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Profit and purpose - impact investing goes mainstream

PE Hot Topics - November 2017

The ability to earn high returns and do some good at the same time — that’s the promise of impact investing, a growing subset of private capital that seeks to generate a market rate financial return while simultaneously creating a measurable social impact.

Impact goes mainstream

For decades, impact investing has been focused on projects with high social impacts, that could deliver below-market rate returns.

However, increasing awareness is driving a growing amount of assets toward investments that are socially additive. This new generation of investors are adamant that returns can be comparable to, or better than, other non-impact investments.

A natural evolution — from ‘do no harm’ to an active dual mandate

The increased interest in impact investing feels like a natural evolution. For decades, investors have sought to steer capital toward funds that promised to avoid industries such as alcohol and tobacco; or more recently, fossil fuels.

Impact investing goes beyond this “do no harm” mentality, to an explicit active dual mandate that gives weight to both economic and social returns. Increasingly, managers with the DNA of a PE investor are applying their skills to the impact investing space.

“Businesses that fail have no social impact, because if they can’t sustain themselves financially, there is no product or service to deliver.”

– Elizabeth Burgess, Partner at Bridges Fund Management

The impact investing advantage

For investors with an impact mandate, sourcing presents additional complications and challenges; not only must deals meet financial underwriting criteria, but they must also pass muster as being a social additive.

This dual focus can be a significant competitive advantage. Social impact funds are often able to identify opportunities that others might overlook. Moreover, impact funds can have an edge in negotiating PE deals that their non-impact counterparts lack.

“When I sit across the table from a founder and tell them that I’m going to be held accountable for the social impact of the investment, a light goes on. That’s a real competitive advantage.”

– John Rogers, Partner at The Rise Fund

The benefits of mainstreaming

Impact investing’s credibility and profile is raising dramatically. According to a recent survey, 18% of pension funds are allocating capital to the impact space, and another 65% are actively developing an impact strategy or beginning to consider impact investing.

Many investors in the space consider this mainstreaming a positive development for the industry. Large funds can help push forward the professionalization of the asset class and contribute to the standardization of metrics.

With growth comes challenges

At the same time, the increasing attention that impact investing is seeing is creating a number of challenges.

Institutions can have very different ideas around what social objectives are worth pursuing. Investors will find themselves under increasing scrutiny as to their perspective on what defines an impact investment, and which “impacts” they support.

The importance of measurement and classification

One of the greatest challenges in the space is the measurement of the social impact.

Impact investors have to be able to consistently measure the positive externalities that were created by their involvement. Uniformity in measurement will be a critical enabler for the further growth of the asset class.

What’s next? (Hint: you don’t have to be a “true believer”)

Impact investors believe that targeted, thoughtful investments in mission-based businesses and companies performing a social good, supported with the expertise in growing businesses that PE is known for, can make the world better.

Indeed, you don’t have to be a “true believer” to recognize that the opportunities are substantial, and that the direction of travel for the global economy runs parallel with the core tenets of impact investing.

The potential is real, and the momentum is accelerating. Investing in purpose-led companies is gaining traction and delivering an impact.