‘Embrace failure’ Acumen’s CIO Urges Impact Investors

An assertion crucial to the increasing popularity of impact investing was challenged at a debate in central London on Monday evening.

Acumen, the charitably funded investor that offers loans or equity, hosted a debate together with Business Fights Poverty at the headquarters of professional services firm EY. The motion put forward was: “This house believes impact investors don’t need to compromise between financial and social returns.”

The Global Impact Investing Network, for example, has published research that supports the idea that no compromise needs to be made. This idea has been further bolstered by the increasing number of high profile investment firms such as JP Morgan and Goldman Sachs getting involved in impact investment.

Arguing for the motion was Diana Noble, chief executive of CDC, the British government’s development finance institution. She said she could prove no compromise between impact and return was necessary as CDC had achieved an average of 6% net return over the last 20 years.

So what about the impact? Noble said that on her regular visits to Africa and South East Asia: “You cannot go anywhere without seeing businesses that simply wouldn’t exist without CDC, whether it’s plantations or dams or cement factories or financial institutions.” CDC specifically focuses on creating jobs, seeing that as the main route out of poverty.

“We are not an impact investor; we build businesses for impact investors.”

Sam Parker of the Shell Foundation sat on the opposing side of the debate. His position was that an investible proposition that organisations like CDC might finance had probably already received grant money in the early stages: “Somebody, somewhere did the early-stage heavy lifting; somebody, somewhere paid for that.”

Parker gave an example of getting power to rural communities in Africa and Asia: “It was simply too expensive to get the grid to reach them.” The Shell Foundation invested “seven or eight million dollars over several years” in entrepreneurs working to solve the problem. “They’re now reaching 350,000 households and are about to close a deal with a commercial investor,” he said.

Parker’s point was that impact investors only get involved once a company has developed a proven business model. At an early stage “other investors will come in that will put up with a 50% loss, then further down the line there’ll be somebody who will work at break even. Then finally, after all of that investment has been put in, there will be impact investors looking for a financial return that can come in and invest in a de-risked company. If it wasn’t for the early-stage patient grant, there would be nothing to invest in.”

Parker finished by stressing the difference between his employer and others in the room: “We are not an impact investor; we build businesses for impact investors.”

“If an impact investor gets scared of failure then they are not true to what they’re trying to do in the world.”

On the same side was Sachin Rudra, chief investment officer at Acumen. He thought that a financial return would sometimes have to be sacrificed but urged impact investors to embrace that. As he put it: “There is no such thing as a free lunch.”

Rudra put forward the cases of LifeSpring and Ziqitza healthcare companies in India. Because of the limited financial capacity of Indian citizens to pay for maternity and ambulance services, both were difficult business models to get right, involving financial failures for investors. Both companies are now thriving and the financial models more attractive to investors. Rudra argued that the eventual impact was worth the risk.

“We should embrace failure. Now, that is likely to reduce the financial return that you make on your overall portfolio. And that same risk that you are taking also delivers the impact because you have failures and you sometimes have to keep price at a certain level so that people living on less than $2 a day can come into your hospital or your school. If an impact investor gets scared of failure, then they are really not taking enough risk and are not true to what they’re trying to do in the world.”

Moderator Jon Shepard of EY asked for a show of hands both before and after the debate. The majority of the audience was against the motion prior to the discussion. This remained the case at the conclusion, although the comments of Noble and fellow team mate Geetha Tharmaratnam of Abraaj had put a dent in that majority.

This article was originally written by Lee Mannion and published in Pioneer’s Post.