News & Insights
Challenges in Financing the Future
by Kusi Hornberger, director of investment research, Global Partnerships
After joining Global Partnerships in June, participating in the 2015 Biennial of the Americas Financing the Future: New Frontiers in Impact Investing clínica as a respondent last month was an interesting way to review the field's current themes and challenges from the perspective of a new role. The discussion was lively, with broad representation from across the impact investing space, including wealth advisors, accelerators and nonprofits. The clínica touched on a number of themes across the industry, but I wanted to share my thoughts on four of the challenges discussed that are most relevant for GP, as well as the impact investing industry as a whole:
- Impact investing has emerged—now we need to improve its execution. The growth and amount of capital deployed in the impact investing space is astounding. A report from Bain & Company last year1 found that capital committed to impact investing had increased from $160 million in 2008 to $2 billion in 2013 in Latin America alone. A recent GIIN report, The Landscape for Impact Investing in East Africa, suggests that non-development finance institution (DFI) impact investors have deployed more than $1.4 billion to date in the region through more than 550 deals. Every day more organizations are being formed that seek to raise or deploy capital to invest in ventures aimed at addressing social issues. The challenge now is execution: Over the next five years, industry actors will need to show that impact investing can achieve and maintain scale. Meeting this challenge is at the heart of GP's rigorous due diligence process for new partners, and is how our five funds have achieved 40 consecutive quarters of positive social and financial returns.
- Despite industry growth, early-stage social ventures still face gaps in funding. There is a funding gap for earlier-stage ventures. Mature investors are less willing to invest at this stage because of a lack of understanding of the business models involved or a lack of confidence in the maturity of the business plans of many earlier-stage social ventures. Organizations like the Eleos Foundation, Endeavor Catalyst and Vox Labs have begun to set up innovative approaches to address this gap, but more resources are needed.
- Balancing impact evaluation with still-developing metrics. As the industry matures, foundations and DFIs are placing increasing importance on impact measurement and evaluation. At the same time, impact measurement tools such as GIIRs, IRIS and B Analytics are recognizing that the metrics and tools available to impact investors remain inherently imperfect, as they continue to evolve rapidly. To date, metrics have generally been output-driven, when what many impact evaluators strive for is outcomes, which are much more difficult to measure and take time to prove. Overcoming this tension will be a critical challenge for the industry as we move forward. GP reports impact evaluation metrics to IRIS (individuals receiving technical assistance, for example), recognizing that not all of the metrics we track are a perfect fit and trying to control for the possible evolution of metrics over time.
- Maintaining focus as the industry landscape continues to evolve. Many impact investors have had difficulty focusing their resources, but reaching clarity on what they do and do not do is essential to focusing their investments in the areas where their efforts can have the greatest impact. This can be challenging, but is critical to success as competition increases and the industry continues to evolve. GP's core value, "aim well and follow through," helps us focus carefully on the initiatives and social enterprise partners where our capital can achieve the greatest impact.
My first two months at Global Partnerships have been exhilarating, as I am now able to focus full-time on an approach to helping reduce poverty I am truly passionate about. Participating in the clínica was a great way to gain perspective on GP's role in the broader impact investing industry and on my role within the team.
After ten years of investment and strategy consulting experience across the public and private sectors, it is gratifying to put what I have learned to work on some of the most important challenges of our day. Namely, how to identify and invest in the most impactful and financially sustainable approaches to economic development in Latin America and East Africa, as well as to support GP's development as a successful impact investor as we—and the industry—continue to grow. I look forward to sharing more of my insights and research moving forward.
1Full disclosure: Kusi Hornberger is one of the report's authors.