Where Do Impact Investing and Microfinance Meet?

This brief presents the results of CGAP research on impact investing and how it relates to the micro, small, and medium size (MSME) investment space. Impact investing is a new investment category that has been getting a lot of play in the past few years. Today there are more than 300 impact investment funds. This universe of funds includes those known as socially responsible investing vehicles (SRIs), microfinance investment vehicles (MIVs), and bottom of the pyramid venture funds. They are run by specialized asset managers and mainstream financial institutions.

Impact investors do not distinguish themselves from traditional investors by their funding vehicles, products, or the markets/sectors in which they concentrate, but rather through the motivations behind their investment. Therefore, broadly speaking, impact investors fall into two categories:

• “"Impact first"” investors who aim to maximize social and environmental impact and are prepared to accept below-market-rate returns;
• “"Finance first"” investors who seek investment vehicles that offer market rate or above returns while secondarily generating social or environmental impact.

Compared to the entities financed by MIVs, impact investment goes to a much more diverse group of possible investees.