How do impact investment fund managers balance the needs of their investors with the needs of their investees/borrowers? RSF Social Finance’s answer: through radical transparency.
How would the world be different if the financial system were open and transparent? What if your bank could tell you exactly where your money is today and get your input into the interest rate you want to earn? When would you push to earn more and when might you actually agree to earn less if you get social impact as a return as well?
The practice is unconventional and as far as we can tell, unique. It puts the conventionally at-odds needs of various stakeholders around a loan into a rare conversation about alignment.
We held a panel for different stakeholders to share their perspectives on this new way of aligning investment needs at SOCAP12 in San Francisco, building off a new research report – A Market Emerges: The Six Dynamics of Impact Investing – published by PCV InSight, CASE at Duke and ImpactAssets.
- Managers of RSF’s Social Enterprise Lending Program decided to not use LIBOR as the benchmark for interest rates; instead rates for new loans are set on the basis of an independent benchmark called “RSF Prime.” RSF Prime is equivalent to the RSF Social Investment Fund interest rate plus a spread of 4.0%, used to fund RSF’s operations.
- Loan Managers at RSF hold quarterly meetings for their investors, who meet the investees and discuss what recommendations they have for changes to the interest rate the fund pays them.
- Potential borrowers, impact entrepreneurs looking for loans to help scale their operations, then get to consider the value of their loan from the fund in a different level: it’s not just about the best rate, but who is the best long-term partner for taking them where they want to go? What is the value of the community RSF attracts, not just the loan?
The following five videos provide a snapshot of these perspectives:
As Ted Levinson of RSF Social Finance explains, RSF’s quarterly meetings and rate setting process are both powerful and onerous:
According to Chris Mann of Guayaki Sustainable Rainforest Products, the heart of impact investing is getting communities to engage intentionally in how their money creates value. His cost of capital defines what he can and can’t do, but there’s more flexibility when missions are aligned:
Another entrepreneur, Jim Fruchterman of Benetech, explores the risk/return trade-off of mission-focused capital and why he appreciates mainstream capital as well:
RSF Investor Kristin Hull describes how she moved money from her and her kids’ accounts immediately into the fund after meeting the borrowers firsthand:
Ted Levinson describes RSF’s role in the larger marketplace, and realizes their practice sets the stage for other investors to swoop in. Listen to what “really gets his goat,” and why he thinks social enterprises may need him less in the future:
The take-away? Impact investors do things differently than mainstream investors, and sometimes that results in a better market ecosystem for all.