Knowledge Partners

 Economic Laws Practice       Avalon Consulting

 Technloogy Holdings   

August 05, 2013

The Bubble in Social Venture / Impact Investing

Economic Times has raised the "danger" flag on the bubble building up in the sector in a full page feature.
"The hype around impact investing far outweighs reality," warns Vineet Rai, founder and chairman of Intellecap, with over a decade's experience in funding and handholding social entrepreneurs through the Aavishkaar funds. "The expectations being raised are just beyond the capability of the system to deliver."

...The noise around impact investing reached a crescendo in November 2010, when JP Morgan categorised it as a distinct asset class and estimated an investment opportunity between $400 billion and $1 trillion (about Rs 20,00,000 crore to Rs 50,00,000 crore)over the next decade. The profit potential estimated for the same period was a stupendous $183 billion to $667 billion.

The study also indicated that in emerging markets, impact investments could fetch annual returns of 8-11% for debt investments and 20-24% for equity investments. It was music to all kinds of investors. The hype machine had begun to pump furiously.
The article does not talk about the extra money that will probably flood the social sector when the "2% of the Net Profits" to be spent on CSR becomes law. Hope some of the concerns surrounding the sector get resolved before that happens. 

Update: Peter Buffett, son of Warren Buffett, has a written an New York Times Op-Ed  piece stating his extreme unhappiness with the state of philanthropy.
Inside any important philanthropy meeting, you witness heads of state meeting with investment managers and corporate leaders. All are searching for answers with their right hand to problems that others in the room have created with their left.

...Often I hear people say, “if only they had what we have” (clean water, access to health products and free markets, better education, safer living conditions). Yes, these are all important. But no “charitable” (I hate that word) intervention can solve any of these issues. It can only kick the can down the road.

...What we have is a crisis of imagination. Albert Einstein said that you cannot solve a problem with the same mind-set that created it. Foundation dollars should be the best “risk capital” out there...Money should be spent trying out concepts that shatter current structures and systems that have turned much of the world into one vast market. Is progress really Wi-Fi on every street corner? No. It’s when no 13-year-old girl on the planet gets sold for sex. But as long as most folks are patting themselves on the back for charitable acts, we’ve got a perpetual poverty machine.
Unfortunately, after calling for "shattering", Peter Buffett's article does not provide clarity on what's "the better way" to give. Hopefully, he will provide further light "down the road" with examples from the actual results achieved by his foundations. From the article itself, I don't see why providing "clean water, access to health products and free markets, better education, safer living conditions" is something that philanthropists or social venture funds should not seek to provide to folks in need of them today.

Venture Intelligence is the leading provider of data and analysis on Private Company Financials, Transactions (private equity, venture capital and M&A) & their Valuations in India. Click Here to view our products list including the Free Deal Digest Weekly: India's First & Most Exhaustive Transactions Newsletter.