International nongovernment organizations wouldn’t know a deal if it hit them in the face, an impact investor recently told Stephanie Marienau Turpin. As director of social enterprise development at the INGO Pact, Marienau Turpin took issue with that assumption, in part because she’s seen evidence to the contrary.
Over the past six months, the number of INGOs involved in impact investing has risen considerably. One group, the INGO Impact Investing Network — launched last winter to bring together INGOs working in or considering impact investing — has doubled in size. Already, INGO-managed or founded impact investing funds control $545.1 million in assets, according to a newly released report by the network.
Most INGOs are still in the early stages of developing their impact investing strategies — whether that includes receiving investments, making them, providing technical assistance or helping build financial ecosystems. As more players enter the market, they are sharing innovations and best practices, some of which are laid out in the network’s report.
There are some who question whether INGOs have the necessary skills or qualified staff to structure investments and raise the investment capital. But to advocates such as Marienau Turpin, the logic for INGOs to be involved is clear. INGOs can add value by leveraging their local networks and knowledge, sector expertise, and experience measuring impact.
“I wonder why traditional Wall Street investors starting up impact investing practices aren’t asked the inverse of that question with a similar level of skepticism: ‘Do investors really have the global reach, cross-cultural communication skills, local knowledge, and expertise on the social problem they are trying to solve needed to create real impact?,” Marienau Turpin told Devex. “INGOs and traditional investors each bring half the story.”
The evolving NGO
The growth in the number of NGOs interested in impact investing comes at a time when their traditional sources of funding are flat, or shrinking, and donors are increasingly looking to work with local organizations. Meanwhile, social entrepreneurship is an increasingly popular tool for development.
Faced with this changing environment, organizations are exploring how impact investments could stabilize funding and boost sustainability. Others are asking how they might leverage their skills to partner with the growing number of existing impact investors.
One opportunity lies in the “missing middle of financing,” a funding gap often identified by entrepreneurs. Many impact investors consider funding between $25,000 to $200,000 or up to $500,000 too risky or too expensive. But NGOs that have existing relationships with the organizations seeking funding — and who can lower due diligence costs through their existing expertise — may be well-positioned to step in. They often have local staff who can be more directly engaged with entrepreneurs and help them gain the skills they need as their companies grow.
The group of early movers among INGOs acknowledge that there are still risks involved — be they failed investments or reputational challenges — but most agree that impact investing is at least an opportunity worth exploring for many INGOs.
Strategic readiness
The network’s report walks through several elements of “strategic readiness” for INGOs considering a move into impact investing. First is the need for internal capacity. INGOs need to ensure they have staff who have the financial know-how to structure deals, carry out investments, and craft the right legal framework. INGOs will also need to adapt how they measure impact and success, something that may involve bringing new experts on board.
Legal expertise is particularly important, so that INGOs can structure profit-earning funds in a way that won’t jeopardize an organization’s nonprofit status. That can be a challenge, said Jeremiah Centrella, Mercy Corps’ deputy general counsel, and organizations have to make important decisions about how big of a fund they want and whether they will need to spin off an investment arm.
For some organizations, starting their own fund will prove too expensive, or too administratively and legally complicated. Irish INGO GOAL, which couldn’t afford to hire a $200,000 fund manager on its own, is looking instead to partner with a number of other NGOs to start a fund, said Henning Ringholz, director of market systems for the organization. GOAL works in 19 countries with an annual turnover of about $200 million. After a lengthy internal discussion, the organization decided it aligns with their mission to invest in some of the social enterprises they work with. GOAL has yet to determine exactly how much money it can and will invest, or exactly how, Ringholz said.
Looking for key strategic partners, be they other NGOs that can invest jointly, or existing impact investors or entrepreneurship networks, is also an important part of an organization’s journey to determine if and how they should invest, the report said.
Impact investing will be a more natural fit or addition to how an organization operates when it aligns with existing culture and strategy. INGOs do best when there is internal support throughout the organization, the report argues. INGOs that are already working on market or systems-based approaches may be better poised to align their missions and their investment strategies, thanks to regular interaction with social enterprises.
One pitfall to avoid, said Mercy Corps’ Centrella, is considering impact investing just as a cash cow for the INGOs coffers. The objective should be whether it points to a better way to serve an organization’s beneficiaries.
“Start with what is the most effective way to achieve your mission as quickly and effectively as possible,” he said. “It may point to impact investing but you can’t lose sight [of the idea] that the objective is not to make money.”
The network report suggests that INGOs make a strong effort to communicate to other stakeholders what they are doing and why. One example comes from the Nature Conservancy’s impact investment unit NatureVest. When the project began, the organization had to reach out to and educate longtime donors. Getting them to invest was a challenge, said Kamil Cook, a senior attorney at NatureVest. Many private donors make their philanthropic and investments decisions in distinctly different ways and so it was difficult for them to determine how investing in NatureVest would fit in with their financial decision-making.
Internal communication is equally important. While there are external skeptics, there are also often employees who question why their organization is choosing to invest and in some cases seek returns.
As with most organizational shifts, the decision to engage in impact investing, while it may be promising, is one that should be made carefully, strategically and with an acknowledgment that there may be setbacks along the way, the report said. What seems clear with the growing interest in the field among INGOs, however, is that it is a conversation that will certainly continue.
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