To really address today’s pressing societal challenges, from inequality to climate change to migration, social enterprises need access to growth capital to develop and scale up their innovative solutions.
Thankfully, more and more impact investors are eager to engage in what they perceive as measurable impact. But they sometimes need stronger evidence and more information about the risk-return profiles achievable.
In its unassuming way, the European Investment Fund has been deftly nudging the impact investment sector forward for over a decade. This has been thanks to its substantial co-investing and market-signalling activities. But also its clear willingness to champion underdogs in the venture and equity space, as part of the European Investment Bank (EIB Group), the EU’s main lending arm and climate finance agent.
The EIF’s quiet achiever status is confirmed by Sarah Budke of Avesco Financial Services in Germany. She handles impact and fund relations for the EIF-backed European Social Innovation and Impact Fund (ESIIF).
“To cope with the societal and environmental challenges, clearly underlined by the recent COP26 conclusions, it’s vital to build a clear impact benefits case for all parties involved,” she tells Impact Investor.
“With the EIF on board, it gives our other investors and backed entrepreneurs added confidence not just in ESIIF, but also in impact investing in general.”
That is important, she adds, because impact investing is still seen in some circles as “a new kid on the block.” And while big investors might know what it stands for, smaller players and semi-professional investors need more convincing.
Education plays a big role in that, says Budke, and the ESIIF team is actively communicating about the fund – and the topic of impact investing in general – to attract more early- and mezzanine-stage investors.
“It’s a positive challenge during Covid-19,” Budke admits, “which means we all need to raise the tempo on impact investing collectively.”
ESIIF is helping German and European social enterprises bridge the early-stage growth finance gap thanks to mezzanine capital underwritten by the EaSI Guarantee Instrument.
It is part of the EU’s Employment and Social Innovation programme and builds on its Progress Microfinance initiative launched in 2010, which mobilised over €520mn and helped 55,000 micro-borrowers. Both are managed by the EIF.
One year on from ESIIF’s opening, Budke says the guarantee has made a difference because it covers 80% of initial losses on up to 20% of the total capital invested. That means €3.2mn of the fund’s target volume of €20mn would be compensated in the event of defaults.
The backing reinforces what she calls the social enterprise “growth triangle of public/official support, private investment and entrepreneurs” by mitigating the risk usually associated with ventures like this. That, she confirms, “attracts investors who might have otherwise stayed away from impact investing.”
Societal needs as a value driver
Alone, these ventures struggle to make such big changes and build a solid impact case, which goes hand in hand with financial returns (4.5% have been quoted for ESIIF). But Budke says with time and awareness, anyone can take the step and become an impact investor, especially as trust in the methods for measuring impact and return converge.
EIF’s Deputy Director of Equity Investments Uli Grabenwarter echoes the view, but thinks the world is much closer to that space already. “Let’s be honest,” he says, “you can only create a successful business now if your business model makes a difference to somebody.”
He explains: “We are on a pathway – not at the beginning but more in the middle – where responsiveness to societal needs has to become a major value driver and an unavoidable element in the decision process of any investor looking at sustainable returns.”
Grabenwarter is a published researcher and major influencer in the impact investment space. His work on metrics and fund manager remuneration is a benchmark in the industry and has informed much of the EIF’s work in this field since 2013, alongside the launch of the Social Impact Accelerator (SIA) – a ‘fund of funds’ with his stamp all over it.
The SIA was a watershed moment for EIF and impact investment, Grabenwarter says, because it was the first pan-European public-private partnership addressing the equity finance gap needed to support social enterprises. It responds to the market and impact needs, but also to wider EU policy aims of establishing a sustainable funding market for social entrepreneurship in Europe.
In his research and in discussion with Impact Investor (see feature interview, ‘In the unconventional pursuit of true impact’) he warns against relying too heavily on one-size-fits-all, or standardised approaches to measuring and comparing social enterprises through ill-advised and often unwieldy metrics and reporting.
Standardised indicators ‘don’t compare well’
EIF’s fund managers are typically asked to define between three and five key performance indicators (KPIs) linked to an impact agenda at the level of a portfolio company, and to define objectives for those KPIs over the holding period of the investment.
Budke confirms Avesco’s KPI-setting focuses on narrowing down the essence of their portfolio companies’ ‘impact essence’ in view of the UN Sustainable Development Goals (SDGs).
But when taken out of the context in which they’re produced, Grabewarter says standardised indicators don’t compare well between companies or even impact activities.
Indicators that make sense
Through SIA and other instruments like ESIIF, he says, EIF’s approach is not top down, but rather gives fund managers and the funded entrepreneurs “as much flexibility as possible to define indicators that reflect very pertinently what their activity is about.”
He sees two benefits accruing from that: “First, we get indicators that are really meaningful to the business model because they demonstrate the true theory of change being pursued by the underlying company.
“Second, and more important, we can rely on the indicators being reported to make sense and ideally be applied by the social enterprise in steering its business.” That way, he concludes, the companies can make a genuine difference and create true impact with their business models, rather than use their reporting as a ‘fake wrapping’.
Education, science, trust
EIF developed on Grabenwarter’s research, titled ‘In search of gamma, an unconventional perspective in impact investing’ together with Heinrich Liechtenstein, which laid the groundwork for a novel ‘gamma model’ tying impact performance and financial return to asset and fund manager remuneration.
To establish an entrepreneur’s theory of change and impact readiness, Avesco works closely with the Financing Agency for Social Entrepreneurship (FASE) for its ESIIF portfolio. It also works with partners such as the Bundesinitiative Impact Investing (BII) to make its ecosystem more efficient and measurable.
“We need to do all this to be trustworthy and part of the whole movement, augmented by scientific measures and processes,” Sarah Budke explains. “Our first line of attack is education, science and to play an advisory role with all relevant parties.”
To date, ten projects have been signed up under ESIIF, including a newly announced deal with the Dutch outfit Searanger Service whose mission is to restore one million hectares of ocean biodiversity by 2040 while training 20,000 young people as a kickstart to their maritime careers.
Other signees are tackling various SDGs, such as working towards affordable irrigation solutions for sustainable villages in developing countries (Aqysta), access to safe drinking water for everyone (Helioz), and reducing food waste (Sir Plus).
Getting to know the EIF
The European Investment Fund was created in 1994 by the EIB, European Commission and several leading public and private financial institutions to provide infrastructure finance and risk guarantees.
After three years, it started dabbling in venture capital – specialist risk finance for smaller European businesses – as part of the EU’s then ‘growth and employment’ drive.
In 2000 the EIB took a majority share in a newly restructured EIF which saw it become the Bank’s ‘exclusive vehicle for venture capital’, a role it continues to perform.
As a lender and guarantor, the EIF essentially has a hand on the risk release valve for a significant chunk of Europe’s early-stage and growth investments – inviting banks, micro-credit providers and private equity funds to co-invest in SMEs, including social entrepreneurs.
Demonstrating what the market can do
Grabenwarter puts it another way. “Our different instruments, including guarantee facilities like EaSI, are indeed intended to modify the risk-return profile to give comfort to certain investor communities.”
Yet he stresses that EIF’s broader, long-term goal is not about controlling any valves, but rather to “demonstrate that market segments are sustainable in themselves, and can be taken on by the financial community as an ‘at par’ investment type.”
He is proud of his work and EIF’s role in promoting impact investing. “We want to engage in a dialogue with the community and market segments we seek to develop, to generate a level of maturity where the market can actually be sustained by private-sector interest that builds on the back of the demonstrated success shown through own activities.”
But he baulks at being described as shaping the space outright. That just sounds like bragging: “We prefer to lead by example, demonstrating what the market can do.”