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Impact Investing: Passing Buzz or Paradigm Shift?

Photography fromMiddle Class in Africa

By: Bart Meijs – founder and CFO of InReturn Capitaland the InReturn East Africa Fund. Bart will be speaking on realising impact at the SuperReturn Africa Conference, Nairobi, 29 November 2011, 17:15-17:45.

While the impact investing market is still young, it is growing and estimates state that over the next ten years impact investing will attract between US$400 billion and US$1 trillion of investments. Impact investing requires a unique set of investment and risk management skills, and demands organizational structures that accommodate its hybrid nature. Bart Meijs of InReturn Capital elaborates on a few underlying dynamics fundamental to understanding the concept and practice of impact investment.

Defining Impact Investing

Impact investments have as a core objective the creation of positive social and/or environmental impact, in addition to market related financial return. Impact investors deliberately craft a strategy to maximize a particular form of non-financial, positive return. For example, InReturn invests in small and medium businesses (SMEs) in East Africa, focused on job creation, training and good working conditions, sound pay, good governance and full compliancy. InReturn seeks businesses that are neither considered microfinance nor mainstream commercial investments, thereby addressing the unmet financing need of an important motor of developing economies. A fundamental component of InReturn‘s strategy is providing management support to investees, helping to ensure business success and financial returns.

Can Impact and Financial Return Coexist in Harmony?

The impact market distinguishes ‘impact-first investors’, who seek optimized social and environmental impact with a financial floor, from ‘finance-first investors’, who seek to optimize financial returns with a floor for impact. Both type of impact investors seek market related returns per investment to pursue a sustainable portfolio. Impact investors take the view that impact and financial return are inextricably intertwined, as it makes for better businesses, higher returns and greater benefit for all stakeholders.

The Challenge of Realising Impact

Measuring impact is one thing, though what is the best way to realise impact? In this regard, perhaps more than any other, impact investing is applying innovative practices[1]. In the experience of InReturn, it requires a full review of the incentives through the investment process. Possible impact targets must be discussed and agreed upon with the entrepreneur upfront, and the mid- and long-term view of the company’s financial and social performance is best linked to the terms of the investment. InReturn even links the investment manager’s remuneration to impact targets, aligning interest across the investment chain.

As we continue to shape our definition and understanding of the impact investing space, one aspect is clear: impact investing is a paradigm shift that is here to stay.

InReturn Capital invests in small- and medium-sized enterprises (SMEs) with the potential for sustainable growth. InReturn’s team is on the ground to manage the investments in Kenya, Tanzania and Uganda. Target sectors include agro and food processing, transportation, manufacturing, construction, energy, logistics and healthcare. InReturn supports portfolio companies with tailored investments including equity investments up to USD 2.5 million. In addition InReturn takes an active mentoring role with company management, providing advice and entrepreneurial expertise. At the core of InReturn’s strategy is market related returns and social impact. Social impact is measured and managed by job creation, employee training and working conditions, strengthened governance and compliance. The InReturn East Africa Fund is open to new investors until final closing in March 2012.

[1] For further discussion of benchmarking in impact investment see J.P.Morgan paper “Impact Investments: An Emerging Asset Class (November 2010)