Two weeks ago, I trekked to an unlikely hub of social impact activity: Washington, DC. I was delighted to spend two days with some remarkable and passionate people who are helping bring some truly high-impact investment opportunities to investors like those at Boardwalk Capital. This article will highlight some of these opportunities, the difference they are making in the world and their role in an investment portfolio.
The Evolution of Microfinance
A few decades ago, it was far fetched to think that one could make small loans to entrepreneurs in emerging countries and get paid back (with interest). Today, this doesn't seem so crazy at all and the microfinance sector has a proven track record of lifting scores of people out of poverty while providing competitive returns to investors. (For more, see: The Who, What and How of Microfinance.)
As capital has flowed to these lending institutions, efficiencies have grown and borrowing costs have declined - further benefiting these borrowers. Likewise, a microfinance fund available to investors in 2017 has evolved branching out to include impact segments such as trade finance, education, health clinics, market access for artisans and small farmers and even solar lighting. Each of these segments, and many more, have both a need for capital and the ability to improve lives. This creates an opportunity for institutions who can also do so profitably.
With investors a bit squeamish about the possibility of rising interest rates, the bond market has not been the place for the strongest fund inflows. Investors have been somewhat reluctant to lengthen their portfolio maturities to pick up yield.
This creates an interesting opportunity to consider impact investments in the form of notes and partnerships that invest in short-term loans. For the portion of an investor's portfolio that can be "locked up" for a few years (since many of these investments do not have trading liquidity), yields are generally competitive with government and corporate notes. Their illiquidity, and the short time-to-maturity of their investments, make these a relatively stable component of a portfolio.
It's worth noting that while government and corporate notes carry credit ratings from well-known agencies, impact notes and partnerships do not. What they lack in rating clarity, they try to offset an unblemished record with investors and through innovative structures. Many of these investment partnerships are structured more like a bank, with reserves or "catalytic capital" from charitable foundations, that insulate investors against the first wave of credit losses. (For related reading, see: Green Bonds: Fixed Returns to Fix the Planet.)
Some Specific Insights
The credibility of an organization is based on their long-term track record in this space, the quality of their team, their level of due diligence and their access to the best local partners. From hundreds of offerings around the globe, our goal at Boardwalk Capital is to discover, interview and evaluate these potential investments. Then we can attempt to negotiate the best terms for our clients by asking these questions:
- Can we pick up yield by bringing groups of investors or by committing to longer terms?
- Can we get lower minimum investment levels, allowing us to better diversity our clients' portfolios?
In the end, the best candidates are those with quantifiable social impact that is coupled with financial return potential commensurate with the risk being taken, and matching these characteristics with with appropriate investors.
One such organization that meets these criteria is MicroVest (MV), based in Bethesda, Maryland. MicroVest has been investing for impact since 2003. They call their work "purposeful Investing," providing private capital to financial institutions that in turn make loans to entrepreneurs in developing communities. Since their inception, MV has disbursed more than $1 billion to clients around the world while also earning competitive returns for their investors.
Other Worthy Ideas Still in Early Evaluation Stage
Boardwalk clients have invested in organic farmland (Farmland LP), solar financing (Wunder Capital) and in other impact notes (Calvert Impact Capital, etc.) Here are some more interesting candidates:
North Sky Capital: Clean technology private equity. North Sky has been a leader in this space for nearly 15 years focused on proven technologies in segments such as water, renewable energy, energy management and storage, and sustainable agriculture. They will be launching a new fund in 2018.
Global Partnerships: A non-profit organization offering senior notes and catalytic capital investments for investors wishing to support diverse impacts, from financial literacy to sanitation and health. Notes from one to 10 years to maturity.
Shared Interest: Providing capital to support lending to small businesses and farmers across Southern Africa since the end of the Apartheid era.
EcoTrust Forest Management (EFM): EFM's unique approach to timber management captures a wide array of funding sources, from tax credits, carbon credits, conservation easements, etc., while managing sustainable forests with Forest Stewardship Council (FSC) certification and delivering attractive returns to investors. (For more from this author, see: Sustainability Gives Work and Investing Purpose.)