Nonprofits are carving their own impact investing niche

WASHINGTON — The average number of employees working full-time on impact investing for international NGOs has nearly doubled since 2016, according to a new report that polled 45 charities. The change is reflective of a growing impact investing sector — one attracting more dollars and more INGO attention than ever before.

More international NGOs have started to explore impact investing in the past two years, according to the report “Amplifyii: The Next Mile of Impact Investing for INGOs,” published by the INGO Impact Investing Network. The number of INGOs that responded to the survey about impact investing — 45 — was up 45 percent from a similar survey in 2016. About 78 percent of the organizations said they are actively involved in impact investing, a 20 percent increase from 2016.

The nonprofit sector can call on unique expertise to contribute to the impact investing space, including local relationships that enable strong risk assessments and the ability to provide technical assistance, said Tom Dente, president and CEO at Humentum and one of the report’s editors.

Still, while engaging in impact investing is increasingly accepted by boards and leadership, INGOs need to develop sophistication in how they source opportunities and conduct due diligence, Dente said.

The INGOs surveyed in the recent Amplifyii report are managing about $916 million, a small number as it relates to the market, but one that is growing. They’re focused on areas they know — South and Southeast Asia and East Africa, and sectors such as agriculture and livelihoods. And they’re busy working to figure out how to excel in a system designed for other types of funding, INGO leaders said.

An evolution

Often in experimentation phases, some nonprofits have set up venture funds, a handful are working alongside investors, and many are adapting as they go. 

Pact, which launched the first version of Pact Ventures about three years ago, started by testing whether it could be useful as an incubator and accelerator, but discovered that as an INGO, it didn’t yet have the skills needed to help businesses grow. With a presence in nearly 40 countries, the INGO tried investing in early-stage social enterprises, only to discover that potential investments often didn’t pass financial muster or would require too much work. 

Now it has settled in version 3.0, which involves trying to bring financing vehicles from the private sector to the social sector and developing new financial products in the space, said Brian Vo, Pact’s vice president of social investment and alternative finance.

“Pact is going through a broader transformation trying to rethink how we deploy programs and create impact. As part of that, we are incentivized to do a lot of testing and piloting in Pact Ventures,” Vo said. “We’re talking about what’s the right financing vehicle for the type of problem.”

Vo’s team works to identify an area where additional capital could create more impact, then determines if there is a relevant business model or some source of cash flow that could be used to fund the work. To that end, Pact is working to get project financing to cover the upfront cost of a machine called a shaker table. The equipment could help artisanal small-scale miners increase the amount of gold they find and reduce the mercury used in the mining process, which would have positive economic, social, and health outcomes. In this case, the increased gold yields could be used to pay investors back.

This type of working capital or equipment financing for individuals or cooperatives is a space that a number of nonprofits are exploring. Heifer International, an INGO that works largely in agriculture value chains, is looking at how it can link its farmers to better access to credit so they can improve their livelihoods and is identifying other market gaps where investment is needed.

World Vision Canada, meanwhile, has an impact fund that invests in early-stage social enterprises working on food, health, and economic development. The global relief, development, and advocacy organization has taken a three-year bond product to market that is raising capital to provide small loans from $5,000-$25,000 to small and growing businesses in developing countries.

Impact first

What sets nonprofits apart and establishes them as important actors in the impact investing ecosystem is that they are driven by impact, not financial returns, INGO leaders told Devex.

Part of the reason INGOs should lead is that the “aggressive cutthroat finance culture” will take considerable time to change and understand impact investing, said David O’Leary, director of impact investing at World Vision Canada.

“[I’ve seen] over and over situations where for-profit motive can be fairly exploitative,” said O’Leary, who spent much of his career working in the finance sector. “INGOs are best positioned to be leading this.”

INGOs have the ability to take certain risks or try things that someone with a profit motive wouldn’t necessarily be able to do, he added. It seems most NGOs are targeting riskier environments and investments that others might not consider, and most are making below market rate returns, according to the report. Part of the reason they can take those risks is that they understand the local environment and can provide the technical assistance alongside the investments that will make them more likely to succeed, Humentum’s Dente said.

“For impact investing, people are not deploying because there’s either not enough deals that are ready or not enough technical assistance to really protect investments,” said Ben Wihebrink, Heifer’s director of impact ventures.

INGOs can provide technical assistance, and some can help create a pipeline of deals. In the long run, impact investing can be another tool or service INGOs can be counted on to provide, Wihebrink said: “Frankly, in a utopian sense of it, it works out in long-term, it really could make impact go a lot further.”

Navigating roadblocks

Building new mechanisms within large, often bureaucratic organizations can be challenging, as can hashing out legal limitations, staffing, and translating between the worlds of development and finance.

Heifer International is interested in doing some investments directly, but is grappling with whether it has the legal ability to engage in various transactions in different countries, Wihebrink said. In countries where it can’t do the transactions itself, Heifer is working to build partnerships so that it can act quickly when a need arises, he said.

As the nonprofit is expanding its work in the impact space, it is also working to investigate how it can facilitate transactions, how this could impact its tax liability and how to ensure that investments are setting entrepreneurs up for success for future investments at less concessionary rates.

But sourcing ideas for these new investments — and ensuring that staff can provide local entrepreneurs with the support they need — has also meant that Heifer has changed some of its hiring criteria to encourage the relevant skill sets on staff, Wihebrink said.

As INGOs hire more employees with backgrounds in private and public sectors, some of the challenges around communicating or “creating the connective tissue” between the worlds of development and finance will hopefully improve, O’Leary said.

That doesn’t just mean recruiting people with solely a private sector or investing background though, Pact’s Vo said. The best translators have experience in the private and public or social sector, he explained. Still, having the right staff isn’t enough for these new financing solutions to scale, Vo said, adding that they won’t succeed if they don’t have the flexibility they need in the organization.

“The biggest roadblock will be: Can development organizations, INGOs — which historically built massive infrastructure and processes for one type of client, project, contract, structure — can they develop infrastructure to allow for different types of conversations and business development and contracting and project or service execution?” Vo said.