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After the Great Recession of 2008, there was a lot of retrospective, especially in the non-profit sector where I spent most of my career. The conversation is largely about how foundations and nonprofit funds can give more to those who serve the poor, address social issues, and invest in undercapitalized entrepreneurs and underserved communities. It was about the fact that they lost huge amounts of money in the market when they could have given away. Do investors really want to repeat these mistakes when navigating the current fluctuating market conditions?
Markets may recover here and there, but indicators point to significant headwinds ahead, especially for traditionally underserved business owners and entrepreneurs. According to many expertsthe recession potential persists through most of 2023.
With that in mind, investors should draw from past experience and believe that betting on people and entrepreneurship rather than leaving money in a highly unpredictable market can be a winning proposition. In particular, some are being weighed down by inflation, rising interest rates, global supply chain problems and geopolitical instability. Rather than continuing to invest only in highly volatile markets, this is the ideal time to invest in the impact of the double bottom line.
By increasing investment in emerging entrepreneur-led SMEs and breaking down barriers to flexible risk capital, I aim to transform lives, revitalize underserved communities, and provide investors with stable solutions. We truly believe we can provide returns. Most companies are now challenged to find the link between opportunities as the economy rocks the prospect of a recession and investors endure diminishing returns or losses across their portfolios.
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Given the high-risk environment, there may never have been a better time to reorient your investment strategy and redirect private equity to smaller businesses in traditionally undercapitalized regions. Deploying capital that supports entrepreneurs who are driving innovation and permanent job creation in hard-pressed communities can deliver both strong economic returns and meaningful societal impact against market volatility. It has proven to be an effective hedge. This is because investments in small businesses do not correlate with returns in the broader market.
Small business investors are generally using more flexible, non-traditional investment vehicles to fill market gaps and may be less susceptible to broader economic volatility. Fundamentally, these types of investments often take advantage of government incentive programs such as the New Market Tax Credit or the Rural Employment Act, which are directly linked to the performance of the companies receiving the investment funds. And, of course, it has little or no relevance to public equity performance.
But while modest investments in healthy small businesses and promising entrepreneurs look increasingly attractive in today’s market, previously “safe” investments look risky. Morgan Stanley “Sustainable investment strategies may provide investors with downside risk protection during periods of high volatility,” he said, referring to years of market volatility (2008, 2009, 2015, 2018). 2010), the downside of sustainable funds was significantly smaller than that of conventional funds.
Despite concerns that there is a trade-off between generating returns and generating impact, research has found the opposite to be true.Bain Capital study Of 450 private equity exits involving impact funds or impact-related causes from 2015 to 2019, the median invested capital for impact deals was 3.4, compared to 2.5 for all other deals. , is what the double bottom line spirit promises. In other words, achieving returns goes hand in hand with achieving impact. Companies that assess and deliver impact are likely to be better investments from the start, and prioritizing impact becomes an important part of investment decisions.
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Additionally, it is important to point out that there is a significant opportunity to support Black- and Brown-owned businesses, which are particularly affected during economic downturns. Companies and institutions have a golden opportunity to turn away from traditional investment approaches that can suffer steep losses in a down market. Instead, the funds will be used to address the structural disadvantages that have long worked against black and brown entrepreneurs in accessing needed capital. grow your business.
Investing in smart and resourceful business owners can have a tremendous impact on underserved communities, helping foster development and prosperity. Because small businesses remain out of the stock market, their performance may be less correlated with market performance than larger publicly traded companies.
However, this is a double-edged sword. Due to their size, SMEs are more susceptible to unstable economic conditions. They now face a potential significant loss of access to flexible capital and other challenges stemming from the inflationary environment.
Therefore, we now have both an opportunity and an obligation to sustain communities by investing in small businesses and the aspiring entrepreneurs who connect them. Investing can provide a stable return, support owners striving to succeed in a competitive business environment, support sustainable growth in undercapitalized communities, and generate lasting wealth. provide preparation tools for producing
There is no better time for investors to consider impact investment options that provide alternative financing options for undercapitalized entrepreneurs. During these volatile market conditions, it may be their best opportunity.