New LBS impact fund to bridge divide between social and financial return
The origins of socially responsible investing (SRI) are not new, dating back at least to Biblical times. In that long history, there have been many ‘eureka moments’ when innovative thinking was required to persuade investors to put their money into funds that either eschewed certain industries – such as ‘sin’ industries based on slavery, alcohol and tobacco – or into ventures aimed at promoting a particular social good.
One such moment (and when tertiary education and SRI first came together in a significant way) occurred in the 1960s, when US students protesting against the Vietnam War demanded that university endowment funds should not be invested in the defence sector.
Inspired perhaps by the country’s deep-rooted culture of civic activism, several elite US business schools now not only offer modules on impact investing, but also run experiential programmes designed to teach students how to think like impact investors. The most prominent of these is the MBA Impact Investing & Training (MIINT) programme founded in 2011 by Wharton Business School and Bridges Ventures. This currently sees students from 30-plus leading schools in the US and Europe compete annually to identify one social enterprise to receive a potential investment of up to $50,000. Utilising its strengths in identifying such opportunities – and, indeed, presenting the case for the enterprises it has selected – LBS has a formidable track record in the MIINT competition, placing second twice in the three years it has competed.
But, while there are many alternative financing structures for early-stage impact investing, each presents problems relating to reputational and fiduciary risk for business schools. It was partly through his experience of competing in the MIINT while at LBS that Josh Bell, who is due to graduate this summer, conceived of the LBS Impact Ventures Fund (LBSIV) – not through any single eureka moment, but through a series of crucial insights which culminated in a business-education first: an impact fund which not only gives students the opportunity to gain real-life experience in the field of impact investing and matches funding with social enterprises, but allows the School to participate in a way that vitiates the risk-related issues in raising money from investors. Whereas, to date, schools have sought to raise funding through investment capital, for which investors expect a reasonable rate of return, LBSIV is structured through a donor-advised fund (DAF); hence funds raised are donations, not investments.
This structure affords legal liability protection to the School while allowing faculty and staff to learn from DAF providers in the administration of the funds (with the providers also giving their support in the form of tax, compliance, legal issues and due diligence on investment and portfolio management). And because DAFs are legally structured to be ‘evergreen’ – the donations are irrevocable – any potential investment returns are recycled back into the fund to support future use by students.
“Having a consistent, ongoing relationship with LBS and having access to LBS students, faculty, network and brand can really move the needle between an enterprise failing and thriving. This has the potential to be a game-changer in the impact space.”
Josh’s interest in impact funding was first sparked by a talk on financial engineering at the Brookings Institution in Washington, DC in 2014, when he was struck by “the power of finance to mitigate the gap between social return and economic return.” As he points out, however, “there is no shortage of social enterprises and social causes that have a clear benefit – it’s a question of finding the right investor base to be able to take on the risk of financing the enterprise.”
And while one bond in particular, Educate Girls in India, impressed him as having the potential to achieve social goals that would lead to significant and measurable economic returns, he was also struck by the fact that, because US investors tend to be wary of investing outside the country, US impact funds mainly target social enterprises that are nationally focused.
This was one reason why he decided to do his MBA at LBS. Another was the fact that, tellingly, he believes London is “a little ahead of the curve” compared to other financial centres like New York, Chicago and San Francisco: “There is just so much more collaboration between funds, the government and schools like London Business School.”
With the MIINT competition tending to feature US-based enterprises (LBS is one of the few schools to have sourced a company from outside the US in which to invest), the LBSIV has a unique competitive advantage in that its network is truly global, so that it can source start-up opportunities anywhere in the world.
This ‘realness’ characterises the LBSIV in all respects. As Josh says, “Fundamentally, there is great education in the classroom, but it always has to be complemented by what happens outside the classroom. Having a fund with real money and real companies is a very powerful experience for students to then go into the job market and say, ‘I have made an investment deal with my classmates at LBS.’ It makes it much more real – it moves it from a student conversation to something that has real-life investment impact.”
And while this is “the main benefits to students,” the fund has key benefits for other stakeholders. One, of course, is the end use of the funds; the social-impact investment itself. Another is that LBS faculty get immediate exposure to start-ups around the world with new and innovative business models. Depending on how successful the fund is, there is also potential to raise money for the School, which could be ploughed back into the fund or used for other initiatives, such as providing scholarships in impact investing.
On top of these benefits, there is one which further distinguishes the LBS fund from the MIINT competition and similar experiential programmes. Whereas these begin again every year from scratch with a new intake of students and judges (and the knowledge and expertise they have gained is ‘lost’), the LBSIV will have a dedicated investment committee who will oversee the process from start to finish, thereby putting the students in much closer and more sustained contact with the impact investment community in London – and, hopefully, a portfolio of companies that will be the recipients of the investments.
Students will engage on strategic projects with the companies, providing advice and resources on operational issues; a potentially huge value-add to resource-constrained start-ups. As a result, it is envisioned that their relationship with LBS will grow and be maintained over many years – adding a whole new dimension to the term ‘sustainable investment’.
LBSIV plans to make minority investments via equity in the ticket size of £20,000 to £40,000, consistent with the MIINT competition and dependent on available funds. Jeff Skinner, Executive Director of the Institute of Innovation and Entrepreneurship at LBS, who currently manages the internal MIINT process, will oversee the formation, organisation and oversight of the flagship fund. He said: “This really capitalises on the huge interest in social enterprises and impact investing among students and the business community at large. The main aims are to give students a great learning experience, help build sustainable, high-impact social ventures and build a sustainable fund that makes a return that can be invested in other ventures and programmes. It’s an incredibly exciting initiative.”
The question how the start-ups could get the maximum benefit from the fund was a central part of Josh’s thinking: “Having a consistent, ongoing relationship with LBS and having access to LBS students, faculty, network and brand can really move the needle between an enterprise failing and thriving. This has the potential to be a game-changer in the impact space.”
Further reading: Nicole Kamra on winning an investment in the MIINT for an innovative healthcare start-up in Pakistan www.london.edu/lbsr/iie-7-things-ive-learned-about-impact-investing
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