Recently, I had the opportunity to sit down with an entrepreneur who had just experienced a life-changing liquidity event. He had worked with a large private equity firm to recapitalize his business, and he had just taken some money out. He still had a more-than-full-time job, but he now had a substantial sum to invest.
I asked the entrepreneur to tell me about his goals. He said he wanted to take care of his family and provide opportunities for others to better themselves through education. Most importantly, he wanted to make the world safer by decreasing the likelihood of harm by infectious diseases.
We talked about an investment philosophy called impact investing, or purpose-driven finance. This cross between philanthropic giving and for-profit investing has a clear goal of serving a larger mission.
What Does Impact Investing Look Like In Action?
The concept is that in order for a philanthropic strategy to be self-sustaining, you need to find a way for the allocation to grow faster than the need that it serves.
For example, take the challenge of fighting infectious diseases. It would be possible for a person to spend $100,000 to buy some tuberculosis test kits that would be used by charitable organizations to test for tuberculosis. As a result, the $100,000 would be used up; it would be a donation.
As an alternative, a person could invest the $100,000 in a for-profit company that had developed a new technology that significantly increases the accuracy of tuberculosis tests. When making the decision to invest in the tuberculosis test company, a person should acknowledge the possibility that if the company went out of business, the investment could turn into a donation. But there is also the possibility that the company could grow into a large, profitable enterprise that helped win the war against infectious disease.
Even better, the company could get acquired, giving an investor an excellent return.
While it is hard to predict the success or failure of any individual company, if you take a professional approach, perform careful due diligence, and use a disciplined strategy to make a series of investments, you can do extraordinarily well. My partners and I at Greenpoint Asset Management have used this philosophy to design the Global Mittelstand Fund. We want to help our limited partners do well by doing good.
Let me give you another example. It is generally recognized that when a desperately poor person gains access to a working cell phone, their ability to make a living is greatly enhanced. Cell phones can be expensive for the citizens of the poorest countries, but there are ways to address this issue. Some charitable foundations attempt to tackle this problem by buying cheap cell phones and giving them to poor people. This is a total write-off, and the foundation is guaranteed not to get any of their money back.
Instead of taking charity dollars and using them to buy cell phones to donate, my fund made an investment in a Korean company that makes MEMS transducer receiver microphones that are significantly less expensive than the microphones being produced by competitors. Since our costs are lower, we can sell these microphones to cell phone manufacturers in low-cost countries for distribution in the developing world.
We aren't giving away the cell phones, but we are helping to make them less expensive. By finding ways to profitably reduce our costs, we are creating a sustainable, long-term, for-profit business.
In the end, more people will be able to afford the phones, and more foundations will be able to give them away. And when we sell a lot of microphones, we will make a lot of money -- impact investing in a nutshell.
Getting Started With Impact Investing
Intrigued? If you'd like to deploy your investment dollars similarly, here is how I recommend you get started.
- Make a list of issues that you feel are the most pressing. For example: It is unacceptable that some people do not have access to clean water. Imagine a person who is trying to live a healthy life while struggling to find water. Another example: It is unacceptable that some people do not have access to sustainable, decent jobs. Imagine a fisherman who cannot catch fish because global fish stocks have been depleted.
- Narrow down the above list to those issues that are most important to you.
- Make a conscious decision to limit your exposure. Impact investing is not meant to replace an investor's entire investment strategy, but it could easily replace the portion of your portfolio that is allocated for private equity.
- Look for investments that address the most important issues. For example, there are for-profit companies that solve problems related to water scarcity. There are for-profit companies that provide employment and job training in areas where people used to rely on fishing, wildlife poaching or deforestation.
- Acknowledge that you do have beliefs, you do have a moral compass, and you do care. At the core of it, this is about building character and exercising global citizenship. This is about using your beliefs and your resources to give someone else a chance, in the same way that you were given a chance.
When you take this approach to a portion of your investments, money itself has an entirely new meaning.