Smart money

Smart money

By Iona Joy 29 September 2014

Writing Smart Money—an exploration of the impact of social investment and impact investing—has taken me on quite a journey.

You could think this topic a little dry and unlikely to stir passions. But you’d be wrong. I can honestly say that the debate I’ve had within and outside NPC as to where we ‘draw our line’ has been harder to resolve than almost any other (and at last count I’ve authored or co-authored 26 reports). Do we want to be dirigiste and have everyone in the market sign up to universal ratings systems that appeal to a wider investor audience/attract the £££s, but don’t really tell the true story? Or do we want investees to retain control, resulting in a hotch-potch of reporting that’s a lot more authentic? Or should we aim for somewhere in the middle?

This report was self-funded by NPC and the budget was modest—we therefore didn’t have the luxury of mapping all the measurement initiatives out there and then fitting them all together. So forgive us if you think we’ve misrepresented your patch of the market. Doing a formal mapping exercise would be really valuable as it would give us a chance to build on what’s already out there—eg, the Big Society Capital outcomes matrix which focuses on end beneficiaries, and some great financial intermediary methodologies developed to understand impact on investee processes. We could then develop something that works across the piece. The social investment and impact investment markets are growing and look to me like a ‘big and baggy monster’. So I’m a great believer that market segmentation could be the key to our collective sanity.

In the meantime, this report is a good excuse to get some things off our chest.

  • Investors and financial intermediaries need to understand their place in the chain of events to create impact and not overclaim results. Many of the effects of investment are indirect, and a lot of the desired outcomes are not within the investor’s control. A theory of change process unpicks this.
  • Additionality—ie, what extra value does the investment bring to the party? What would have happened without it? This lies at the heart of the whether or not social investment is genuinely achieving impact.
  • The deal structure—terms and exit—can affect impact, and it’s always worth analysing how in the due diligence/negotiation phases.
  • The measures investors ask investees to report on must be useful to the investees; because if they don’t help them to learn and improve, the staff won’t collect good data. Investees should drive this process much more actively otherwise they may find themselves pushed in wrong directions.

NPC has been closely involved in analysing the impact of a potential investment for one of our (fund) clients. Both NPC and the fund wanted really good measurement from the project. But in reality, many of the desired outcomes were being delivered by parties outside the control of the fund, and we constantly had to ask ourselves about the trade off between:

a) ‘What happens if we don’t do this deal’? Answer: Lots of good folk don’t even get a chance to move out of their inadequate accommodation into nicer homes and have better lives; versus

b) ‘What happens if we do this deal with imperfect measurement’? Answer: the good folk get somewhere nicer to live but we’re not sure how much their lives will improve.

Where was ‘our line in the sand’? Well the deal didn’t proceed for a myriad of reasons, but we learnt that this ‘line in the sand’ is as much about the passion and motivation of parties to achieve social good, as it is about nailing the measurement of every outcome. In this, the due diligence process and understanding the culture of partners and investees is crucial. Give me investees/partners passionate about achieving the best for people, coupled with dire need, and I’d live with imperfect measurement—and then work with parties to improve it over time.