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Patient Capital, a New Option in Social Impact Investing
Venture capital is a crucial part of the financing model for emerging pharmaceutical companies, but is also an instrument that can be used in trying to achieve larger societal goals. An ongoing challenge in traditional aid and philanthropy is to build models of assistance that can be economically sustainable. Fluctuating resource allocation and fund availability may make this difficult for the donor but also for the individuals or groups on the receiving end. An innovative way to tackle this problem is “patient capital,” a concept being applied by Acumen Fund, a nonprofit venture-capital firm that targets debt and equity investment in early-stage enterprises that provide low-income consumers with access to healthcare, water, housing, alternative energy, or agricultural inputs.
“We are using a different model for philanthropy,” said Omer Imtiazuddin, manager of Acumen Fund’s healthcare portfolio. “We are bridging a gap between traditional forms of aid and commercial financing that is secured through venture-capital funding or debt.” Acumen Fund has invested more than $40 million in approximately 40 companies in the developing world, principally in East Africa and South Asia, including India. The fund hopes to increase to $100 million during the next three to five years.
Acumen Fund was founded in 2001 by current CEO Jacqueline Novogratz, who started her career in international banking with Chase Manhattan. Prior to forming Acumen Fund, Novogratz founded and directed The Philanthropy Workshop and The Next Generation Leadership program at the Rockefeller Foundation and was the founder of Duterimbere, a microfinance institution in Rwanda.
In the patient-capital model, Acumen Fund invests in enterprises that meet its criteria of providing products or services that assist in poverty alleviation. The investment serves two functions. First, it supports an enterprise that provides access to products or services to meet the needs of low-income consumers in the developing world. Secondly, it supports the creation of a potentially financially viable business that provides employment to people from those developing nations. The investment functions as any venture-capital funding would with the exception that the time line for expected return is elongated and the amount of that return is less than in a typical venture-capital model.
“In a traditional venture-capital model, you would expect a return on investment in three to five years,“ says Imtiazuddin. “In a patient-capital model, we expect a return in seven to ten years.” In terms of debt financing, Acumen Fund makes loans below conventional commercial lending rates and also provides a source for funding for enterprises that would otherwise not be able to secure funding in commercial capital markets. Approximately 40% of the fund is invested in debt and 60% in equity in various enterprises. Although the level of investment varies depending on the firm, the average investment in an enterprise is approximately $1 million.
The investors in Acumen Fund are corporations, foundations, and high net-worth individuals. Investment in Acumen Fund is considered a charitable donation and is treated as such for tax and reporting purposes. Acumen Fund’s board of directors, which provides advice and support for its work, includes representation from investment banks and private-equity firms, as well as from a Nobel laureate in economics, Joseph Stiglitz. Its advisers include representation from investment firms, corporations, and philanthropic and humanitarian organizations such as the Bill & Melinda Gates Foundation, the Nike Foundation, and UNICEF, and representation from other entities such as the Harvard Business School, Citigroup, and Newsweek .
Acumen Fund’s criteria for investing in a given enterprise is that the management of that enterprise shows “both the skill and the will to be an effective social entrepreneur,” says Imtiazuddin. Portfolio managers in the fund use a variety of tools and metrics to assess whether to invest in a firm. These include traditional tools used to assess the potential viability of a business, but also include social-impact metrics, with one such tool being the Best Available Charitable Option (BACO). Using this methodology, managers assess whether a given investment would be better served through a traditional charitable contribution or through patient capital.
Acumen Fund is also partnered with the Rockefeller Foundation, and B Lab, a firm providing societal-impact advice, in the development of the Impact Reporting and Investment Standards (IRIS), a common framework for defining, tracking, and reporting the performance of societal-impact capital. IRIS combines traditional financial metrics with societal impact metrics. The IRIS conceptual framework uses more than a dozen frameworks ranging from the Global Reporting Initiative (GRI) to the International Financial Reporting Standards (IFRS) to the Social Reporting Standards metrics developed by the Social Performance Task Force (SPTF) and The Microfinance Exchange (MIX). Many of these frameworks were designed for specific sectors such as microfinance, which has adopted the SPTF metrics, or to encourage standardization and credibility in social and environmental reporting, such as GRI. The IRIS is designed to function across a variety of sectors to enable better measurement and communication of social and environmental impact and which can be used by a variety of stakeholders, including investors, donors, and humanitarian organizations.
Another example from its healthcare portfolio is a company called 1298, which provides ambulance service in India. “Unlike the United States, there is no public ambulance service in India,“ says Imtiazuddin. “Individuals have to take private cars, taxis, or other transportation sources, which lack medical equipment. For the poor, it is particularly difficult to secure medical transport.” The capacity of 1298 has grown from 10 ambulances in 2007 to more than 56 ambulances today. Additionally, the company has secured government contracts in four Indian states that will enable it to have more than 1000 ambulances nationally in the next three years. The company charges a standard market rate of approximately $30 for ambulance service and provides free or subsidized rates to individuals that cannot afford that fee.
Imtiazuddin says these examples show how business models and humanitarian efforts can be combined to create econonomically sustainable social enterprises. He sums up the importance of this work. “We are a piece of the puzzle in trying to make a dent in global poverty.”