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2014: The Year of Impact Investing

3p Contributor | Thursday January 9th, 2014 | 3 Comments

Beth_Sirull

By: Beth Sirull, President, Pacific Community Ventures

This is shaping up to be the year of impact investing — the year when impact investing ceases to be a buzzword or a niche play and when mainstream investors start to recognize the opportunity presented by this growing investment thesis.

Impact investing refers to investing capital with the intention of producing social benefits alongside financial returns.  Take, for example, Pacific Community Ventures’ 2003 investment in the Evergreen Lodge, a historic Yosemite destination. Over the course of a decade, Evergreen’s management team transformed the lodge from a mom-and-pop seasonal motel to a year-round, premier destination resort. Since PCV’s investment, Evergreen’s leadership not only increased revenues by 18 times and its number of employees five-fold, but also implemented an internship program for at-risk Bay Area youth as well as cutting-edge energy and environmental conservation practices. PCV exited this investment in 2013, with substantial returns — both financial and social.

Impact investing is here to stay.

A growing body of research illustrates that impact investing has not only arrived, it is growing exponentially. The Aspen Network of Development Entrepreneurs (ANDE) recently estimated that there are 199 impact investing funds; a survey by J.P. Morgan and the GIIN in late 2011 found that 19 percent of the impact investors surveyed believe the market is about to take off. J.P. Morgan also estimated that global impact investments exceeded $50 billion in 2010 and predicted that invested capital in the impact investing market could reach $400 billion to $1 trillion by 2020.

What makes impact investment funds successful?

The latest important research, issued late last year at the World Economic Forum by PCV in collaboration with the Center for the Advancement of Social Entrepreneurship (CASE) at Duke University and Impact Assets, paves the way for a new era of impact investing – one that brings the market closer to the mainstream.

The report, “Impact Investing 2.0: The Way Forward – Insight from 12 Outstanding Funds,” represents the largest public release of data on the financial performance of 12 successful impact investing funds. The authors analyzed more than $1.3 billion in investments across more than 80 countries, and they reached exciting new conclusions about the factors and trends that lead to a fund’s success.

  • Successful impact investing requires “policy symbiosis,” a deep, cross-sector partnership with government. The successful funds studied received direct support from the government as an investor or as a co-creator; or they leveraged government policy initiatives — like the Community Reinvestment Act — to stimulate or accelerate investment. The funds were also active in the creation of more supportive public policy to encourage impact investing. This is true not only in the United States but also around the world. The Impact Investing Policy Collaborative has been chronicling and advancing these policies for the past several years.
  • Next, the authors discovered across the board that funds had accessed “catalytic capital” in the form of grants, guarantees or seed investments from foundations, government or other sources of seed funding. The catalytic sources of capital served to unlock billions of dollars in non-catalytic investments. This initial capital served as the foundation of a “capital stack” that enabled different types of investors, with different requirements, to invest — producing total investable dollars many times the amount of that initial catalyst.
  • Third, the authors found that because impact investing straddles multiple sectors it requires “multi-lingual leadership” that goes far beyond money management. Successful fund managers and leaders had experience in multiple arenas, including finance, government, public policy and philanthropy.
  • Finally, whereas previous analyses of the impact investing market differentiated between funds that were either “impact first” or “mission first,” the authors described the successful funds studied as “mission first and last,” meaning that impact investing is in the fund’s DNA. The successful funds put financial and social objectives on equal footing, which enforces discipline, avoids mission drift and keeps funds on track.

Looking to the future

The scaffold has indeed fallen, and impact investing is here to stay. But there is still much more work to be done to activate capital and to grow the field in a meaningful way. First, more research is needed to pinpoint what makes investments successful in different asset classes. Second, industry (and educational institutions) will have to grapple with the new requirement for multilingual leaders who have experience across different sectors. How do we accelerate the development of these leaders? And third, public policy will have to keep up the pace to build a stronger framework and drive more capital to solve the environmental and social problems that are just too big for governments to address on their own.

Beth Sirull is president of Pacific Community Ventures, whose mission is to create jobs and economic opportunities in low income communities through the direct support of small business and entrepreneurship as well as by promoting policies that drive investment in underserved communities. PCV is an impact investor providing capital directly to small businesses. The organization also works to build the capacity of these small companies to accept and deploy impact capital effectively.


▼▼▼      3 Comments     ▼▼▼

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  • Kevindoylejones

    Good report.

  • PeterBurgess

    My first impression was that this was really encouraging … but digging a little deeper I became quite disappointed. It is a good report, but the story is really that impact investing is hardly scratching the surface. While impact investing may be growing exponentially, it is from a small base. Meanwhile global problems are growing exponentially from a large base. Do the maths, and this is not good.

    I am also worried that the way we judge impact investing is still very subjective. The core metrics in the global economy remain focused on organizational profit performance, return on investment, etc. Impact is talked about, but not measured with very much rigor at all. This is problematic. And in the end, impact investors tend to observe that they give the investor a decent financial return while also being impact investments.

    What this means is that this sort of impact investing will never be used to solve the really big problems that we have to face in the global economy and society. There are many investment needs that are good for society (and in the long run, the economy) but cannot (and should not) make profit returns in the short run. In my view, these are not going to get financing through the impact investing space as it is presently operating.

    I am glad to see progress … but I also see the need for dismal realism

    Peter Burgess – TrueValueMetrics
    Multi Dimension Impact Accounting

  • David Leventhal

    Peter, I’m more encouraged than discouraged. What is most encouraging is the volume of funds flowing into impact investing. If the research is correct, we are talking about a 20X growth in 6 years. If I had an investment that grew 20x in 6 years in my portfolio, I’d consider that a grand slam. With that much capital flowing in, it will create whole new classes of social impact grade investments as the pool expands and the demand for more (and better) investment opportunities follows the market . Second, and core to the reports, is that values and profits MUST take equal status – so it not JUST about doing good or just making money any more, this pool is demanding both on equal footing (according to the report). Finally, as the pool grows, I would proffer that while grants will still be important in kickstarting many ventures, that grants and microfinance will become a smaller proportional part of the social impact investment pool and thus become less significant drivers of social investment related metrics. This still means that metrics such as GIIRS will be important to provide transparency from investment all the way through to investor (and customer). But for me, the big news is that we are now the “T” word in describing the size of the market.