Caroline Hartnell

‘There seems to be more venture and less philanthropy at this conference,’ the person sitting next to me commented during the recent European Venture Philanthropy Association (EVPA) conference, held in Luxembourg on 16-17 November. This remark provides an apt summing up for the whole event. Admittedly it was made during a session on ‘Turning impact finance into an industry’, but impact finance featured prominently throughout the two days.

In its early days, EVPA put more emphasis on the synergies between venture philanthropy (VP) and ‘ordinary’ foundation practice – unlike the US VP pioneers, who tended to present VP as new and better. Now, as conference chair David Carrington put it, speaking at an opening plenary entitled ‘A new era for venture philanthropy: where grantmaking and social investment converge’, VP is expanding its toolbox to include investments, going beyond grants, such as those being developed by the European Impact Investing Network.

Can venture philanthropy build the pipeline for impact investing?

One issue that arose throughout was: can VP build the pipeline for impact investing? One much touted barrier to the growth of social investment/impact investment is a shortage of investment-ready organizations/projects. Husk Power Systems in Bihar, India, which produces power from rice husks in order to bring safe, affordable electricity to some of the world’s poorest people, provides a perfect example of how the different actors can play a role, with the Shell Foundation providing philanthropic support so the first eight plants could demonstrate their viability and LGT Venture Philanthropy (Liechtenstein), Acumen Fund (US) and Blue Orchard (France), among others, investing at the next stage.

The opening workshop for non-EVPA members, called ‘Venture philanthropy unwrapped’, provided a good illustration of the range of finance now offered under the VP umbrella. While One Foundation (Ireland) makes grants only, both LGT and the Noaber Foundation (Netherlands) make both grants and other investments. LGT makes 35 per cent grants and 65 per cent loans and equity investments, with investors receiving financial returns ranging from zero to 5 per cent. Noaber has 30 investments and 35 grants, largely focused on healthcare innovations, often start-ups. Any money coming back into the foundation from the investments is reinvested in social purposes.

Wolfgang Hafenmayer of LGT prefers to see VP not as a broad church (the convergence model) but as one small segment of the philanthropy world, for people of entrepreneurial bent, just as venture capital is one small segment of the finance world. He sees VP finance as long-term patient capital, with exit taking five to eight years. As another conference participant put it, ‘Often impact finance can catch the ball after charitable support has demonstrated viability.’

Turning impact finance into an industry

One plenary session focused on the barriers or bottlenecks to ‘Turning impact finance into an industry’. One such seems to be the lack of access to standardized information on investment opportunities and recognized performance standards. This may be due to the lack of a generally accepted method – or maybe because there are too many. One participant suggested there are 150 methods for assessing impact. We need at most a few generally accepted approaches. It seems that only 50 per cent of investment managers measure impact systematically.  Several people expressed a feeling that the finance side is overriding with impact investments – having recognized tools to demonstrate social impact would help remedy this. Tim Radjy of AlphaMundi spoke of the role of VP in developing online platforms for offering opportunities and measuring impact. He mentioned Impact Base, Nexii (South Africa) and the UK Social Stock Exchange. An issue identified by Lenka Setkova of Fair Pensions was the prevailing interpretation of fiduciary duty, emphasizing profit maximization, among investment managers.

But the barrier that was most stressed was the lack of investment-ready organizations – or ‘deal flow’. Jean-Pierre de Schrevel of Blue Orchard said he had been looking for investors to support newer organizations with a higher level of risk but had found no takers in two years. He therefore sees the role of VP in bringing organizations to investment readiness as crucial.

But not everyone saw the lack of deal flow as the major barrier. Sir Ronald Cohen of Bridges Ventures, speaking in the closing plenary, said that the supply of finance would create demand. As more social finance becomes available, people will leave businesses and set up social ventures – as happened in the early days of the venture capital industry. The existence of a social investment bank and financial instruments will stimulate new entrepreneurs. An example of a new financial instrument is the social impact bond, a scheme to raise £5 million from private philanthropists and foundations to finance pilot schemes to lower reoffending rates in English prison. If the reoffending rate is reduced by less than 10 per cent in seven years, the investors lose the bond; if the rate improves by more than 10 per cent, they get a 7.5-13.5 per cent yield.

Sir Ronald outlined what he saw as five key components for an enabling environment for social finance: tax incentives to encourage investment in poor areas; government use of matching finance to encourage the formation of social venture funds; a Charity Commission ruling that it is acceptable for trustees to invest in social investment vehicles such as social impact bonds and social venture funds even if returns are slightly lower than on mainstream investments; a legal requirement for banks to disclose what they are doing in poor areas; and an industry organization to train people and represent their views to government. ‘These five components give you an engine,’ he said, ‘then you need the fuel – a social investment bank.’ You need all of this if social finance is to thrive, he insisted.

For more information
For more on EVPA and a full report on the conference, visit http://www.evpa.eu.com