An investor motivated by societal impact – known as an impact investor – may charge a 3% coupon for a bond issued by a well known charity, whereas the market might suggest that a more appropriate risk-adjusted return should actually be 5%. This discount of 200bp is referred to as the Implied Impact of the transaction because the impact investor deems it to be a fair exchange for the societal benefit that can be expected from the underlying activity being financed.
A commercial investor considering a request for working capital by a social enterprise (tackling complex social problems like recidivism or homelessness) may offer a loan at a 15% interest rate because of the perceived higher financial risks associated with this sector. The business models of social sector organisations are frequently not well understood by commercial investors, but it is often the case that real risk is lower than anticipated. In the example above, it may be that an interest rate of say 10% is more appropriate based on the actual historic right-off rates (i.e. the real risk of losing capital) within the sector, even when factoring in transaction costs and costs of capital for the lender. This premium of 500bp would also generate the inverse or corollary form of Implied Impact™.
A social venture may be willing to accept a loan at 6% from a highly regarded impact investor, whereas a main street bank may only charge 4%. The social venture may be comfortable paying this 200bp premium because they recognise that in addition to the financial benefit of the loan, the impact investor will bring additional value by virtue of their experience or other non-financial attributes. This is similar to how venture capitalists are often valued for their know-how of developing businesses in addition to the capital they invest. It could also be that the terms from the social investors are more flexible and the social venture beleives that because the social investor understands their business model better, the investor may be more understanding when forebearance is required.