Impact Investment: A Practical Guide to Investment Process and Social Impact Analysis is a must-read guide for investors and wealth managers entering the social finance investment space known as 'impact investing.' This book walks readers through the demanding task of properly executing an impact investment strategy, providing solutions to some of the most vexing challenges that arise when investing for both financial return and social impact. Readers will learn how impact investing is different from other strategies, how the organization's mission affects investment decisions and structures, and what to look for in an organization prior to investing. A running example of a village distribution company illustrates the methods and concepts in action, and a full-fledged case study utilizing downloadable professional level analytical tools consolidates all examples into a real-world setting.
Impact investing is generating significant momentum, but many individuals operating in this space come from alternative backgrounds and lack the knowledge to form a rigorous investment process. Disparate funding sources, immature markets, variations in fund economics, and the need to generate and report social impact all complicate the industry even further, creating a barrier for curious investors. This book is a guide to applying standard investment processes and social impact analyses to impact investing, helping readers:
Adjust standard analysis techniques to suit the particularities of impact investing
Discover how social mission influences the entire investment from entry to exit
Plan and execute a robust custom impact investment strategy
Understand social impact entities and the management of impact investments
Investing with the goal of social impact doesn't remove the need for rigorous investment techniques and diligent processes. Impact Investment: A Practical Guide to Investment Process an Social Impact Analysis is a guide to putting it all together, for a more targeted approach to impact investing.
KEITH A. ALLMAN is a Director in Deutsche Bank's Structured Credit group, working on esoteric asset-backed securities. Previously, he was a Senior Investment Manager with Bamboo Finance, a commercial impact investment firm managing a unique portfolio of direct venture and private equity investments around the world. He currently engages in impact-related work as a Director on the board for Relief International.
XIMENA ESCOBAR DE NOGALES is the Head of Impact Management for Bamboo Finance, a private equity firm investing in low-income business models in developing markets. She is responsible for impact management throughout the investments' life cycles. Previously she worked at BlueOrchard, the Global Fund to fight HIV%Aids, Tuberculosis and Malaria, and a Swiss Foundation promoting dialogue and economic reconstruction in conflict-ridden countries.
Introduction to Impact Investing
It is an extremely tempting proposition: Invest money in a business whose product or service offers financial return and at the same time generates positive social impact. All parties seem to win, with an investor making a return and society benefiting. A charity could direct money into an organization that accomplishes the same social mission as one it grants to, but instead is able to receive back and reinvest the granted funds. What could hinder such a paradigm?
This idealistic form of capitalism has surged in the last few years. As of 2014, over USD12.7 billion has been committed to impact investing, representing a growth of 19 percent from the prior year. 1 Numerous investors are active ranging from lone high net worth individuals to a multitude of private equity funds. Even larger-scale financial institutions and investment firms have dedicated funds and resources to impact investing. Ancillary services have emerged to support these investors and further develop the industry including secondary market platforms, capital advisers who specialize in impact investments, and services to validate and rate social performance.
With such fervor, why does it still seem like the impact investing market is constrained? The simple answer is that it is not easy to both create a profitable business that has a significant social impact and also scale that business so that it generates commercial returns for investors and continues to progress its social mission. It comes as no shock, then, that for a number of years in a row, J.P. Morgan's impact investing survey cites "a shortage of high quality investment opportunities with track records" and a "lack of appropriate capital across the risk/return spectrum" as primary hindrances to the growth of impact investing. 2
Part of the issue is that impact investing appeals to our senses and consciences through innovative solutions to pressing social problems. This thought should not be misinterpreted though, as many of the entities and businesses an investor encounters when reviewing social enterprises legitimately intend to or are actively creating significant positive social value. The problem is that a majority of these businesses are not commercially viable and will not generate the return that many investors require. Our morality wants to support these investments, so the industry has grown considerably to encourage social enterprises, but as investors, we must maintain a fiduciary responsibility and invest at the appropriate risk-return level.
However, as we seek to increase the scope of suitable investments, we run the risk of going over an inflexion point, where social impact has been compromised so much that the investment can no longer be considered an impact investment. This can either occur by investing in businesses that actually do not have significant social impact or by investing in a social enterprise that alters itself to become a traditional company. At that point, we have become traditional investors and the paradigm is lost.
We now find ourselves in a delicate situation, balancing financial viability, monetary return expectations, and social impact. How do we achieve the correct balance? As with most industries, the solution is basically hard work and being equipped with the right resources and knowledge. We must know how to look for the right investments and how to screen out ones that are not financially sustainable or demonstrating the right level of social impact. Once found, we must adhere to a rigorous investment process and vet a company to establish its financial and social value. The investment structures created need to properly balance risk and reward. Documentation needs to be done professionally to accurately reflect the structure created and the intentions of all parties. We have to endure far beyond the investment phase