Impact Finance - an emerging asset class

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December 2011

In a world where government resources and charitable donations are insufficient to address the world’s social problems, Impact Finance offers a new alternative for channeling large-scale private capital for social benefit. Impact Finance is intended to attain positive impact beyond financial return by seeking to proactively create positive social or environmental benefit. As such, Impact Finance needs to be distinguished from the more mature field of socially responsible investments (“SRI”) which is based on a negative-screening approach.

Investors and investments within the field of Impact Finance range broadly. Investors include development finance institutions, private wealth managers, commercial banks, pension funds, investment funds, companies and community development finance institutions – operating across multiple business sectors such as water, housing, education, health, energy and financial services. Their impact objectives can range from mitigating climate change to increasing incomes and assets for poor and vulnerable people. Impact Finance investments can take the form of private equity or debt instruments but can also include guarantees and deposits.

With increasing numbers of investors rejecting the notion that they face a binary choice between investing for maximum risk-adjusted returns or donating for social purpose, the Impact Finance market has moved to a significant turning point as it enters the mainstream. The Global Impact Investing Network (GIIN) estimated Impact Finance investments to be worth USD 50 bn in April 2010, with a projected growth of USD 500 bn by 2014. Impact Finance represents as such one of the strongest emerging asset classes within the asset management industry.

Luxembourg has been aware of the importance of Impact Finance as an asset class since many years. As Europe’s number 1 investment fund center with a long track record in Private Equity and Venture Capital, the Grand Duchy has always supported the development of Impact Finance. Within an efficient market infrastructure, a stable and flexible legal framework and the continuous support by the regulatory authorities, it was initially the specific area of microfinance that developed the strongest. As of today, 46% of the worldwide assets under management by microfinance investment vehicles (MIV) (representing nearly USD 3 billion) are held in Luxembourg. The exemption of the subscription tax for MIVs as of 30 July 2010 has been another example of the Grand Duchy’s strong commitment to this investment area.

Against the trend of many Luxembourg investment funds broadening their investment focus over the whole range of Impact Finance, a number of Luxembourg institutions (Banque de Luxembourg, ADA, Arendt & Medernach, EY, European Investment Fund) decided to create the “European Impact Finance Initiative Luxembourg”. Further to having supported the 6th EVPA’s Annual Conference that was held in November 2010 in Luxembourg, the initiative analyzed together with AlphaMundi Group, Switzerland, the current status and development trends of Impact Finance. The main objective of this survey consisted in identifying how Luxembourg’s financial industry can support the evolution of Impact Finance into a fully-fledged industry segment and thereby foster its broader recognition within the international financial industry.

Based on interviews with 62 Impact Finance institutions, the lack of access to standardized information on investment opportunities and recognized performance standards showed to be an important barrier to further industrializing Impact Finance. Further to creating such standardization, seed capital and incubation facilities providing an eased registration and approval process; market promotion through e.g., awareness-building campaigns targeted at institutional and HNW investors and the creation of tax incentives were most mentioned as facilitators to the sector’s expansion. Another outcome gave further proof to Luxembourg’s potential in the area of Impact Finance: Good reputation and the availability of legal structures were identified as key criteria to choosing the fund domicile.

Luxembourg has a long-lasting track record with Impact Finance and is well positioned to attract further Impact Finance structures. Beyond that, the Grand Duchy will not cease to show its high commitment to this emerging and important asset class.

Posted on May, 2011