In October 2018, I attended Social Capital (SOCAP) 2018, held in San Francisco. More than 3,000 participants joined the event. This was the 11th SOCAP held since its founding in 2007, but it was my first. The event lasted for four days featuring over 150 sessions and more than 500 speakers, diverging on 14 themes. The themes covered included impact investing, racial equity, gender & market, transformative development, blended finance, circular economy, blockchain for impact, and opportunity zones.
Given my interest in alternative investments, I attended sessions on impact investing, blended finance, and opportunity zones. I gathered many interesting insights and would like to share some of them here. Many of the discussion topics were new to me, and it is my hope that the topics would be of interest to those with a focus on social impact, finance, and real estate.
- Impact Investment
The practice of impact investing may have begun as early as 1976, but it was not until 2007 that the term was coined by the Rockefeller Foundation. The nonprofit organization Global Impact Investing Network defines impact investment as “investment made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” The intention is the imperative word here as it differentiates the process and the objective from conventional investment targeting pure financial return.
Among the topics discussed at SOCAP18 on the subject of impact investment were investing through specific lens (with intentionality on variety of targetable social impact such as gender and racial equity), place-based dimension (with intentionality on targetable impact in a specific, local geographic area), and sustainability (with intentionality on environmental conservation and regenerative agriculture).
Globally, impact assets are still small, less than $200 billion, but they are widespread. Development can be observed in developed nations in Europe and North America, and also in emerging markets of Asia, Africa, and Latin America.
- Blended Finance
According to the global network Convergence, blended finance is defined as “the use of catalytic capital from public or philanthropic sources to increase private sector investment in developing countries and sustainable development.” The idea is to de-risk an investment project due to its unattractive risk-return profile such as long break even, low margin, lack of visible growth, or any combination of those or other factors. Despite its risks, the project may exhibit public benefit and social impact. As such, certain measures need to be taken to reduce risks and improve financial return. Once the catalyst manages to fulfill that purpose, then private investors would benefit from an improved risk-return profile of the investment project.
The “blended” part of that catalyst capital is the source and purpose of the money invested. It may be a combination of philanthropic funds (with an expectation of neither financial return nor repayment), equity (with an expectation of financial return), and debt (with an expectation of repayment and fixed or variable interest). Blending of the source may be in the form of government and foundation grants, endowment, community development investments, and patient capital equity. At the later stage, institutional investors such as social impact private debt and family office with a more conservative risk-return profile may join in the project as impact investment capital.
- Opportunity Zones
In December 2017 Congress passed the Tax Cuts and Jobs Act as part of the Government initiative to reform the tax code and stimulate the economy. Inside the Act, Qualified Opportunity Zone (OZ) is created to encourage investment in underserved communities around the country. States and territories were given autonomy to decide their own OZs. Suffice to say that the tax incentive is intended to spur investment inside the zones.
Since the new act was introduced in late 2017, the discussion on this topic was among the popular sessions in SOCAP18. Some 8,700 zones have been designated, exhibiting high poverty and high unemployment, both in rural and urban areas. The discussion mentioned that intermediaries (funds) were forming to capture capital for deployment in these zones, to the tune of $12 billion. On the demand side, projects were being developed at the local level to better address the situation unique to their area.
Since OZ tax incentive is constrained by a deadline, development of intermediaries within the next year or two would be interesting. A large part would feature real estate development but there would be some with pure entrepreneurial and business development aspect. OZ was mentioned to be an unprecedented experiment on a national scale to put impact investment into the mainstream. It is also a topic that intersects social impact, finance, and real estate. While development in the near term would be worthy of research, the longer-term developmental result would still be highly relevant down the road.
The intersection of money and meaning is a nascent but very promising undertaking. What may have begun some 40 years ago has undergone rapid development in the past 10 years. I look forward to participating in its development over the next 10 years.