The New York-based Imperative Fund is really all about the value of people. It makes sense. One of the founding principles of the United States is a belief in the tremendous power of human capital. It’s perhaps best expressed in the poem inscribed on the Statue of Liberty, The New Colossus by Emma Lazarus:
“Keep, ancient lands, your storied pomp!” cries she
With silent lips. “Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!”
Where the old aristocracy of European nations tended to view their poorest residents as a liability, many of those same people would find a society across the Atlantic that recognized the value of human capital and gave them the opportunity to reach their true potential. One could even argue that the primary source of America’s economic success in the 20th century was the wide swath of humanity that arrived on its shores, presented with the opportunity to reach their true potential.
This is not to say that this ideal was universally applied over the course of American history. To the contrary, plenty of American communities have repeatedly been systematically denied and excluded from this American dream. However, this failure is just further proof underlining the veracity of this dream: there are few things as valuable as tapping into human potential. People given a chance to succeed usually do, and the innovation that success drives is invaluable.
It’s this core concept of tapping into human potential that lies at the core of the Imperative Fund. If you really believe in the value of untapped human potential, it means that lifting people out of poverty shouldn’t be viewed as charity. Rather, it’s an investment, one that can improve the world we live in while simultaneously creating real returns for those willing to bet on their fellow human beings.
Breaking the Cycle of Poverty
Poverty is expensive. In addition to its tremendous human costs, the financial consequences are also considerable. In what’s known as the “Ghetto Tax,” those people who are already low-income can frequently see a lot of basic costs increase because of the community they live in, from high-interest short-term loans to higher food costs. Impoverished communities have to spend more to get basic goods and services, which only pushes them deeper into the poverty that is costing them in the first place.
That’s compounded by a lack of economic opportunity. A lack of access to credit prevents these communities from building their own businesses, creating a lack of reliable employment that makes it even harder to for those basic needs that are already costing them more. Not to mention the huge opportunity cost presented by so many people being forced to fight to find ways to get by rather than planning and building something for the future.
Breaking that cycle can make an enormous difference. The same communities with the same income level can grow more prosperous simply by addressing their resource demands in ways that are commonplace for most other communities. A common-sense approach to things like housing, food supply, and energy can make an enormous difference.
“We actually believe poverty shouldn’t be measured by income per capita, but rather by the access (or lack thereof) to the basic goods and needs that communities need to reach their natural potential,” said CEO Camilo Galvis in an email. “If you grow in an environment where you have a safe and comfortable roof for you and your family, have access to telecommunications and information, have access to electricity, do not pay a poverty tax on your everyday basic goods and needs, and have access to healthcare, sanitation and clean water, you might be poised to develop yourself to a higher potential than otherwise.”
“More productive members of society are good for business, good for social integration, and good for our progress as a human species,” he continued. “You never know, the next Einstein or the definite cure for cancer might lie in a curious mind in one of these communities and, without the variables mentioned above, it is highly likely that it falls through the cracks, as could already be the case so many times to date.”
Tackling Problems with Collected Knowledge and a Systemic Approach
In attacking these issues, the Imperative Fund focused on using the collected knowledge of a wide variety of experts to develop a systemic approach to the issues these communities face, one that could maximize the social impact of every dollar spent.
“Researchers at Columbia, comprised mostly of students and staff from the School of Engineering and Applied Sciences, worked on developing a quantitative approach to how the capital of the fund is to be deployed in order to maximize 1) the individual number of beneficiaries who are brought out of poverty, 2) the number of goods and services provided and 3) the yield to those investing in bringing these communities out of poverty,” says Galvis. “The result is a mathematical model and algorithm that explains the optimal allocation of assets in order to, at an industrial pace and scale, address poverty elimination in those communities that can benefit from our model.”
The resulting approach bundles goods and services together, collectively raising the standard of living for the entire community. Beginning with building sustainable and reliable housing, the process then moves to providing internet connectivity and digital literacy classes, meeting energy demands with solar arrays, empowering local mini markets to offer food baskets that can cut costs by nearly a third, and even providing access to healthcare.
Sustainability Meets Profitability
This approach alone represents an important new contribution to the global fight against poverty. However, it’s another element of Imperative Fund’s model that could be the most important: profitability. While most people tend to associate anti-poverty programs with charitable organizations alone, building a for-profit model may be a much more effective way to help the most people in the long run.
“From a social perspective, we are challenging the current approach to social mobility, which has historically mostly been approached as a public service,” says Galvis. “Being able to bring an entire community out of poverty while recovering 100% of the funds provides the unique opportunity to replicate the process indefinitely for as many communities as can benefit from the model.”
Sustainability isn’t just about the environment, the same concept applied to natural resources can just as easily apply to capital. Providing returns for investors is part of a plan that could attract more capital and stretch it much farther than the non-profit model, ultimately helping more communities in the long run than simply donating goods and services. It’s part of why the fund’s plan revolves around social enterprises (SEs), organizations that apply commercial strategies to social problems in an effort to maximize results. By using these organizations, Imperative Fund works with groups that have local expertise and a relationship with the communities they’re trying to target.
“We provide capital in the form of convertible debt to Social Enterprises (SEs) who in turn finance the community’s access to the goods and services they provide,” says Galvis. “These are companies with successful business models, who have developed an expertise in catering to people at the base of the income ladder.”
Opportunity, Not Handouts
At the core of Imperative Fund’s approach, though, is an understanding of how the financial system is not operating efficiently. By repeatedly passing and overlooking communities like these, the banks and financial firms are leaving valuable opportunities on the table.
“The clientele for these SEs have no credit history; they cater to low-income individuals with no bank accounts or credit worthiness, and as such, the average financial institution often shies away from providing these SEs with access to capital,” continues Galvis. “One important – and rather amazing – aspect is that their clients (low-income individuals) have much lower default rates (~1.5%) than people with an established credit history (~3.68%).”
Imperative Fund is currently seeking investment, and the pitch they’re making is not to ask for a handout. It’s to offer an investment opportunity, one that can fit easily into a diversified portfolio.
“Our objective is to provide returns of at least 5.00% to our investors,” says Galvis. “In the situations where we have agreements with governments on a pay for success model after achieving certain development goals, returns for investors could potentially be improved close to 8.00% yields.”
Those are returns that are absolutely competitive from an investment standpoint, making Imperative a way for investors to help make the world better while still growing their assets.
“From a strictly investment standpoint, the performance of equity funds in the US for the past five years has averaged a 5-6.00% return,” continues Galvis. “In our case, if we can consistently navigate our return objective, we could prove a very valuable asset in anyone’s portfolio: even just by investing a very modest share of your overall portfolio with Imperative, you can happily go to bed knowing that part of your savings are constantly working on bringing people out of poverty.”
More People = Bigger Returns = More Capital
If Imperative Fund can attract enough invested capital, it could be a model that provides a basis for real change, a framework for bringing the power of capital markets to bear on humanity’s most pressing problem. By creating a sustainable framework that provides real return on investment, it has the potential to go a step further than where non-profits and NGOs could.
“Reaching $75MM of assets under management would allow us to run the above model continuously under sustainability, including adjusting the cost of capital for inflation,” says Galvis.
Replicating the model means reaching more people, and creating returns means raising more capital.
“After analyzing and monitoring the work of hundreds of social entrepreneurs throughout the past five years, we quickly realized that it is mostly those with a business-oriented mentality and approach who have been able to sustain continuous growth,” says Galvis.
“Those who have been most successful have some kind of business background as high-level executives and/or business owners. All of this reinforces the fact that you can do ‘good’ (socially and environmentally) while doing ‘well’ (financially). For all these reasons we believe the opportunity we can offer investors is quite unique. It really provides a tangible double bottom-line.”
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer