The growing impact investment industry (II for short here) is entering hype territory, a sign that less is going on than meets the eye. The language of II promotion is buoyant, breathless, boosterish, and in some cases un-believable. “We have helped create 30,000 jobs and improved 96 million lives,” says one private equity firm that invests in emerging markets (Bamboo Capital Partners). A non-profit, also focused on developing countries says it “helps break the cycle of poverty for millions of farmers around the world” (Root Capital). A $350 million private equity firm that works in Sub Saharan Africa suggests that impact investment is “a paradigm shift” in the way we intervene to solve poverty (Vital Capital Fund). The Omidyar Network, calls itself a “philanthropic investment” firm. Its impact investing “seeks to generate both social change and a return on capital. It ends the old dichotomy where business was seen solely as a way to make a profit, while social progress was better achieved only through philanthropy or public policy.” As for the world’s largest philanthropy, the Bill and Melinda Gates Foundation, involved in many areas including II, they describe themselves as “Impatient Optimists.”
Based on my experience over the last 50 years in poverty reduction in the developing countries, the high expectations of impact investment are at best unreasonable. The history of poverty reduction interventions contains countless cautionary tales that should dampen the II movement’s enthusiasm. The chances are slim that poverty and profit can produce a lasting and happy marriage, or that infusing start-ups with capital will create growth, or that people can be trained to be entrepreneurial, or that small promising cases can be scaled up to large nation-wide successes. Instead of hubris, the II field needs humility. The wisest attitude should not be impatient optimism, but “patient pessimism.” Patience because the one sure factor in the solution of social problems is time: Time to estimate long term impact, time up front to do serious homework into the complicated interactions between the political economy, social structure and culture of places where II wants to go. Pessimism because experience tells us that the pickins are likely to be slim and that even when things look good now, they can go down hill fast later on.
An old friend, one of the three founders of Chicago’s ShoreBank, the first U.S. financial institution to consciously attempt – almost a half century ago – what today would be called social impact investing told me a few years ago:
“It’s very hard to predict about businesses coming up from the bottom. The barriers are structural, social, cultural, educational, locational and so on. ShoreBank in the ‘60s was doing lending to South Side [Chicago]“re-habbers.” [enterprises aiming at the rehabilitation of slum housing]. At one point we were doing 100 of these loans a year. Today the South Side of Chicago is back where it was, it all got wiped out.“
Here are an additional five reminders from past history that may help the II field regain a healthy degree of sobriety.
- Despite the growth in the number of organizations explicitly engaging in II (estimated as having grown by a factor of five in the last 20 years), impact investing is in its infancy and pinning down its claims about dual impacts remains a challenge. As the field has grown more organizations of all types conveniently define themselves as II firms, from private VC firms seeking the cachet of social impact, to big financial institutions like Prudential and US Trust, to old style poverty alleviation NGOs. Given this array of big and small, family and corporation, non-profit and for-profit, mutual funds, banks and foundations, the promised impact of the II field remains hard to determine. When for example Morgan Stanley reports that sustainable investing funds met or exceeded the median returns of traditional equity funds, one has to ask which of II’s many players they are referring to.
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