Opinion: Maverick’s ‘Impact First’ Investing Sits Between Philanthropy and Market Rate Returns

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It is possible that the investment theme of the next decade will be to set aside financial rates of return and raise the performance of society. The ranks of nonconformist “impact-first” investors who are willing to forego some financial results while putting their capital to work for social impact are growing. As it becomes easier and easier to invest with your securities, opposing the ingrained norms of the investment community is becoming more popular.

No group is better positioned to infuse hit companies with the capital they need first than private wealth holders. Campden Research estimates that some 7,300 family investment offices worldwide, each with more than $ 100 million in assets, manage $ 5.9 trillion. It is those wealthy individuals and families who have the greatest discretion to declare social or environmental impact as a priority for a portion of their private investment portfolios. In fact, wealthy individuals and families already invest with social good as their goal. Campden Researsch reports that private equity holders will increase their average portfolio allocation for impact investing from 20% in 2019 to 35% by 2025. The need has never been greater. The social and economic cost of COVID-19, plus growing concerns about climate change, racial injustice, income inequality, and gender discrimination, have injected new urgency in the quest to direct capital toward some of the biggest. society problems. While most impact investors seek market rate returns alongside the social good, investors who prioritize impact are “willing to give up some financial return if necessary,” explains a report from the Monitor Institute. For example, impact-prioritizing investors helped launch d.light’s solar home business in developing countries and AeroFarms’ indoor agriculture vertical operations in the United States. Both companies needed patient and risk-taking capital in the early days, when traditional investors saw more risk than reward. Both have now graduated to more traditional forms of investment. To date, only a small amount of private wealth flows to impact investing first. The Global Impact Investing Network pegs impact investing first at just 7.5% of the $ 47 billion in new impact investments made in 2019. While high net worth individuals have a habit of making large donations to institutions Not-for-profit, its investment mindset is built on traditional practices focused on the primacy of growing wealth. The fund managers and investment advisers they hire are even more committed to financial performance as a measure of success. Leaving financial returns on the table in the name of shock has not been a widely accepted strategy. Breaking this psychological barrier begins by recognizing impact investing first as one more option on a returns continuum, where it falls between impact investing for market returns and philanthropy. Unlike philanthropy, investors who prioritize impact expect a return, but accept less than the market rate. The social and environmental impact replaces the economic profit as the currency of success. It’s a different way of thinking about “total return”. Once this mental hurdle is cleared, getting started with impact investing first has never been easier. Wealthy individuals and family offices can outsource to a growing number of funds, advisers, and intermediaries who have impact-first options. Jordan Park, Tiedemann Advisers, Align Impact, and Avivar Capital, to name a few, provide families and institutions with a variety of impact investing and wealth management services, including accessing impact first opportunities. Family offices can also build a lean team by adding a few specialists to their staff and augment their portfolios with investments that prioritize impact. It’s a practical first step for investors who want to make room to invest on impact first, but don’t want to go all-in just yet. Other family offices, such as the Omidyar Network, Ceniarth, Blue Haven Initiative, and Spring Point Partners, have created their own internal teams. Carrying out decision making internally ties investor values ​​and objectives closely with investment decisions. It also makes impact investing a core commitment, not a side bet. To be sure, while impact investing first is gaining momentum, there is a gap between aspiration and execution. Campden’s family office research found that 65% of family offices believe they have a role to play in alleviating economic inequality, yet only a small amount of their collective wealth currently flows to prime investments. impact specifically designed to alleviate poverty, disease and inequality. , social injustice, environmental degradation and more. There has never been a better or more urgent time to close that gap. Michael Etzel is a partner in The Bridgespan Group’s Boston office, where Mariah Collins is a manager. The Bridgespan Group is a social impact consultant and advisor for nonprofits and NGOs, philanthropists and investors. Matt Bannick is the former managing partner of the Omidyar Network and a member of Bridgespan. They are co-authors of “Back to the Frontier: Investing that Puts Impact First.”