Durreen Shahnaz says part of the reason for accelerating growth in impact investing is a realization that, especially in these times of fiscal austerity, there is simply not enough philanthropic and government spending to address the world’s most pressing issues.
Durreen Shahnaz says part of the reason for accelerating growth in impact investing is a realization that, especially in these times of fiscal austerity, there is simply not enough philanthropic and government spending to address the world’s most pressing issues.

Durreen Shahnaz | Capital markets with a conscience

The former i-banker is trying to combine capital markets and social good with the Impact Investment Exchange

Singapore: Can you have capital markets with a conscience? Combining capital markets with social good is precisely what ex-investment banker Durreen Shahnaz is attempting to do with Singapore-based Impact Investment Exchange (IIX), a stock market that is limited to mission-driven companies.

For Shahnaz, now 45, the inspiration to start IIX was her experiences in a career spanning over two decades, beginning with Morgan Stanley in New York, her first job after completing her degree in economics and government studies at Smith College, a liberal arts school in Massachusetts.

Going against her parents’ wish that she study in her native Bangladesh or in neighbouring India, she left for the US after agreeing to the two conditions they placed on her: that she go to an all-women’s college and fund her education on her own.

After two years in Wall Street, where she learned how access to capital markets can enable companies to grow, Shahnaz went back to Bangladesh in 1991 to work with microlender Grameen bank, and was posted in rural ares.

She then did stints with the World Bank in Washington and Merrill Lynch in Hong Kong before going back to the US, where she changed careers and joined Hearst Magazine International, which publishes titles such as Harper’s Bazaar, Cosmopolitan and Marie Claire.

She also received a joint MBA from the Wharton School of University of Pennsylvania and an MA from Johns Hopkins University’s School of Advanced International Studies and was the first Bangladeshi woman to attend Wharton.

Shahnaz said she did not consider finance and media to be diverse career paths.

“It is not New York that has brainwashed me—when you are in the East Coast you believe it. I truly believe that there are two forces that can do good or bad—one is media and the other is finance. For me, after I did finance, I wanted to go into media as it would teach me how to use the other power."

“When I was with Hearst, I was the one that got minorities on the cover, I launched magazines that talked about alternative ways of living, I worked on the launch of O, The Oprah Magazine (launched in April 2000). For me, it was a fantastic experience to see how media can be used to do good," Shahnaz said.

Yet something she had witnessed when working with Grameen bank got her to shift careers again and become a social entrepreneur.

Her first-hand experiences of Grameen borrowers defaulting on loans for lack of market access to sell their products got her to start Onenest, an online platform for artisans from Asia, especially Bangladesh, to sell handicrafts, handmade textiles and other products.

Ironically, it was the success of Onenest that prompted her to sell out and exit the venture in 2004.

“Hundreds of thousands of artisans were using this, but I sold out since my investors did not care about the mission. They made it very difficult for me. They cared about just the bottomline," she said.

Shahnaz explained this by narrating an incident that happened after the Gujarat earthquake in 2001, when many thousands of people perished. Onenest had worked with CARE, a humanitarian organization fighting global poverty, to get “three villages off the ground and got them business worth several millions of dollars", she said.

“Our investors said it was great, but they said if we had manufactured in China, it would get us better margins. That is when I did a lot of soul searching," she added.

On exiting Onenest, she moved to Singapore and joined Reader’s Digest. At the same time, she also began writing, especially in Bangladesh newspapers, on investing that would provide a measurable social impact.

Shahnaz’s writings attracted the attention of both the Lee Kuan Yew (LKY) School of Public Policy at the National University of Singapore and the Rockefeller Foundation, a philanthropic mission. In 2008, she joined the Lee Kuan Yew School to teach ‘social innovation and social finance".

“I told the Rockefeller Foundation that I could not join them as I was just starting in LKY. Then they funded my research in this space at LKY," Shahnaz said.

At LKY, Shahnaz began “exploring the notion of creating a stock exchange for social enterprises that would eliminate many of the barriers to market opportunity that currently exist and help them scale to their full potential", and the Rockefeller Foundation became the first organization to support the creation of IIX with a grant of $495,000.

Shahnaz pointed out that while the concept of using finance to do social and environmental good has been developing for the last 30 years in different forms, the earlier entrants in this space, such as microfinance institutions, had tripped as they used capital markets to grow, thereby losing their “social side".

She cited the initial public offering of India-based SKS Microfinance Ltd in 2010 as an example. “In this case, the fine line between being a microlender and being a money lender was crossed," she said.

On the Bangladesh government’s recent controversial move to tighten control of Grameen bank, Shahnaz said it was “extremely sad".

The whole thing has become a big political game and it is therefore very unfortunate," she added.

IIX has three investment arms headed by Shahnaz’s husband Robert Kraybill, an ex-investment banker with Morgan Stanley.

First is the incubator arm, which has a partnership with Small World Group that is based in both Silicon Valley and Singapore and provides seed funding, mentoring and help for small companies to start and grow.

“They (Small World Group) help us incubate small deals below Singapore $200,000. Impact Partners is a private placement platform which has a group of investors who can invest into organizations and this is extremely active for us now with about 250 investors including family office, high networth individuals and venture funds. About 80% of this is from Asia and we feel it is a huge accomplishment as in this continent philanthropy is not easy and this is seen as an extension of philanthropy. About 15% of our investment base is Indian. From the deal perspective, India accounts (for) 40%," Shahnaz added.

The third, for deal sizes of $10 million and above, is the exchange that is expected do its first public bond issuance in early 2014. The stock exchange of Mauritius will operate IIX.

“It is interesting to see what happens as this has not been done before. Once it is up and running, it will be great to see other exchanges like this in other regions—say Mumbai," she added.

She is also of the view that impact investment can be a solution for projects that do not get access to public funding, or in areas where governments can’t or are not willing to spend. As countries such as India and Thailand become middle-income economies, donor agencies are also stepping back and reducing aid, and Shahnaz said that using private sector solutions for development could help fill this gap.

Some large non-governmental organizations (NGOs) have approached the exchange to help them raise capital, as they see reduced funding in the future. “Rob and his team are looking at really interesting and funky deals where they are looking at future guaranteed streams of donation and doing bond issues against that—so they (the NGOs) will get some money now to get into projects that will get them revenues," she said.

Large firms are yet to get active in the impact investment space, but “some banks are trying to walk the talk", she said, citing JPMorgan Chase and Co., Credit Suisse AG and UBS AG as examples.

Shahnaz says impact investment is getting a boost with several organizations and governments looking at it.

“In India, the government is setting up a fund in this space; Vikram Gandhi, the Wall Street banker, is putting the fund together with the Indian government. It is a public-private partnership. The Hong Kong government, Korea have all set up such funds," she added. Edited excerpts:

Can you define what is impact investing and what does your company IIX do in this field?

Impact investing is the investment of capital with the intention to create measurable positive social and/or environmental impact in addition to generating financial returns. Heralded as an emerging asset class, the market size for impact investments is estimated to reach $1 trillion over the next 10 years. It is poised to take off in our view. Among others, my contribution to this social capital markets are the two companies that I founded who are now leading this space in Asia, both of which are working at moving this space from niche to mass. IIX is creating access for investment capital for social enterprises from impact investors through Impact Partners, its private placement platform. It is the world’s largest and we have raised capital for over $10 million worth of deals, impacting lives of over a million disadvantaged people in Asia, bringing them access to credit, clean water, electricity, vocational training and low-cost education. IIX also launched Impact Exchange, the world’s first social stock exchange with Stock Exchange of Mauritius to create the world’s first public and retail exchange where all of us—rich and poor—can equally participate in issuing shares and trading shares which is linked to social good. Impact Exchange is working with several issuers now and the first public bond issuance in this space will take place in a few months’ time. While we are playing a role in raising investment capital for social enterprises, my other company, Shujog, focuses on strengthening, deepening and expanding the impact social enterprises deliver in their communities and enable entities to accept investor capital.

Tell us about your work in India?

India is the most developed social enterprise market in Asia. In our Impact Partners private placement platform, we have close to 250 investors—including family offices and high net-worth individuals, as well as investment funds—who are interested in making a development impact in Asia, in addition to making financial returns. Of these investors, approximately 15% are from the Indian diaspora. We would like to continue building this base and also attract more Indian investors residing in India in the near future. Roughly 40% of the social enterprises we work with are based in India. For example, we recently raised capital for Frontier Markets, which distributes clean energy products and other beneficial products to low income consumers in rural and semi-urban markets. The capital we raised for them will help them expand their distribution network in Rajasthan before expanding to other states. During the past six months, we also raised capital for an innovative Indian social enterprise, Spring Health, which addresses the issues of clean water availability in Odisha and another, Kinara Capital, which provides financing for SMEs (small and medium enterprises) in Karnataka. These companies are often too big to access microfinance but too small to borrow from banks and, hence, we come into play in this space.

What do you see as the emerging trends in impact investing and social entrepreneurship in Asia.

Social entrepreneurship and impact investing are rapidly growing fields, not only in Asia but also globally. These are both relatively new fields. In fact, “impact investing" is not a term one would have heard much before about five years ago. Part of the reason for the accelerating growth in these fields is a realization that, especially in these times of fiscal austerity in much of the world, there is simply not enough philanthropic and government spending to address the world’s most pressing issues. At the same time, there is a growing realization that the best way to address certain development issues is to harness the power of the private sector.

What is your view of Asia and its role in global growth?

Asia has played a big role in the global growth that the world has witnessed in the last several decades. In Asia we have a booming middle class. In 1990, 21% of the population was considered middle class. That number more than doubled in 2008. With growing wealth in the region, there has been a rise in the wealthiest of society. There are now 3.4 million high net-worth individuals in Asia. The city we are in today—Singapore—has the highest number of millionaires per capita.

Despite this wonderful economic report card, if one scratches the surface you will find a large gap between the haves and have-nots.

In Asia, over 1.1 billion people suffer from multi-dimensional poverty; it is home of 62% if the world’s hungry and 70% of its children are malnourished. Over a billion people do not have access to clean drinking water. Global as well as Asian growth cannot be sustainable with these statistics.

What do you see as the way forward?

There are not enough dollars for philanthropy and not enough hearts in the traditional capital markets to solve this enormous problem of poverty. Thus, a third way is a necessity with the rise of social capital markets.

Social Capital Markets means organizations are on one hand not focused on profit maximization at any cost and, on the other hand, not relying on unreliable philanthropic grants. It is the third way where a vibrant marketplace is created where actors who value social, environmental and financial returns come together.

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