By Thomas Kostigen | Marketwatch.com | Aug. 10, 2012, 12:01 a.m. EDT
SANTA MONICA, Calif. — Gil Crawford was on the back of a Red Cross truck in Chad near the border of Darfur doling out bags of food to nomadic villagers. Mission accomplished, he gave food bonuses to the local workers who had helped with the effort.
“It was my first microfinance failure,” Crawford laments.
The local governor arrested the workers with the extra food, assuming they had stolen it. Crawford had to backtrack, explain things, and get them out of jail.
It was a classic case of failing to understand local ways and means. It’s the difference between intent and impact. And Crawford says it’s what haunts the impact investing community today: doing well and doing good are collectively exhaustive. It isn’t doing social good or doing financially well; it’s both.
Crawford is now the chief executive of Bethesda, Md.-based MicroVest, which manages a family of funds that make equity and debt investments in microfinance institutions around the globe. His Chad experience was many years ago, but informs his decisions to this day.
“The concept of balance has to reside in the governance of an organization,” Crawford says. “I’ve seen many, many well-intentioned impact groups that have not been willing to accept the fact that to be sustainable, they need to be profitable.”
Sometimes this comes down to the difference between scale and profiting, or helping the poorest of the poor. For many organizations the choice is spending all their money on the poor, as opposed to scaling their impact.
“The world is littered with tiny impact investment organizations where everything is held together with twine,” Crawford says. “It looks as though they are scaling impact, but there is very little scaling. And they are unprofitable.”
The balanced approach isn’t easy, especially when emotions and good intentions get in the way. This is where charity and impact investing differ somewhat. With charity there is no expectation of financial return. With impact investing there is.
So as with any good investment, choosing the right type of organization to invest in is crucial. The way to do that is to know the tell-tale signs that an organization is tending to both financial and social impact.
The first things to look for are cash flow, collateral and character, according to Crawford. The first two are balance-sheet items. Is the organization — whether it’s making private equity, debt or even micro loans or investment on your behalf — financially sound?
For example, MicroVest operates as a sort of fund of fund operator. Therefore not only should an investor know the financial state of MicroVest, he or she should know the financial state of the sub-advisory fund to which capital is being allocated. The double credit risk is very often overlooked.
Risk should also be examined from a social impact perspective. Many impact investments are made in the developing world where political, natural, and risks of conflict occur frequently. Are there risk-adjusted solutions in place?
If not, Crawford says, the organization likely won’t produce the forecast impact and the whole investment plan is jeopardized.
To be sure, any investor worth their salt will do the proper financial due diligence on their investment. But when it comes to “character” as Crawford puts it, vetting becomes more of an art.
“You can’t be blinded by the mission, or the buzzwords,” he says. “The determining tell is that Malcolm Gladwell sense on the back of your neck.”
“It’s ethical behavior,” he explains. “What is the CEO driving? If it’s an Escalade, that’s a red flag. Or how do they treat wait staff at a restaurant?”
Founders and boards can be in the impact investing sector for their own egos or to do good unto others. Neither works.
The best impact investing organizations aren’t disillusioned; they understand the investment landscape from the ground up. It means, often, hard decisions. But better that than, say, wasted food. Lesson learned.
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