Investors' motivations are not what you might expect

Social impact can be just as important as the bottom line, says the chief executive of ClearlySo, which helps social entrepreneurs raise capital

Rodney Schwartz
Rodney Schwartz

At our firm, the question we are asked most by clients seeking to secure social investment is: "What sorts of return or impact are your investors looking for?"

We urge them not to think in this way and to focus instead on building their enterprises, being innovative about how they achieve their social impacts and working with us to see which financial model and instrument best suit their needs. Investors can be found for pretty much any inspiring social enterprise in the increasingly rich and broad investment ecology that is emerging.

However, social entrepreneurs are not satisfied with this answer. They seem to want a single number - but there isn't one. Our sector is emerging and investor behaviours and preferences are developing. The importance of social impacts means that values play a big part in the investment decision-making process: values shift and are challenging to measure, and the trade-offs investors are prepared to make change constantly.

This is common with angel investors, such as those in our ClearlySo Angel network. Individuals might be willing to accept even a negative return to achieve a social impact they value - such as educating young girls in Africa - but seek market returns on the rest of their portfolio. Then they might have been inspired by a health-sector social entrepreneur and are investing a substantial sum with a relatively low return. These ever-changing desires make social finance fun and are part of the self-discovery process in which we are collectively engaged.

Deep-seated individual motivations play a vital role, but motivational factors also seem to be important to institutions. One of the most interesting oddities in the impact investment space lies with institutional investors rather than individuals. This came to light magnificently with a client we were advising. In order to establish potential demand for social investment in our client's project, we sought the opinions of investors in advance of an offering. This is a time-consuming process, but it makes it easier to feel confident in the levels of demand and the appropriate rates of return investors will seek for a given project.

At the end of the interviews, my colleague summed up by saying: "The impact funds are more demanding than the mainstream investors." The client and I looked at each other and then at my colleague, assuming he had made a mistake. But he was right - for this investment, conventional investors would accept a lower rate of return than on those funds established to target social impact.

This seeming anomaly might be case-specific, but I doubt it. It also might have something to do with deep-seated motivations. From some of our enquiries it appears as if mainstream investors carry out impact investment because of corporate social responsibility, assessment of client demand or employee pressure, or a combination of all three: they rarely do so, at least at this stage, to make a lot of money or as a core part of their business.

By contrast, this is the core business for impact investment funds. They are trying to prove to sceptics that a fund that generates social impact can deliver solid returns, and this is particularly important at this early stage in the history of IIFs.

Perhaps the mainstream is trying to prove how social it can be while the IIFs are demonstrating their commercial viability. Our sector is indeed fascinating.

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