In the annals of impact investing, the saga of Elizabeth Holmes unfolded a grim chapter as she began her prison sentence.
Here was an entrepreneur with a vision that could radically change the world: affordable blood testing machines that would diagnose diseases early, save lives, and revolutionise healthcare. Holmes was an extraordinary storyteller, capturing hearts and wallets to the tune of hundreds of millions of dollars.
Her motto seemed to be 'fake it until you make it'; perhaps born out of entrepreneurial optimism, a belief in her cause's potential to change the world, or a combination of both.
While Holmes' fall from grace is extreme, it holds important lessons for impact investors.
Having worked for the past two decades in impact investing, I have noted increasing concern among investors of impact fund managers who often seem to possess a less robust sense of fiduciary duty than their commercial counterparts.
These observations are surprising. After all, impact managers navigate the dual mandate of doing well and doing good, and surely adhering to fiduciary obligations falls within the ambit of doing good.
The concept of fiduciary duty in an impact fund is not fundamentally different from a commercial fund manager. In essence, it boils down to investing the capital in a way that upholds the investor's interests.
It is never straightforward, even in ordinary commercial ventures where financial interests include return, liquidity and risk. With impact investing one layers new, additional, and often hard to measure interests on top.
This new complexity provides fertile ground for both honest errors and deliberate deceptions to take root.
Challenges of duty
The concerns around poor fiduciary practices do not fall into the category of the headline-grabbing, sensationalist scandals like Theranos or Abraaj, these are exceptionally rare.
The challenges of upholding fiduciary duty in this terrain are much more subtle: the choice of adjectives used to describe the investment pipeline, the interpretive gloss on investment performance, the tipping of the investment committee’s decision to make a borderline investment rather than lose future management fee.
There are a few causes of this. Firstly, in private equity and venture capital, an investor commits to a long-term investment, often spanning a decade or more, with the anticipation of returns once the businesses in the portfolio are eventually sold.
For the first couple of funds (and most impact managers are on their first couple of funds), the investor can not predict returns based on the manager's past performance.
The investor is to some extent investing into a story. Impact investing confers a storytelling advantage. It allows for better stories: with the same target returns, who would select the fund manager investing in motorway retail outlets over the fund manager investing in healthcare businesses that can cheaply eradicate serious childhood illnesses?
