Hubert Burda Media

Investing for Social Impact

There has been a lot of buzz about social enterprises, many of which are actively courting the investment dollar. But what are they and why should you invest? Steve Dawson finds out

Investing for Social Impact

In the Philippines, about an hour's flight south-east of Manila, lies the province of Negros Occidental, home to around 2.4 million people. Among them is 22-year-old single mother Mary Jane, who lives with her extended family in Bago City on the north-west coast. Life had not been easy, but the pressure has eased, thanks to help from a company with its roots in Singapore.
BagoSphere, started in 2011 by National University of Singapore graduates Zhihan Lee and Ellwyn Tan, is a social enterprise. Through intense English tutoring, it helps Filipinos land jobs at call centres.
“There are various definitions out there,” says En Lee, a pioneer and former director of Impact Investment Exchange Asia (IIX), which helps social enterprises like BagoSphere raise capital. “Stripped to its simplest form, a social enterprise is any organisation that tends to use business-driven solutions to tackle a social problem.”
But “business-driven” does not mean shareholder profits. Here, Lee makes a distinction. “You could have a company that is financially sustainable but chooses not to repatriate any profits back to shareholders.”
Opportunity to Create Opportunities
With a higher level of English literacy in the Philippines than surrounding countries, the country has become increasingly popular as a location for call centre facilities in recent years. Many English-speaking Filipinos desire jobs with them, but the reality is that for every 10 applicants, nine fail the interview process because their English standards fall below par.
Enter BagoSphere, which offers a two-month American-English course to Filipinos for 500 pesos (S$15) to better their chances of landing the job. Some 80 percent of their customers are women and often also single mothers.
Mary Jane, a college dropout who lost both parents to sickness, was understandably busy with her role as a single mother but wanted to take the course. Her aunt managed to raise the money and despite having to miss parts of the course because she had to cook and care for family, Mary Jane worked hard. Halfway through her training, she was sent for a mock selection process with call centres where candidates are assessed for the practical skills needed. One month ahead of schedule, she impressed the assessors sufficiently well enough to land herself a job.
Mary Jane now earns around 12,000 pesos (S$350) a month. She has excellent prospects of progressing to supervisor level within two to three years, which would increase her monthly salary to 30,000 pesos (S$875).
BagoSphere, which began on the strength of grants totalling S$30,000 to assess whether their idea was viable, followed by around S$150,000 to launch and run the business to date, plans to look for a second round of funding next year.
Whether such social enterprises create dividends or not, the “payout” clearly is not just financial. Johnny Heng, Asia head of active advisory and deputy chairman for Coutts Institute in South Asia, explains: “By investing in social enterprises, there is the potential for achieving ‘blended returns' — i.e. comprising of financial as well as social benefits. The widely held notion that for-profit investment could only maximise financial returns and that social purposes could only be pursued through charitable giving and charitable activities, is no longer valid.”
For BagoSphere, “blended returns” include 16,000 pesos spread over eight months from each course participant who subsequently becomes employed, plus a commission of 5,000 pesos from the call centre. But it doesn't stop there.
“As the saying goes: ‘Give a man a fish, you feed him for a day. Teach a man to fish, you feed him for a lifetime.' The impact you make from investing in a social enterprise goes well beyond the traditional grant-making to charitable causes,” says Heng.
Not Without Challenges
This apparent win-win investment vehicle seems like extremely good news, but with its dual benefits come dual challenges. Failure to achieve a mutual understanding among respective investors on the precise “blend” of returns on investments can lead to frustrations, Heng points out. Also, when assessing non-financial “dividends”, it's sometimes challenging to get sound and robust reporting on the social, environmental and economic benefits of a project.
Mae Anderson, the philanthropy advisor for Credit Suisse Private Banking Asia Pacific, cites difficulties when non-profit organisations modify their models after for-profit social enterprises.
“Sometimes they do not have the business acumen or execution capability to actually deliver. As with any investment, it is important to focus on the track record of the management team,” she says.
Similar concerns over the management team strike Rita Sharma, HSBC's head of philanthropy in Singapore. “The day-to-day people might just lose focus along the way. They don't see the things like initial entrepreneurial debt,” she says, adding that getting the right people, paying them a decent living wage and making sure they have the same clear focus is important.
With these concerns in mind, Coutts Institute's Heng sees a sound starting point being an investor's own ideas, values, concerns and expectations about what social investing should involve. The investor must also acknowledge what he hopes to achieve socially and financially.
The most established source of such investments comes from the estates. HSBC administers a vast number of charitable structures funded by private family trusts. The bank's Sharma and her team sit on an internal charities committee that actively looks for worthy causes that can also be tracked for financial returns — what they call strategic philanthropy.
While primarily led by the wishes that people leave them, having so many clients, contacts and staff that work across a variety of sectors and in different territories, they are well placed to make a social dream become a profitable reality both for the donor's estate and their surviving family.
Ask the Experts
What about those who perhaps aren't willing to pass over their entire life savings to philanthropy just yet? Credit Suisse's Anderson highlights fund managers who specialise in social impact investment as an option worth exploring.
“In recent years, trade associations and similar groups have been set up to support social impact investment,” she says. “Such groups are a good place to start in order to network and to map the market.”
Indeed, things are moving at a steady pace for the retail investor, thanks to the aforementioned Singapore-based IIX, which recently partnered with the stock exchange of Mauritius to create a social stock exchange. There, social enterprises can issue shares and bonds that trade just like any other exchange.
But if you are a more hands-on investor looking to make a social enterprise your day-to-day work, like any businessman, you need good research and probably some like-minded investors.
Robert Kraybill, the managing director at IIX, helped Bagosphere raise capital to get their business off the ground. Their Impact Partners network has a large number of signed-up investors, for whom they source and screen social enterprise investment opportunities. They then engage the social enterprise with the aim of reaching a point where they are ready to absorb investment before finally introducing them to investors with the best fit.
“We also do many other things. We have various advisory services for social enterprises, investors and others in the space; we do educational workshops; then we have a non-profit arm called Impact Investment Shujog and they do research,” says Kraybill.
During his time at IIX, Kraybill has encountered many who want to invest their time and money for worthy causes. But he emphasises that perhaps the best way to contribute is to invest your core skills.
Sov Leang did just that. He was born in Cambodia but moved to the United States when he was just one. Years later, armed with a sterling education and excellent experience in the semiconductor industry, he returned to the country of his birth in 2010 looking for a business venture that could make him a living but also kick-start a Cambodian community on the road to prosperity.
He found that in rural parts of Cambodia, the lack of a proper electricity grid forces people to sleep as early as six or seven o'clock in the evening, or move around their homes in darkness. What electricity there is comes from car batteries, which at US$1.50 per kilowatt-hour is extremely expensive. By comparison, the price of electricity in a developed country like Singapore is around US$0.20. In the US, it can go as low as US$0.08.
Leang acquired a licence to supply electricity in one rural area of Cambodia and started Sun-eee, a company that has established a grid that slashes the cost to as little as US$0.40, 75 percent less than using car batteries. He is left with a profit margin of between 15 and 20 percent, income that helps develop the business further and widen the supply. With Sun-eee, domestic life has been transformed, and new opportunities for the local economy are endless. “We're going to start raising funds again in about 18 months. The more successful we are, the more active investment we need,” Leang. “Ultimately our plan is to service roughly 400,000 people, so there's going to be a huge social impact.”
Going forward, Leang makes a profit, rural Cambodia's standard of living improves and its people may finally be able to afford to stand on their own two feet.
Win-win-win.

Tip Box

Starting or supporting a social enterprise? Here are some pointers on how:
• Be clear about your social values and concerns
• Invest your skills and expertise
• Research the availability of grants to fund your enterprise
• Seek guidance from fundraising experts when attempting to raise capital
• Ensure that co-investors share the same expectations in terms of social profit vs financial profit
• Research companies and their track records before investing in any existing businesses
• Ensure that management has the requisite business acumen for sustainability

Cup of Change

There are several social enterprises at work closer to home and a few cups of coffee unveil some fine examples
The Joan Bowen cafe at St Andrew's Village employs young adults with special needs, paying them a decent wage and imparting essential lifelong skills along the way through the sale of coffee products.
Bettr Barista at Burn Road provides professional barista training within a wider, holistic programme to disadvantaged and underprivileged women. It aims to help them subsequently find related employment.
Blisse, a cafe at Ang Mo Kio Street 55, trains and employs single mothers, people with disabilities and at-risk youth.