11.2m.

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Following the interview of Michael Chu, here is a more detailed description of IGNIA Fund, the social venture fund that he co-founded and manages.

Founded in June 2007 and headquartered in Monterrey, Mexico, IGNIA Fund is a social venture capital fund that supports social enterprises with high growth potential. IGNIA builds bridges between financial markets and the « Base of the Pyramid » by providing capital to enterprises of this sector. Traditional investors are usually reluctant to invest in this sector as the incubation period is longer than for regular companies. As a consequence, social enterprises face major underserved financing needs. IGNIA’s founders believe that the market constituting the « Base of the Pyramid », has a huge potential. In Latin America, it is composed of more than 360m people whose purchasing power is valued to $520 billion.

In May, IGNIA completed his third closing bringing its equity commitment to $40,7m. The round was led with $5m from Soros Economic Development Fund, created by philantropists investor George Soros. According to Michael Chu, IGNIA’s fund raising have not been affected by the current economic slowdown. Moreover, it made it possible for IGNIA to come closer to its objective of $50m - $75m in equity. If we also consider the credit line of $25m provided by the InterAmerican Development Bank, IGNIA will have a total of $75m - $100m that can be invested in initiatives dealing with the most urgent problems of our planet. The invested amounts will vary between $2m and $10m for a period that lasts 12 to 15 years. In IGNIA’s founders’ opinion, this is the necessary period for having a major social impact.

IGNIA does not only focus on a specific industry and is willing to have a highly diversified portfolio. On the geographical level, its ambition is to go beyond Mexico and to participate to the development of the « Base of the Pyramid » in South America as a whole.

In addition to a major social return, IGNIA also wants to offer above average return to its investors (e.g. IRR 30%). If the two founders, Michael Chu and Alvaro Rodriguez, are convinced that social enterprises represent the future of our society, they also believe that a sustainable change can only be obtained through the development of entire industries (requiring the emergence of numerous companies). As the development of industries implies superior financial return, maximizing financial value is, together with having a social impact, one of the two pillars of IGNIA’s investor proposition.

IGNIA’s first investment is an equity investment of $3m in Primedic‘s capital, a Mexican firm based in Monterrey. Primedic provides healthcare to the most destitute people through an innovative membership program. The capital provided by IGNIA will allow Primedic to extend its services to other cities of Mexico. Up to now, the performance of this investment exceeded IGNIA’s expectations.

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