June 23, 2021
Our Chief Impact Officer, Sandra Moore recently spoke at the 2021 Social Innovation Summit–an annual global event that brings together visionaries and change agents from around the world for discussions on how to take action and create lasting, positive change.
In her session Sandy joined Bart Turtelboom, the chairman of Delphos International; Justin Stevens, a senior partner at Apollo Global Management and financial journalist Louisa Bojesen for a discussion on impact investing and the future of finance.
Here are some key insights from their conversation:
Catalytic capital requires collaboration between the private and public sectors
There is a need for the public and private sector to work hand-in-hand to combine the on-the-ground knowledge and lived experiences of the public sector with the resources and technical specialties that the private sector can bring. This kind of collaboration opens up greater opportunity for small businesses and capital- starved communities to benefit from the type of laser-focused, targeted investment that transforms businesses and local communities. With Sandy’s work in both of these sectors, she believes the catalytic change needed to transform underserved communities is not possible from solely philanthropy. If philanthropic efforts were enough to solve the crisis at hand, it would have occurred already.
There is no “best” sector/industry to invest in
Given the large number of metrics in impact investing and the difficulty of narrowing those down, figuring out the best sectors or industries to invest in truly depends on the person or firm. For Advantage Capital, our mission is to bring jobs, technologies and opportunity to the places that have long been underserved by traditional capital. We are largely industry agnostic, and instead, focused on investing in small businesses in underserved areas that are able to expand and create good, quality jobs in their communities. We invest in rural pockets of the U.S. as well as urban core neighborhoods, finding companies from diverse industries that have the potential to grow and positively impact their communities.
Panelists discussed the issues to consider when investing by industry. Every industry scales differently and expecting a one-size-fits-all model in terms of scalability is impossible. For example, in the software industry, once an initial code is developed it can be replicated and sold countless times, this same principle is inapplicable for manufactured goods. Sectors like healthcare may have high returns on investment but can require deeper technical understanding of developments and what constitutes success. Thus, determining the best industry to invest in requires a deep understanding of which metrics are valuable to your organization and investors.
Specificity is occurring across the impact investing space
In the past, impact investing was widely regarded as a blanket term applicable to investing in any company with a desire for social impact by trading higher returns. However, as the industry continues to grow and more firms enter the space, a level of specificity that hasn’t been previously seen before is now occurring. For example, at Advantage Capital, a key performance indicator for our small business investments is how many high-quality jobs they generate for local economies. Other impact investing firms are focused on any number of social, governance or environmental impacts, whereas others are focused on particular demographics. This specificity and focus have created clearer expectations for a set of outcomes and has opened the door to more investors who are able to see the projected impact and financial return their investments will bring.
Targeted investing in small businesses works
History has and continues to be a great predictor of our future. Small businesses make up over 99% of America’s 28.7 million companies. Our work with small businesses in economically distressed communities not only provides the financing needed to expand, but often to attract additional investment to these communities, helping to equalize opportunity. The inequity in access to capital comes from a variety of factors including: the high cost of capital in rural and distressed communities, lack of management experience and educational opportunities in rural areas, or demographic trends that leave these areas unable to maintain the labor force needed for expansion. However, we know from experience that targeted investment in small businesses in these areas drives expansion in local economies and this process is replicable in distressed communities across the country.
There is a balance between financial return and social impact
Impact investing differs from other forms of investing given that it balances other priorities alongside financial return. Impact investors need to carefully assess how financial return and impact work together and determine suitable goals for their organizations and funds. Moreover, “impact” and “social impact” are broader terms that can apply to a variety of benefits to a community, ranging from job creation to strides in sustainability, so communicating the goals and expectations of various funds and investments to stakeholders is extremely important. However, for impact investing to make a difference, competitive returns along with the change investors are seeking are important—otherwise it’s back to simply philanthropy. Understanding this balance needs to be a continuous and thorough conversation between external and internal stakeholders.
To hear these takeaways and more, watch the full recording here:
