Impact Investing & The US Government: A Report from SOCAP11 Day 3
Given my passion for change through politics, I was really looking forward to hearing from Elizabeth Littlefield, CEO of the US Government agency Overseas Private Investment Corporation (OPIC). Elizabeth was appointed to this position by President Barack Obama. Her Friday AM plenary lecture was entitled “Government that Gets Things Done.”
President Obama had once said that “OPIC is perhaps the best kept secret in the federal government”. OPIC provides long term financing and insurance to companies and non-profits that are investing in emerging markets to solve some of the world’s greatest challenges. OPIC manages a $15B portfolio of investments – ranging from investments of $100,000 in small businesses to investments of $250M and more in large companies like Coca Cola. It invests in things that the commercial market will not invest in, and manages to return funds to the US Treasury each year.
OPIC is promoting blended value investments, in order to build community between two seemingly divergent groups – the aid folk and the business folk. Elizabeth said that the groups aren’t really that far apart from each other – she thinks the gap can be closed.
Elizabeth and OPIC are working to support the impact investment sector. OPIC has collected funds from parties interested in investing in the impact investment space. These parties had to be committed to generating social or environmental impact, yet also interested in receiving returns. OPIC then solicited the community for applications for these funds, and received eighty eight complete and timely applications.
Elizabeth learned a lot about the current state of impact investing from her review of these eighty eight applications. Fifty of the applications were equity funds. They covered sectors ranging from clean tech finance to water, agriculture, health, and education but did not address social or environmental issues around infrastructure and forestry. The proposals had different financial structures – ranging from fund to funds, which Elizabeth was not used to seeing, to innovative ideas such as carbon finance. The persons behind the applications generally had a lot of mainstream investment talent, however very few mainstream institutions applied – such as private equity firms and big investment banks. The applicants projected returns ranging in the high single and low double digits from debt funds, to mid-teens from fund to funds. The equity fund applicants were targeting fully commercial rates. Elizabeth said that this was quite a change from the 2-3% that the community was seeing in the early days of the impact investment sector. OPIC is now in due diligence with a handful of the eighty eight funds that applied to this program.
So what is needed to push the sector forward? Elizabeth suggested six things. Firstly, she said that the sector is still too heavily driven by the public sector; she would like to see more private capital enter the space. Secondly, we need more experienced deal teams. Elizabeth referenced a 2011 survey of equity partners, conducted by the Emerging Markets Private Equity Association. The equity partners surveyed said that their number one hindrance to investments in markets such as Africa was lack of experienced deal teams putting deals together. OPIC views their job as bringing those teams and the capital together. Thirdly, there is an absence of risk mitigation mechanisms such as political risk insurance. OPIC would like to develop this in the future. Fourth, the current investment opportunities are not large enough for the big investors and primarily use equity. OPIC would like to help the community develop a better range of instruments. Fifth, the impact investment community has a limited track record. Finally, the community will need to utilize marketing tools to promote the concept that you can make a difference and money at the same time.
Elizabeth then went on to predict what is next for the space. Firstly, unfortunately impact investing social capital space will always be microscopic in comparison with mainstream capital, but we can still make it a bigger space than it is right now! Secondly, we will see more diversity in terms of a range of returns and ways of measuring metrics. Thirdly, consumer demand in the form of the retail market will drive growth in the impact investing space. Selling investments with a story will work, but selling investments that pay back will not work. Fourth, growth will come from repeat customers – investors who come back and add more impact investing to their portfolios. Fifth, the community should focus on steady, moderate , sound, long term results instead of focusing on short term growth. I particularly liked her final point. Elizabeth said that “in the long sweep of history the big story of our generation will not be simply that billions of people in China and Russia and India and across the developing world have all turned towards market economics in a short period of time. I think it will be that people within market economies, investors and entrepreneurs, have figured out how to translate their capital into answers for our common challenges like poverty, health care, water, housing, energy, and climate change.”
What do you think? What is next for the impact investment sector?