This Is Karl Moore of the Desautels Faculty of Management at McGill University with Talking Management for The Globe & Mail. Today I am sitting down with James Tansey from the University of British Columbia.
James you have been looking at Impact Investment. What is that and what are some of the latest trends.
JAMES TANSEY – Impact Investing is an emerging field and it comes out of, in many ways, the failure of traditional philanthropy and aid to address some of the larger social and environmental problems we face as a society, both in developed economies and developing economies. It is based on a couple of premises, one is that you can mobilize far more capital if you have a private investment model that targets financial returns but also social and environmental returns. So that is part of the issue, part of the problem is about fixing what is not working with traditional development aid. The second part of it is the belief that an investment based approach through some form of corporate structure or enterprise functionally can be more effective than just giving away grants, and aid and donations.
MOORE – So when people are looking are they looking first for return on investment or are they looking for social impact and then return on their investment?
TANSEY – It's a good question. We are just finishing a report that separates out investors who look at market rates of return and investors who are looking at below market rates of return. The first thing we did was clarify what market rate of return actually means. The rhetoric of the fund manager is that is 15-20 per cent, in practice it's typically 7 or 8 per cent in traditional commercial funds. Secondly, what we found was that the investors into the below market rate of return projects were comfortable making a negative return in some cases, or a 0-5 per cent IRR in the best cases. When we queried why that was the recognize was that in traditional philanthropy when you give the money away and you get a tax credit, your IRR is negative 70 per cent or more, depending on the tax rates. At least with impact investing if they are re-capitalizing and getting their money back, the money is going further, it is being used again and it is building a base. So you really see below market with a strong emphasis on social and environmental benefits who are comfortable with re-capitalization or even a smaller loss and then finance first, which has been dominated by clean tech type investments and micro finance investments, where they want to do good, quite intentionally want to do good, but are looking for at the outset 15-20 per cent, but in practice they are actually getting 5-8 per cent returns.