For-Profit is the New Non-Profit

For-Profit Is the New Nonprofit: Private equity is playing a central role in the rise of “impact capital”

One of the best speeches I’ve ever witnessed was by Mo Ibrahim, the African investor, at a 2005 gathering in Washington, D.C., hosted by the International Finance Corporation. At the time, Ibrahim had only recently sold his mobile phone company, Celtel, to a Kuwaiti conglomerate for $3.4 billion, reaping one of the most spectacular private equity exits ever—and forcing Western observers to realize that such returns could be had in sub-Saharan Africa.

In his 2005 speech, Ibrahim lauded not only the profits generated by his cross-continental Celtel rollout, but the impact its growth had on Africans. More than 50 senior Celtel executives had become millionaires; millions of consumers in underdeveloped countries like Chad had access to telecommunications for the first time; and by 2005 the company sold services from 120,000 locations across Africa, driving local employment and entrepreneurialism.

The Celtel story, Ibrahim said, was the better model for improving the lives of poor people—a for-profit endeavor creating employment, wealth and economic growth. He excoriated “aid”—even pronouncing the word with disdain. Addressing the hundreds of private equity executives in the crowd, he issued a challenge (I’m paraphrasing): “Keep your aid. You are supposed to be capitalists—be greedy and come to Africa to create businesses.”

It was the first time I’d heard such a passionate and eloquent articulation of the idea that capitalism could be a force for societal good. Eight years later, there clearly is growing momentum behind the model for growth Ibrahim promoted. It is being called “impact” capital. Much of the energy behind it is coming from groups that are basically private equity firms with slightly broadened investment mandates.

The goals of the impact-capital community have gone by different names in the past: double-bottom-line investing, ESG, corporate citizenship, responsible investing, sustainability. “Impact” appears to be emerging as the winning term, in part, I believe, because it suggests most clearly that the environmental, social and governance objectives sought are meant to be the result of capitalism, not consolation prizes for some watered-down version of it. In other words, the jobs created by Celtel were the result of an effort that was primarily focused on economic success, and not the other way around.

This is a version of responsible investing that the proto-capitalists in the private sector can get behind: Make money, but create and achieve ESG goals in the process. The impact mandate also succeeds at bringing corporations and investment firms into alignment with development agencies and advocates across a spectrum of causes, from poverty eradication in developing countries to the advancement of women and minorities in developed ones.

Private equity, starting with the largest firms, is becoming a major driver of the impact capital movement. The Carlyle Group, for example, highlights its own commitment to the cause in an annual corporate citizenship report that outlines initiatives at the firm and portfolio-company levels designed to promote progress in areas like environmental impact and the advancement of women. The Abraaj Group is another large firm that assiduously measures its impact on aspects other than financial returns, such as jobs and the environment, and sends the results out in glossy reports.

Until this past May, I’d never had a conversation with David Bonderman—though I’d certainly tried—but he agreed to a Privcap interview because the topic we proposed was TPG’s environmental goals, which combine cost-savings with green improvements.

The move toward impact capital isn’t so much about private equity firms radically changing their approach to investing as it is about setting explicit ESG goals, then measuring and reporting the results. Furthering this integration of financial and non-financial goals is the “One Report” concept, formulated by Harvard Business School senior lecturer Robert Eccles, who argues for a unified report to stakeholders.

A cynic would say that the embrace of impact capital objectives by corporations and investment firms is largely window dressing designed to impress idealistic shareholders and institutional investors. Which is where the reporting imperative comes into play–groups that claim to have achieved societal benefits through capitalism need to produce credible evidence. Private equity firms are good at many things, but transparency hasn’t typically been one of them (it wasn’t so long ago that GPs howled in protest when their pension LPs sought to share fund IRR results with the public pensioners whose money was being managed).

Greater impact-capital consciousness will be good for the world and also good for the private capital asset class—most GPs have privately assumed that investment activity is by and large beneficial to society, or at least not the blood-sucking caricature so often used by industry detractors. The imperative to chart those benefits and explain them to a skeptical world will bring greater transparency to the asset class in general and highlight its ESG mandates in particular, and this will further boost the popularity of a capitalist endeavor that delivers positive financial and societal returns.■