Beyond the J.P. Morgan Report

Posted by on June 29th, 2011

What’s next for the J.P. Morgan team whose report, Impact Investments: An Emerging Asset Class, – co-written with Antony Bugg-Levine’s team at Rockefeller – both sized and defined one part of the Social Capital Market?

We are looking forward to J.P. Morgan continuing to help build the market through further research and to help investors think about returns and risks of the broader impact investment market and the opportunities ahead.

Whereas the market is at an early stage, J.P. Morgan is encouraged to see many more solid fund managers coming into the space with rigor and financial expertise. Their initial research had 1,200 respondents.

Most of the investment opportunities they are looking for in impact investing have been for their principal investing activities. Renewable energy in the developing world is a fast growing opportunity, but SME related funds in the developed world are also emerging as government steps back from a broad range of social services.

In several places in Sweden, there is a rise of local, city, or regionally-focused, targeted investment funds (created by private individuals involved with some institutional investors with experience – sometimes with a government lift) focused on local problems of the economic and social integration of immigrants. Continent wide, social enterprises coming online to work on immigrant issues are arising partly in reaction to a right-wing shift by some governments in Europe. This is money intended to create a certain kind of place, with the kind of social contract that they had and want to preserve, but be as welcoming to new people as they can be.

Impact investment funds are also emerging in the developed world. Beyond pioneers like Bridges in the UK where $30 million funds are being raised, there are funds that are cropping up in Germany and Italy.

One possible investment structure is club deals, with a smaller number of investors coming into one specific fund, say focused on early stage, potentially game changing funds in agriculture, mobile, medical technology, health, or renewable, locally-produced energy. Impact investors are demanding a higher degree of engagement than traditional investors, and clubs deals allow the investors to pool their expertise and understanding as well as their resources.

I am finding that across the board, traditional institutional venture investors – used to deep engagement and not much interference from their limited partners – are being asked into a different kind of relationship than they are used to. Limited partners – used to being passive – having often faced the fact that they can likely make some lower rates of financial return in exchange for linked social and environmental impact, want to be part of the change they are making.

Capital is becoming more democratic in ways that will shift the relationship between professional and amateur investors. The line between amateur and professional becomes blurred as people with money are demanding that they get to play a part in exchange for the discount to financial return. Helping the amateur to learn in order to be truly helpful is the job of the clubs; watched over by investment houses, in some cases, or by funds who take on a new kind of engagement as core to their mission.

This is a development that can lower costs and increase returns if it they can deliver real, blended value. It calls for funds to learn something of the volunteer engagement that non-profits have been doing for decades. These volunteer, strategic mentor-like resources are easiest to employ on early stage deals, that need more help focusing and launching operations, as the Village Capital network of funds – including Hub Ventures – is learning.

European adoption deeper, broader than in the U.S.

The serious engagement by long-time mission-focused banks, like Triodos, with the movement side of the social capital market is another sign of how the European market is moving in greater depth and breadth toward making impact investing – including on governments like Greece using impact investing as a key tool in the tool kit they are trying to employ on their daunting economic and fiscal problems.

Europeans – having validated the social enterprise approach to problem solving in the developing world, the complete tool kit of the social capital market: including grants, subsidies, mission-focused loans and catalytic, risk-taking equity – are applying it to local problems.

That’s because the social enterprise approach to solving big problems is innovative, game-changing, systemically aware; it is a good tool to use to stir the soup and catalyze things when civil society, philanthropy, business, and investing alone are not solving a problem on that scale. Europeans – newly aware that some among them have been pioneers in moving money with meaning – are getting on board in a broader way than is happening in the United States.

U.S. lags Europe in action on funding social innovation

In actual serious action being taken, the United States government (other than OPIC) is a laggard to many European governments. Many parts of the U.S. government are giving increased lip service to putting their money behind social innovation. But they are often consumed in cumbersome meetings with little to show for it. There are promising signs that that may change some time soon, but optimism takes some effort when waiting on government to make a difference.

On the other hand, the U.S. is a leader in democratically-aligned capital, from seed-stage investing to peer-to-peer funding platforms – like MicroPlaceKivaHoop Fund, and IndieGoGo – and in project-focused crowdfunding platforms. It’s hard to get a clear handle on the size of those platforms and efforts in the aggregate, but it’s a hub of vibrant activity that is itself starting to draw funding.

There is a froth of energy and enthusiasm for social innovation in the U.S., especially by young people – newly aware of the systemic and pervasive extent of the problems facing the country and the world, that these platforms can help channel – and it’s an area that should be taken more seriously by researchers.

Giving the money you have in your wallet is easy; people do it on the street all the time. Investing the money you have in your wallet, or $25 and up investments, requires a behavior change for most people. This is an area where there is an opportunity to apply online consumer and donor research in a coherent manner to this mix of investor, donor, and consumer behavior.

If you are interested in helping to make sense of this explosive, exciting part of the market, let us know. We are trying to define this market, and the linked behavior-aligned trends or movement – like collaborative, shareable commerce and new style cooperatives that are also arising. It’s a common pool of money; some of it is being spent, some invested, some given, but the thinking and feeling around those dollars are increasingly the same.

Because of the coherence they are putting around the use of their resources, the people who act in those ways – who invest on MicroPlace, or IndieGoGo, or Kiva, and who are changing their spending habits at the same time – are perhaps the most important market segment emerging in the social capital market.

Social enterprises who want to engage the corporates who want to be part of the social capital market will do best to describe and serve this new mission-aligned investing consumer.

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