A U.S.-based hybrid impact investment fund is moving to invest $47 million, which it secured in a deal announced in early December.
The Grassroots Business Fund began eight years ago as an initiative of the International Finance Corporation, partnering with businesses to create 100,000 jobs and providing basic social services to 1.4 million people, as reported by NextBillion. It spun off from the IFC in 2008 to become an independent fund and hopes to increase its impact with the new money, which includes an additional $12 million in grant money to provide business training for businesses in its portolio.
CEO Harold Rosen says the fund wants to develop the “ecosystem” of impact investing through a two-part hybrid approach: investors commit investment capital for high-impact enterprises, expecting a seven to 10 percent return, while philanthropists donate money to the "technical assistance" side. So GBF’s clients get free business help directly from the fund, while investors earn market rates on their investment.
One example of a GBF-sponsored “high-impact enterprise” is Shree Kamdhenu Electronics Private Limited, which sells energy-efficient milk collection systems to small-scale dairy farmers in India. India's milk industry is huge, but it is plagued by market inefficiencies and corruption. GBF’s capital has allowed SKEPL to reach over 400,000 farmers in nine states through their products and a microfinance fund that helps farmers expand their production.
Measuring impact is a tricky business, and GBF is professionalizing the metrics that investment funds use. It shares its data with IRIS, a set of standardized metrics developed by the Global Impact Investing Network and eventually hopes to use benchmarks to evaluate the performance of its investees.
GBF’s success falls in line with a growing number of wins for impact investing. J.P. Morgan and the GIIN reported earlier this year that investors would commit $9 billion to impact investing this year, up from $8 billion in 2012. The Unitus Seed Fund recently secured $8 million for BoP investors in India and Bamboo Finance announced it had crossed the $250 million line in its January report.
This isn’t to say there aren’t growing pains, however. The industry is struggling to define itself, as highlighted in a recent article in the Stanford Social Innovation Review. A big issue is how to connect capital with early stage entrepreneurs (the so-called "pioneer gap"). Alternative approaches such as those employed by the Acumen Fund accomplish this by working as philanthropic enterprises, refusing to specify a particular return for investors. This allows them to invest in projects that will have the greatest impact rather than the highest return. On the other end, the J.P. Morgan report widely defines impact investing to include such things as real estate and shopping malls, a technique that inflates the numbers but raises questions about how much real “impact” is happening.
The Stanford Social Innovation Review article points to two key barriers to creating a well-functioning impact investing marketplace:
The first is ideology—the simple notion that any investment involving trade-offs or submarket rates of return inherently is bad investing and is unsustainable. The second is a lack of imagination on the part of funders to create products that match the real needs in the marketplace.
The Grassroots Business Fund tries to walk the line between these challenges, simultaneously providing capital to new markets and returns to investors. More stories like theirs would be a welcome sight.