Takeaway: Grassroots Business Fund’s investment in social enterprises throughout developing countries enforces discipline investing using patient capital from impact investors.
Investing in social causes has for a long time remained an oxymoron. But with companies like Grassroots Business Fund (GBF), such investments are becoming real, abound, and very much desirable.
GBF was founded in 2008 by the International Finance Corporation of the World Bank initially as a Grassroots Business Initiative. As way of background, the IFC was created in 1956 as an institution through which private investors can invest in developing countries. Similarly, GBF intends to mobilize private capital from developed to developing countries. Unlike IFC, however, GBF’s investments are in a much smaller scale involving small start-up social enterprises.
In the talk about GBF I attended on February 24, 2012 at John Hopkins University, Harold Rosen, GBF’s CEO, very eloquently shared the company’s business structure and investment strategy. GBF is essentially an investment manager that invests in high impact businesses, which are for-profit businesses that create economic opportunities for people at the base of the economic pyramid. Unlike traditional venture capital firms, GBF incorporates both financial and social metrics to assess its investments, which Rosen stresses to be one of the main challenges in investing in social enterprises. The funds managed by GBF come from various institutions, including Overseas Private Investment Corporation (OPIC), DEG (German Development Bank), FMO (the Netherlands Development Finance Company), and Deutsche Bank. GBF charges a 3% management fee, and its average investment size ranges between $500,000 and 2 million with an average investment span of 6 to 9 years. GBF has investments in Kenya, Ghana, Tanzania, Indonesia, India, Bolivia, and Peru.
Rosen stressed the importance of obtaining patient capital for investment with an eye on development. GBF strives to identify nontraditional investors who are willing to wait for returns to finally kick in. This requires investors who believe in the underlying cause of creating positive impact in the enterprises’ surrounding communities. Such investors are now popularly known as impact investors. Factors that signify “impact” include the numbers of people employed and family members supported.
However, GBF’s typical investment structure in these social enterprises combines equity with debt, which Rosen refers to as quasi-equity or hybrid securities. These investments are debt-type instruments with equity features, such as convertible loans or redeemable structures, that incorporate a current income component. Unlike equity, quasi-equity holders have a known cash flow. GBF distinguishes itself from other sources of funding that Rosen refers to as “soft money”―grants and equity, investors of which do not care much about returns―by characterizing its investment as discipline investing. Through the current income component, these social entrepreneurs are obligated to bring steady investment returns to the investors. The reason for such a structure is to discipline the investees to allocate income on a steady basis, which would thereby affect their business planning, enhance investment accountability, and consequently strengthen their financial viability.
In addition to, or part of, its investment, GBF also provides technical assistance in areas of corporate governance, financial management, operations and supply chain management, environmental and social impact, and human capacity. GBF builds the portfolio companies’ capacity to create, maintain, and use simple management dashboards. By having the skills to build such dashboards, these entrepreneurs can leverage their data to obtain future financing for their high impact businesses.
One final but very enlightening point raised by Rosen: there is more capital out there than social enterprises. It took me several minutes to really understand and agree with him. My guess is that Rosen was not referring to simply any business ventures that call themselves social enterprises; rather, he was probably referring to social enterprises that directly benefit the communities while creating profit, or what our business friends would call reaching scale. The smooth and successful marriage between profits and philanthropy remains a mystery to most.
For the talk’s power point slides and taped talk, visit http://www.sais-jhu.edu/academics/functional-studies/international-development/events/index.htm.