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New economics: Fund managers linking pay to social good

A blog post written for PYMWYMIC

By Simon Hodges

In the midst of global economic uncertainty and consumer backlash against financial sector bonuses, a small East African SME Fund is paving the way for a new construct for linking performance to reward: measure return not only by business growth & profit, but also by verifiable social good.

Is this an indicator of new business consciousness that can carry us out of the financial crisis? Perhaps. The private equity fund managers of InReturn Capital have decided to link their pay to a series of social impact targets. An investment firm specializing in small and medium enterprises (SMEs) in Kenya, Tanzania, and Uganda, InReturn, now sets the fee paid to its managers on the
basis of five measured social impact targets in its portfolio companies.

In East Africa as elsewhere, small business investment is seen as the dynamic, innovative engine of economic growth and stability. SME growth is one of the hot topics in development circles and a key area of priority for the G20, who estimate that for every new full time job created in an SME, an
additional 30 indirect jobs will also flow into the economy.

InReturn managers five measurable targets include the number of direct jobs they have created in Kenya, Tanzania, and Uganda (target for InReturn is 2000 new direct jobs); training and salary growth for portfolio company employees of 20%; enrolling 100% of the employees in health insurance; having 100% of the investment companies comply legal, tax and environmental; having
100% of the companies have sound reporting and good governance structures. Further social benefit impacts are also measured, though can be more difficult to precisely measure and target.’

Are they making money or doing good? “Both.” says Bart Meijs, InReturn Managing Partner and CFO “We see these elements as genuinely improving business growth and profitability as well as improving social impact. When entrepreneurs see both financial and social impact, they have an incentive to continue these measures forever, even after our investments have exited.” InReturn’s standard investment time is around five years.

“There’s an old saying: what gets measured gets valued” says one of InReturn’s investors and limited partners. “And the current practice of measuring the most short term profit has helped get us into this global mess. That time is over. We invested in InReturn because they are growing businesses while considering impact.”

For fund manager Meijs, another benefit of the measurement targets for partners is that they prevent mission drift of the InReturn Fund. “Social impact is one of the founding principles of our firm. By basing performance upon our social impact, we ensure our principles are incorporated in our core way of doing business.”

InReturn’s investors include a large circle of informals, institutionals Cordaid and Hivos Triodos Fund, and now traditional investment firms are also showing an interest. With 10-15% returns predicted per year, ABN AMRO Bank has recommended the fund to its private clients, and current talks may see InReturn placed amongst publicly listed funds.
For more information:
Bart Meijs, InReturn Capital
bart.meijs@inreturncapital.com

Simon Hodges
simon.hodges@gmail.com

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