Every time the Green Founder’s Group gathers to discuss investment-related issues, the dialogue between our two authors will be like a ghost fight. When one of us starts talking about making money, another person will start to talk about the principles of energy conservation, carbon reduction, environmental benefits, brand, social influence, trust, love and relationship, and even the soul can move out and talk. When the “money” person is annoyed, he will say, "I think you are right with all these. But does any of these ever make profit for you?"
In fact, we believe that the dialogue that plagues us must also bother you.
Is it really possible for investment to make money and have an impact on the environment and society? Is impact investment an executable strategy, or is it just a paper talk, or even a financial instrument used to chase fame?
According to Global Impact Investing Network (GIIN), there is now (2017) at least USD 114 billion of AUM under impact investment mandate, up from USD 50 billion in 2010. Pension funds are showing strong interest in the space and money managers with their risk radar are expected to play an active role.
Money manager is a wide definition so you might ask which specific type of managers am I talking about? Are they venture capital funds, growth capital funds or private equity funds?
The short answer is it is a new type of money managers although many are part of large money managers such BlackRock, KKR, TPG and Partners Group. The reason why these large money managers are venturing into these sectors and why pension funds are willing to support their efforts are simple - there is a high level of demand for these products from the pension funds and they believe it is more sustainable for such funds to be run by large money moneys, usually private equity firms, with existing networks, operational scale and best in class investment practices.
You might challenge that impact investment is more similar to venture capital in terms of investment size and operational maturity and it is weird for private equity firms to run impact funds. This is a fair comment but misses the core belief behind venture capital and private equity. As a broad categorisation (a dangerous thing to do in a sector where lines are not drawn so clearly but I will try anyway), venture capital focuses on emerging trends and how new businesses can capitalize on such trends which private equity focuses on existing demands and how leading businesses with their competitive advantages can capitalise on these demands. It should not surprise you that impact investors do not look at emerging trends but existing issues or problems face by less fortunate social groups or the environment. Looking at it from this perspective, it therefore makes a lot of sense for private equity firms to ‘expand’ into impact investment. However that said, these firms are aware that impact investment is different from their ‘bread and butter’ and therefore usually a new team is set up for such funds.
Another reason why the larger private equity firms are among the first in setting up impact investment funds is that they have actually done impact investments for a number of years! Unknowing to the general public, it is not uncommon for large private equity firms to have employee-driven foundation that invest into impact investments. My current employer, Partners Group, has made impact investment through our employee-driven foundation for a number of years. The foundation is made up entirely of employees who volunteered their time and funded by employees’ donations. With the infrastructure and in-house expertise already established, it is not surprising that we are moving into managing impact investments.
How about angel investors or foundations? We definitely hear more on the press that some rich entrepreneurs supporting impact investments. Yes, that is correct. High net worth and foundations have been and will continue to be an important contributors to impact investment but the new trend is moving towards institutionalised impact investment. Why? Sustainability! In order for impact investment to continue growing, it has to be institutionalised and bigger. High net worth and foundations will remain an important part and perhaps the first movers for impact investment but impact investment funds run by money managers will allow the asset class of impact investment to be more sustainable.
In the next article, we will discuss how impact investment due diligence works.