Impact Investing Digest #20 - 3rd February 2025

EXTERNAL EVENTS

I'll be attending a few things at home and abroad in the coming weeks - do reach out in advance or come say hi if you'll be attending any of them:

• The Beacon Philanthropy and Impact Forum 2025 - The Beacon Philanthropy and Impact Forum is a unique event in the UK that convenes foundations and philanthropists, NGOs and non-profits, government and regulators, impact sector leaders and financial institutions sectors. All are experts in social and environmental impact and all are bound by a common goal, to grow the level of impact capital in the UK. The Forum will be held at the Guildhall, London on Wednesday 12th February 2025.
• Sankalp Africa Summit 2025 - from February 26th-27th I'll be in Nairobi, Kenya for the 12th African edition of the Sankalp Forum . I'm excited for my first trip back to the Continent in a number of years.

ECOSYSTEM NEWS

Impact vs returns in the UK: Better Society Capital is one of the leading examples of national impact investing wholesalers globally and has committed almost ￡1bn into the UK ecosystem since 2012 (see #Digest16 for more information on impact wholesalers globally). They've been a valued partner and co-investor to Ceniarth as we look to deepen our UK-focused impact-first portfolio.

As a (partially) publicly funded body, it is subject to strong external oversight and an independent quadrennial review was recently completed by the Oversight Trust . The report flags tensions in its dual mission of "growing the market" and "maximising social impact", which it attributes to the "original sin" of unrealistic expectations at its founding in 2012 - "experience suggests BSC cannot earn market returns while simultaneously delivering impact, covering its costs and mitigating risk from investing in vulnerable enterprises". As the review states, "At one end of the range, BSC investment in mainstream impact funds (especially in social housing) has delivered growth, but BSC’s ‘additionality’ is sometimes unclear. At the other end of the range, social fund managers who focus on more risky and often harder-to-scale catalytic investments have struggled to raise capital (especially since 2022) and remain fragile."

Alongside the trade-offs on the risk/return/impact continuum at investment level, Better Society Capital also plays an important market-building role which adds additional costs versus other purely investment-focused organisations. Even with a reduced net financial target of 1% annually (3-5% gross), it faces pressure from some in the ecosystem for being too conservative or not being flexible enough on return expectations - "Social fund managers commented that, from their perspective, BSC has become more explicitly return-focussed rather than impact-focussed, which has further squeezed social fund managers’ business models and limited their further investment in frontline investees."

This tension is familiar to impact investors and DFIs globally - for those struggling with these very real trade-offs, the full report and Better Society Capital 's thoughtful response are worth reading. It will be interesting how the findings feed into the organisations 2026-2030 strategy which will be launched later this year. To me the main takeaways are:

• A need for better segmentation of more scalable finance-first approaches and impact-first strategies in the UK; and
• UK foundations and family offices should step up and fill the capital gaps for less commercially attractive strategies. It's an ongoing disappointment how little impact-driven capital is flowing from these large capital pools here. This in turn creates a reliance on some combination of BSC, Access - The Foundation for Social Investment and Social Investment Business to anchor almost every strategy.

Impact vs returns in Africa: On a similar theme, I enjoyed this recent article profiling Joshua Bicknell of Balloon Ventures. In a way that aligns a lot with Ceniarth 's approach to impact-first investing, he challenges the narrative that you can simultaneously maximise both financial returns and social impact. The solution appears to lie somewhere between the false dichotomy of pure profit-seeking VC and grant-dependent impact investment. As journalist Andile Masuku says, solutions to Africa's early stage investing ecosystem requires "new asset classes (like the boring SME business one Balloon Ventures is pioneering), appropriate return expectations and honest conversations about trade-offs. both financial returns and social impact."

Tackling the issue on a more global level, I'd encourage people to read Katie Boland and Brian Boland of Delta Fund provocative piece on the "violence of market-rate returns". I agree entirely on the "comfortable fiction" they cite of much of the responsible/impact investing ecosystem, and found their pointed commentary on the more extractive features of capitalism thought-provoking.

How can African SME funds mobilise more capital? The funding gap facing Africa's estimated 44m SMEs is stark, with 40% saying that access to finance is the primary factor constraining their growth - precise estimates are challenging, but a recent estimate puts the number at $140bn annually (via Convergence Blended Finance ).

A new report from Investisseurs & Partenaires - I&P and Argidius Foundation provides rich insights into the challenges and opportunities for African fund managers looking to mobilise domestic and international capital to support this important segment. It profiles a range of African SME funds, including valued Ceniarth partners Balloon Ventures , iungo capital and Investisseurs & Partenaires - I&P 's Development portfolio of local African funds, highlighting pretty limited progress against the needs. There are a host of takeaways, but a few stand-out points for me were:

• 45% of first-time fund managers fail to achieve a first close, with an average fundraising timeline of two years or more. Those succeeding either raise progressively (smaller <$5m pilot funds, or "build and raise") or partner with larger fund platforms.
• Fund returns are improving, both at a gross and net level - interestingly first-time fund managers from non-traditional backgrounds outperform.
• DFIs remain the primary source of capital, but their risk aversion and greater comfort with larger funds is a barrier to new solutions emerging - incubating these solutions remains the preserve of family offices (like Ceniarth ), foundations and publicly funded vehicles like FASA and Dutch Good Growth Fund 's Seed Capital programme.

Is Blended Finance failing? Progress against the SDGs is dangerously off track. A new report from economist Mariana Mazzucato for the United Nations Department for Economic and Social Affairs has highlighted the limitations of the current blended finance architecture. It points out how it has failed to mobilize private finance at scale, with concessionary funds often only locking other non-concessionary public funds - and at volumes far below the estimated $5-7 trillion per year. While I whole-heartedly agree with the calls to build a more mission-oriented approach to finance, it's hard to have any faith of this being achieved in the current global macroeconomic context.

Pioneers Post helpfully summarise the issues in this article, also providing some competing perspectives from Convergence Blended Finance on the positive impacts blending can facilitate.

IMPACT MEASUREMENT & MANAGEMENT

Evaluating Iceland's Food Club: Leading UK supermarket Iceland Foods has been piloting an innovative new product with UK personal lending CDFI Fair for You CIC and Fair4All Finance . It provides financially-excluded households with a mechanism to buy essential items and build their financial resilience. The Food Club offers micro-loans of to those needing to smooth out their income, in particular during the school holidays if they have extra expenses. To date, ￡7.1m of credit has been extended to over 27,000 customers - a recent evaluation report by Centre for Responsible Credit digs into the impacts for those using the scheme. Key impacts to date include:

• 29% are no longer using interest-bearing credit sources, and there has been a 74% reduction in the number using illegal ‘loan sharks’.
• 22% are no longer cutting back their spending on essentials, and 18% are also able to redirect scarce funds to rent or mortgage payments.
• There has been a 74% drop in food bank use.

All of this has been possible due to the provision of ￡2m low-cost capital by Fair4All Finance , which highlights the amazing impacts that catalytic, impact-first capital can have in communities in the UK.

Microfinance and impact: evaluations of earlier microfinance interventions acknowledge improvements in borrowing and investment, but they convene around a lack of transformational impacts on important outcomes such as business profits and labour supply. More recent studies have highlighted significant heterogeneity in impacts, based on key indicators such as gender and prior business experience of entrepreneurs. VoxDev summarise the recent emerging evidence in Issue 3 of their "VoxDevLit" on the subject. For anyone investing in financial inclusion globally, I'd suggest listening to the podcast and reading the full issue. It certainly helps me when looking to apply this to strategy and origination in this area.

60dB 2024 Review: Regular readers will know that I am a big fan of 60 Decibels and their efforts to put customer voice at the centre of attempts to improve impact measurement globally. In 2024 they spoke to 152,000+ customers across 62 countries, and this article summarises some key insights from their work.

SECTOR-SPECIFIC CONTENT

• How machine learning and AI can be harnessed for mission-based lending (via ImpactAlpha )

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