The 50 Shades of Impact…

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Christian, a young and handsome billionaire, realises that he could do better things with his money than fly his private jet and impress girls. Always ready to explore uncharted territories, Christian ventured out into impact investing. He shares his first impressions with his advisor, Bill Pangloss.

From: Christian@grey.com

To: pangloss@impact.org

Subject: Impact Investing?

Dear Bill,

In my search for impact, I have tried out various things.

I first met with a Dutch bank that offers a series of Socially Responsible Investment funds, that consider both financial return AND social good. They invest in interesting things such as renewable energy and fair agriculture. It sounded good until they told me that they had been doing this successfully for over 20 years. 20 years?! What a disappointment… If they have been doing this for so long, where is the innovation? Where is the excitement?

A month later, I heard about a fund that had invested 800 million dollars in a company which was creating micro dripping irrigation solutions. Their game plan was to help this technology reach into emerging markets. Investing in a technology that saves water consumption by up to 40% and increases crop yield at the same time …Now, THAT had to be the ideal impact investment for me!

Alas… the fund managers explained that they were a private equity house looking for financial returns; that any positive societal impact was just a consequence of company growth and business ethics. In other words, they were not impact investors! Like many asset management and private equity firms, they were just applying the United Nation’s Principles for Responsible Investing (UNPRI). They went on to explain that many so-called “impact deals” were just normal private equity deals that were being “re-packaged” for fundraising purposes by impact fund managers. Yet another disappointment...

But sometimes, the right opportunity arises in the most unexpected manner. During my recent trip to Monte Carlo, I randomly met with a REAL impact investor. I was on a honeymoon trip so we reasonably agreed to meet two weeks later at his office.

The fund’s documentation is very touching with lots of pictures of children from around the world going to their new-built school, receiving medication, or just drinking clean water. The former head of an NGO sits on the board and the managers are committed to reporting on the fund's positive impact to the investors. Financial returns also seem quite promising. Even though they have not sold any investment yet, an independent valuation shows interim returns in excess of 10 % per annum. Fund managers use their preferred networks to find deals. They align their own personal interest with that of investors, since they receive a share of the profits of investments in excess of 6%.

So after many attempts, including some awful disappointments, it looks like I have found the ideal opportunity.

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To: christian@grey.com

From: pangloss@impact.org

Subject: Re: Impact Investing?

Dear Christian,

Congratulations on your in-depth research. But then, not a surprise for a man who wants to master everything that he tackles.

That said, let me give you a candid view regarding three major risks for impact investing. Actually, you already had a taste of it.

1. Remember the Tech bubble? Well, we are facing a possible "Impact bubble". Some common warning signs are:

  • A fundamental shift, but with unrealistic market and financial expectations; 
  • Possibly too much money chasing a limited volume of quality deal flow; 
  • Lots of talk but almost no profitable exit history ; 
  • Established or “old school” investors being snubbed, while inexperienced or failed investment practitioners successfully sell themselves as “new experts”.

2. After the “green washing” fad, we are now experiencing a wave of “impact washing”. Clean energy, life sciences, emerging markets, infrastructure and other high impact investments have existed and generated healthy financial returns long before the “impact investment” trend started.

3. Just like with the credit crisis, remuneration schemes in Impact finance can create conflicts of interest. Remember how debt brokers were incentivised to “sell” credits and didn't care about the borrower’s ability to pay back the loan? Similarly, many impact investors receive a bonus called “carried interest”, which is only based on financial returns and not on societal impact. Just ask yourself: will they favor an investment with mediocre impact and high returns, or the reverse? How will this impact the company’s strategy? Will they sell it to the highest bidder or to the one most committed to sustaining societal impact?

Don’t get me wrong my friend, the growth of impact investing is good and many professionals are truly committed to doing the right thing. But there are some grey areas to watch out for.

Beware of the backlash, dear Christian!

Yours,

Bill Pangloss

Credit: Flickr/ EandJsFilmCrew

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