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Investing for social and financial returns: OPIC’s perspective [Part 3/5 Perspectives in Impact Investing series]
Note from Global Partnerships: This is the third installment of our "Perspectives in Impact Investing" series, which presents the variety of perspectives of different actors in the impact investing space. Read:
- Part 1: How wealth advisors can facilitate impact investments by Cynthia Muller, Senior Director of Impact Investing, Arabella Advisors
- Part 2: 4 ways to use grant funding to catalyze innovation and de-risk early-stage enterprises by Richard Gomes, Head of Policy and Advocacy, Shell Foundation
Part 3: Investing for social and financial returns: OPIC's perspective
by Loren Rodwin, Managing Director, Overseas Private Investment Corporation (OPIC)
It is fitting that I write about the Overseas Private Investment Corporation's (OPIC) impact investing strategy, challenges and goals on Global Partnerships’ (GP's) blog because GP is one of OPIC's highly successful impact investments. OPIC has lent to four of GP’s past five funds, which have collectively supported more than one million people in 10 countries with loans, healthcare, entrepreneurship training and other services. The first of these funds has already been repaid in full.
Investing with impact was a core mission of OPIC long before the term impact investing was in vogue. As the U.S. Government’s development finance institution OPIC has worked for more than four decades to support private sector investment in emerging markets in projects that have built infrastructure, improved agriculture, introduced schools and otherwise had a lasting impact on people and communities. In recent years, as impact investing has captured the imagination of more investors, OPIC has not only continued to seek out these investments, but also worked to refine the definition of impact investing and establish some tools and practices for effective impact investing.
Below are four of OPIC’s key areas of focus that have informed our approach to this still relatively new and rapidly evolving sector.
1. Reaching individual recipients
OPIC has money to invest and a strong interest in investing in individuals and communities that are most in need. But because we are a small Agency with our staff of 229 based mostly in Washington, D.C., we often must rely on our partners to get these funds to the end recipients. One of the reasons our work with Global Partnerships has been so successful is because Global Partnerships has, through its extensive network in Latin America, been able to reach groups such as women and rural residents that have traditionally been underserved by banks and lending institutions.
OPIC is particularly excited by Global Partnerships’ newest fund, the Social Investment Fund 5.0, which seeks to invest in microfinance institutions and cooperatives that, in addition to access to finance, provide clients with access health care, agricultural supply chains, environmental goods and entrepreneurship training.
Some of our other partnerships have served a similar purpose, enabling us to support lending to many of the smaller microfinance institutions in places in sub-Saharan Africa, where individuals, small farmers and entrepreneurs have used funds to start or expand small businesses or schools.
2. Attracting other investors
OPIC recognizes that private sector capital is essential to addressing the world’s biggest challenges and one of the Agency’s core goals across all of the projects we support is to catalyze additional private sector investment. OPIC seeks opportunities to invest in projects where the nature and structure of its investment encourages private investors to make investments that might not otherwise consider. For example, OPIC has invested in a more junior position, or has provided a longer tenor debt instrument in well-managed investment funds. This has provided private sector investors with the additional protection needed to invest in these funds.
Another example is OPIC’s ability to make loans to businesses that are just beginning to attract commercial capital. Often these are early stage social enterprises that have a proven business model, but have not yet reached the scale required to allow the business to grow in a sustainable manner. OPIC seeks to support these companies by providing a source of “expansion capital” at the critical stage in the enterprise’s life cycle. Such investments may have a powerful long-term impact in enabling the enterprise to grow sustainably, thereby serving more clients, and, in so doing, helping these clients to solve critical developmental challenges.
3. Setting standards for impact investing
As impact investing has increasingly become recognized as a bona fide investment category, OPIC has worked to establish a clear definition of what constitutes impact investing. While many investments may ultimately lead to a positive environmental or social change, there is a difference between those projects that happen to yield good results and those that were designed from the outset with such a specific intention in mind. In 2012, OPIC set out to determine how much of our portfolio met the strict definition of impact investing by addressing social, or environmental problems while generating sustainable financial returns. You can read more about this exhaustive process in a piece my colleagues published in the Stanford Social Innovation Review.
One recent project that was officially tagged an impact investment under OPIC’s new tagging system is OPIC’s investment in Bridge International Academies, a chain of schools in Kenya that exemplifies OPIC’s focus on both the positive social benefit and the positive bottom line. Bridge has a scalable business model designed to reach large numbers of students while also earning a profit. The schools operate under a for-profit model, but provide a quality education at less than $6 per month, to be affordable to even low income families.
4. Earning a return on investment
One of the questions that initially inspired this series was, what are the motivations of the institutional investor in pursuing impact investments? OPIC, like any serious investor, makes positive financial returns a priority. Our consistent ability to earn a profit from our investments has put us in a strong financial position that enables us to grow our portfolio and increase our investments in the developing world. While we actively pursue impact investments, we also rigorously review potential projects and look for a strong management team and investment strategy. Because OPIC’s mission is to be self-sustaining—as exemplified by its record of making a profit for 43 years--it must carefully evaluate the risk of repayment for each debt investment under consideration.
OPIC is the U.S. Government’s development finance institution. It mobilizes private capital to help address critical development challenges and in doing so, advances U.S. foreign policy. Because OPIC works with the U.S. private sector, it helps U.S. businesses gain footholds in emerging markets, catalyzing revenues, jobs and growth opportunities both at home and abroad. OPIC achieves its mission by providing investors with financing, guarantees, political risk insurance, and support for private equity investment funds.