Today, I was chatting with an experienced investment manager for a wealthy international family who was trying to better understand impact investing.
One of his questions was, “How are current impact investors thinking about these investments?”
I said that this was a very good question and I think that there are two core driving reasons.
Impact investing for more philanthropic impact
Historically (in the last few years), impact investors have primarily made impact investments because they saw that they had the potential of making more impact per dollar invested in this manner than giving a donation. So, in most cases, this money was coming from their philanthropic allocation. In many cases, the fundee is running a business with the potential for revenue (and possibly even profit), so one dollar invested would be leveraged by the revenue generated to have more capital being put to work. Most of these impact investors are planning to take any capital they received back from this investment and re-invest in our impact investments or philanthropic endeavors. If they want a tax credit up front, the simplest thing to do is to setup a Donor Advised Fund (if they don’t already have a private foundation), which allows them to continue to direct these re-investments.
Impact investing is a new asset class
There is another reason for doing impact investing which is gaining investor interest and attention. Some impact investors are viewing their investments as a new, smart part of their investment portfolio — a new asset class. With “no risk” investments like government bonds, the returns of 1% or less are clearly not very attractive. Many other higher return (potential) asset classes have correspondingly higher risk and many are under performing or at least have high volatility with our current on-going economic system/crisis.
Many impact investments have very little correlation to the performance of the global markets. For instance, in many developing countries the majority of the workforce operates in the informal or unorganized sector which is quite disconnected from the global marketplace. So, while global prices for fuel and food may affect them, much else about their life is unaffected. Therefore, businesses serving them are also often insulated from global trends. The result is these investments can improve the overall performance of an investment portfolio.
Oh, and did I mention that many of the impact investment companies are designed to be inherently more sustainable and are pursuing very large, unserved markets? They’ve figure out how to operate very efficiently and sustainably strategies greatly reduce regulatory risk. High growth and lower risk is an attractive combo.
Some people are predicting that every business will need to be an “impact business” in the near future. I don’t know about that, but I do think that there is an increasing opportunity to find attractive financial return investments in businesses which have an built-in positive social impact. That’s what we’re trying to do with Unitus Seed Fund.