Investment
Impact Investing

Beth Sirull ... 2014: The Year of Impact Investing

Burgess COMMENTARY

Peter Burgess

2014: The Year of Impact Investing

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.