The Next Great Frontier of Impact Investing

Shortage. Accessibility. Timing. Donor restrictions. Most, if not all, nonprofits know resource constraints very well, and many are looking for creative ways to overcome them.

Could these financially stretched organizations represent the next great frontier of impact investing?

Our organizations—Zurich Insurance Group, a global insurance firm, and Population Services International (PSI), an international nonprofit that applies established commercial concepts to address complex public health challenges—came together to ask, and hopefully start to answer, that question from our two different perspectives.

Among nonprofits, there generally is limited understanding of how to use private investor capital to increase impact. Similarly, impact investors seem to struggle with how to interact with nonprofits—the experts in creating impact.

A few nonprofits are building independent social enterprises as opportunities for investors, but what about employing private investor capital within the nonprofit itself? And how might we understand different models of nonprofit-investor transactions in relation to each other—can we create a taxonomy, a common language, for these transactions?

As a first step toward answering these and other questions, our organizations recently produced a report on using private investor capital to increase nonprofit impact, drawing insights from structured interviews, workshops, and conversations with nonprofit leaders, investors, and donors. The report suggests a framework to help investors and nonprofits speak a common language, and to better understand various financial models through which they can engage with each other. The framework consists of three models, with select case studies of examples already in action.

Model 1: Using donations to pay back investors
In a simple version of this model, nonprofits might take out loans or even issue bonds, and make payments back to investors out of existing and future donation streams. Such arrangements can give nonprofits flexibility to overcome timing challenges—for example, purchasing supplies when volatile prices are low versus when grant funds become available. The risk of course is that donations may dry up; the organization’s impact, for example, may decrease or it may fail to effectively communicate impact to donors.

As one interesting example of this type of transaction, in May 2013, the Pledge Guarantee for Health (PGH) launched a partnership supported by a partial credit guarantee from USAID and the Swedish International Development Cooperation Agency (SIDA), giving it access $100 million in commercial credit. PGH then extended this credit to nonprofits and other aid recipients as short-term, low-interest loans.

Development impact bonds, which involve investors sharing the risk in performance-based projects, are a more complicated variant of this model. Nonprofits use private investor capital to implement projects, and donors pay returns to investors once the nonprofit has achieved previously agreed impact targets. This still means handing over donations to investors, but in return, investors provide capital up-front, bearing the risk that the nonprofit may not achieve impact targets, and donors pay only for results.

Model 2: Using income generated from dual-purpose assets to pay back investors
Nonprofits often vastly underestimate their capabilities and economic value. There are tremendous assets—distribution networks, tools and knowledge, insight about “bottom-of-the-pyramid” consumers, and more—that nonprofits can monetize to generate impact and revenue. Investor capital raised on the back of this revenue can present a new source of funds for nonprofits.

The trick is figuring out where those monetization opportunities lie without subverting social impact for the sake of investors seeking returns. For example, Brian’s colleagues at PSI in Mozambique developed a mobile communications and management-information system called Movercado to manage its health service and product supply chain, and stay in contact with consumers. It could potentially lease out the software to other businesses; charge small license fees to shops and community agents using the system to connect with suppliers and customers; or sell anonymous data on consumer activity to third-party businesses.

Model 3: Using income generated from independent social enterprise to pay back investors
There is already an abundance of literature and real-life examples of nonprofits launching and scaling-up successful social enterprises—BRAC’s empire of social enterprises in Bangladesh and ACCION’s numerous microfinance institutions converting from nonprofits to commercial entities are just two examples. While the report does not focus too much more on this model, it is important to include it in the broader taxonomy of ways nonprofits can work with large institutional investors.

Conclusion
Under each model, the report notes requirements for nonprofits wanting to explore these models—for example, many will need to shift mindsets and acquire new skills. But in all cases, nonprofits need transparency and consensus around situations where private investor capital is the only viable option for overcoming financial constraints such as shortage, accessibility, timing, or restrictions. (The report also examines other concerns, such as donor willingness to pay commercial investors for achieved or yet-to-be-achieved impact.)

Our vision is to unlock more than just some of Zurich’s $200 billion in assets as impact investment capital for large nonprofits. The goal is to expand the universe of possible impact investments, making it appealing to any investor looking to diversify their portfolio and accessible to any nonprofit prepared to achieve impact at scale.

We hope the framework presented in the report will help create a common language about that vision, and in the coming months and years we hope to learn even more from all those who share that vision with us.

Read more stories by Brian Smith & Manuel Lewin.