PEI: Why private equity should care about social investment

16 July 2013


Why private equity should care about social investment 
The industry’s interest in the social investment movement should be more than just academic.
This week, the Impact Investing Policy Collaborative held an event in the City of London to launch ‘The London Principles’, a set of guidelines intended to help governments around the world create a policy framework around social impact investing – i.e. investments that explicitly target a social as well as a financial return. Given the sort of difficult conversations private equity has been having about regulation in recent years, it was refreshing to see a group of politicians, bureaucrats and financiers all (relatively) united in a common purpose: to facilitate the development of this new alternative ‘asset class’.It would be easy for private equity to dismiss social investment as an irrelevance. Clearly the politics involved are very different: governments have a much more vested interest in the success of social investment, particularly at a time when most of them are reducing the amount of money they spend on addressing social problems.But the rise of social investing (consultancy BCG reckons social finance, a market that didn’t even exist a couple of years ago, could be worth £1 billion in the UK alone by 2016) shouldn’t be ignored, because it carries some important lessons for private equity.First, it highlights investors’ growing interest in the concept of socially responsible investing – something that GPs have been seeing for a while now. So far, most of those investing in social finance have been foundations or other organisations with a philanthropic bent. But over time, as track record develops and different types of products emerge, expect to see more institutions taking a more active interest.Second, there’s some interesting innovation happening on the product side, in an effort to attract new capital into the asset class – social impact bonds (pioneered in the UK and now happening elsewhere around the world) being an obvious example. That’s something for private equity to think about, especially at a time when some traditional fundraising sources are withdrawing from the market.It’s also true that the clear dividing lines between financially-motivated and socially-motivated investing just don’t exist in the way that they once did. In fact, some specialist impact investors argue that by solving big social problems, you can also generate big returns.That’s particularly true in developing markets, where there’s clearly a big opportunity in providing products and services to the emerging consumer class; Andy Kuper, founder of Leapfrog Investments, which backs high-growth financial services companies in emerging markets, says his portfolio companies have increased revenues by 25 percent in the last year. But it can also be true in developed markets: in the UK, for example, Bridges Ventures recently made a return of almost 4x from the sale of The Gym, a budget gym chain that operates in low-income areas.“This notion of profit and purpose enabling one another – it’s not conceptual any more, it’s being demonstrated emphatically,” Kuper says. “There’s a series of business showing both financial outperformance and resilience in the face of challenges – [demonstrating that] purpose-driven businesses can reduce or mitigate risk too.”There’s one last reason why private equity shouldn’t ignore social investment: because its practitioners can play a big role in its development. And not just in terms of money.Take ex-Permira boss Damon Buffini, who now spends his time chairing the Social Business Trust, an organisation that helps social enterprises to scale up their impact (it’s aiming to reach a million disadvantaged children). “It seemed to me that businesses have an opportunity to make a large impact on some real social issues by using their everyday skills in partnership with social entrepreneurs,” Buffini told PEI recently. “The private equity skill-set of helping companies grow and take advantage of market opportunities is incredibly valuable in [this] sector.”Private equity has a lot to offer the social investment space. And it might also be able to learn a thing or two. It’s a movement worth following.PS – This month’s issue of PEI features a special section on impact investing. Subscribers may click here to read more.

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