Impact Investors

24Nov09

Summary of a brilliant article I found on the Acumen Fund Knowledge Centre (great resource, if you haven’t discovered it already):

Impact investors: seek to combine financial returns with social impact using the tolls of venture capital to make principal investments in private, high-growth companies that have the potential to deliver measurable social or environmental benefit. More patient capital that is willing to assume higher risk for lower returns.

Huh? Why? GOES AGAINST EVERY RULE OF Capitalism – higher risk and lower returns?! But wait and see, the venture capital ecosystem is evolving

Impact investors will often, but not always be willing to exchange a lower economic return for potential social or environmental impact – here are some reasons why:

-investments are mission driven (poverty alleviation, climate change targets)

-government/international community sponsored (eg International Finance Corp IFC)

-regulatory/political frameworks (community re-development in US)

Different sources of capital determines degree of impact investing:

-financial institutions in the US compelled by community reinvestment Act

-pension funds looking to diversity their risk and fulfill social obligations (may/may not receive tax credits to generate competitive risk adjusted financial returns)

-multiple high-net worth individuals

-single limited partners (one high network individual) – higher degree of flexibility

-governments

-foundations (indirectly seed funds through program related investments (PRIs)

-individual donors (aggregated)

Many social investment funds are closed-ended limited partnerships, with offshore structures that aim to optimize taxes on investment returns for their LPs. Most funds are operating between the $50-100M capital deployed range with individual company investments ranging $500k-$2M. At the commercial end of the spectrum, investors are expecting 25-30% IRRs, while some funds are okay with real return of principal.

Fund’s investment strategy = theory of change – or why it believes world will be better place because of its investments.

Conclusion: Impact investors are here to stay. Part of a new emerging asset class that can generate deal flow, test new ideas, expand into new markets and in the process contribute to solving some of the world’s most pressing social problems – with a reasonable return by most measures.

 

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