In London’s heartland of private equity a group of finance’s bright young things gathered for a glass of wine and reflections on impact investing from Nesta’s CIO, Matt Mead, at one of a series of Happy Hours organised by Finance Matters, a community of finance professionals in London with a strong interest in helping the financial industry drive social change, and put sustainability at the heart of their careers (a version of this article was originally published in the Finance Matters Weekly).
Matt gave us a brief history of his career from chartered accountancy, by way of corporate recovery and a life time of lessons in dealing with owner-managed businesses to leading 3i‘s technology practice through the turbulence that followed the dot-com bubble. From 2007, 3i focused its business on private equity and growth capital, and, after managing the disposal of the early stage portfolio, Matt joined Nesta in 2010.
Nesta, the National Endowment for Science, Technology and the Arts, was formed in 1998 as an innovation agency. Shortly after Matt joined, Nesta was reformed as a charitable foundation, funded by a £350mn trust and its activities include grant making (through the Innovation Lab) and the investments business. Matt and his colleague Joe Ludlow began talking to a series of wealth managers and angel investors to better understand perceptions of social investment (now know as social impact investment) as an asset class. When Big Society Capital (BSC) was set up in 2012, Matt and Joe saw the opportunity to combine Nesta’s expertise in grant-making and early stage investment and create Nesta Investment Management LLP (NIM is a wholly owned subsidiary of Nesta) to raise a social impact investment fund. The fund was closed in December 2012., with £18mn: £8mn from Nesta matched by £8mn from Big Society Capital, and the Omidyar Network providing £2mn. The fund targets ventures addressing major social needs in the UK, around three broad themes: the needs of an ageing population; the learning and employability needs of younger people; and efficient use of resources by households and communities, each of which has four impact goals attached to them.
Social investment used to mean loans to a charitable organisation, but NIM are neutral on the legal form of organisation they invest in. Matt is clear that to broaden social impact sector, it is important to enable companies limited by shares to deliver impact. There are constraints, for example, NIM look very closely at organisations’ object clause, dividends and remuneration policy.
Out of the roughly 600 projects that came across Matt and Joe’s desks over these years, 7 made it through to investment so far, not an unusual ratio. These investments, currently all in companies limited by shares, are a mix of equity and debt, typically around £0.5 m ticket.
Investment decisions are impact first, and organisations must have a theory of change addressing one of NIM’s target outcomes that is clear, measurable and at the core of its business. The investment criteria include “scalable approach; delivering impact and public benefit in the UK by providing products or services that are inclusive, accessible and affordable; with strong business models that are able to generate reasonable, sustainable returns on capital”. One of the most talked about of NIM’s investments is in Oomph!Wellness Ltd which runs exercise classes in around 500 residential care homes. The founder wanted to shift to a “train the trainer” model training care homes’ activities co-ordinator and providing music, materials and equipment. Oomph’s theory of change is based on exercise improving physical and mental health, reducing accident rates, and enabling care homes to provide a better quality of service addressed NIM’s ageing outcome. Oomph and NIM worked together to develop an impact evaluation plan around targets to develop evidence proving a correlation between Oomph’s growth and the target outcome. This is typical of NIM’s involvement, coupled with board support.
Alongside their own impact evaluation framework, NIM is keeping a close eye on measurement frameworks emerging within the industry. The debate around measurement is lively, and far-reaching. Calls for the adoption of standard metrics around corporate social responsibility are growing, with Mark Wilson, CEO Aviva commenting: “There is a clear need for a global mandate and a globally coordinated approach to corporate sustainability reporting, which is clearly understood and consistently applied” referring to a recent report showing that only three per cent of the world’s largest listed companies report on all basic sustainability metrics.
When talking about the differences between running an impact investment fund and a conventional venture fund, Matt candidly confessed “It is harder“. The financial returns have to be matched with impact measurement. The two are not always in close alignment in periods of difficult trading. If an organisation seeks to scale back its impact, NIM, as an equity investor could be left with an equity investment that is no longer delivering on its proscribed outcome.
As always, the FM audience participants had quite a few questions, including around target financial returns. Along with a measurable impact, there is the expectation of a “reasonable, sustainable return on capital” with a net target rate and an envisaged range around it, depending on the investment and its structure.
NIM is charting new territory. Interest in impact investing is growing in age of growing societal challenges, and government austerity. Ronald Cohen, chair of the Social Impact Investment Taskforce, writes, “It harnesses the forces of entrepreneurship, innovation and capital and the power of markets to do good. One might with justification say that it brings the invisible heart of markets to guide their invisible hand.”
An enjoyable evening and a unique opportunity to gain invaluable insights from a pioneer of the social impact investing space in the UK.
Image credits: Oomph Wellness Ltd; Nesta Investment Management