Private equity players typically seek investments that will provide the biggest financial gain, but experts say the recent rise of impact investing, which sees money directed toward companies that are focused on helping advance society at large, has no end in sight.
Impact investing involves private equity and other investors making capital injections that, in addition to generating a profit, will benefit the greater good, with examples including investments in companies focused on climate change, education and affordable housing. Actively seeking out investments that won’t necessarily be the biggest moneymaker seems to contradict the very purpose of private equity, but experts say that isn’t the case.
According to David Fann, president and CEO of alternative assets consulting group TorreyCove Capital Partners LLC, the proliferation of impact investments in the private equity industry is set to soar as firms large and small follow the lead of giants such as KKR & Co. LP, Blackstone Group LP and Apollo Global Management.
“We are in the early innings of the impact investing movement,” Fann said. “More European funds have embraced it, especially its environmental aspects. Most larger U.S. investment firms are beginning to integrate elements of impact investing and in many cases, have undertaken some aspect without realizing it.”
“Usually, when the large PE firms begin talking about it, most of the industry follows,” he added.
The practice has seen significant growth in recent years, as evidenced by the fifth annual impact investor survey, which was released in May 2015 and conducted by The Global Impact Investing Network and JPMorgan. According to the survey, the 146 respondents planned to increase their commitments in 2015 by 16 percent, with an aim of plugging $12.2 billion into impact investments, up from $10.6 billion in 2014.
The intended increase in impact investing is also evidenced by the publicly stated policies of some of the larger private equity firms, such as KKR, which notes on its website that responsible investments are more than just the right thing to do.
“It is also essential for smart investing,” the firm notes in a quote attributed to Henry R. Kravis and George R. Roberts, co-chairmen and co-CEOs of KKR. “Our commitment to creating sustainable value has never been stronger.”
The initial reaction from many may be that financial concessions are necessary to dive deep into the world of impact investing, but that hypothesis doesn’t totally pan out when you look at the data. The impact investment survey showed that 27 percent of respondents reported that their portfolio of impact investments outperformed their expectations, while only 2 percent reported an underperformance against their financial return expectations.
The reason impact investments can be just as beneficial to a firm’s bottom line as any other investment is that the capital injections have the dual purpose of being financially lucrative and beneficial to society, according to an article penned earlier this month by Susan Balloch, chief operating officer of the Global Impact Investing Network.
LEARN MORE ABOUT PRIVATE EQUITY AND OTHER INVESTORS IN IMPACT INVESTING AT THE AFRICA IMPACT INVESTING LEADERS FORUM: >> http://aiilf.com/
Balloch detailed in her article that the point of impact investing is to effect long-term change in whatever industry you are focused on, and the best way for private equity firms to do that is by plugging money into already profitable businesses that agree on the direction a given industry must go.
“That’s one of the reasons why private equity is so suited to the task,” she wrote. “The variety of industries private equity has supported over the past several decades is enormous. Private funds helped bring us the dawn of the Internet age as well as overhauled brick-and-mortar infrastructure. Private equity is designed to maximize value and manage with efficiency.”
As for where impact investments are generally directed, there’s no single area, as parts of many industries can be considered to be important for the greater good. Or, as Fann put it, “impact investing is literally all over the map,” meaning no matter the focus of your firm, industry-wise or geographically, there is opportunity to make a true impact with your investment.
“Some private equity investors focus on the inner city,” he said. “Others are focusing on sustainability themes including clean energy, food supply and pure water. Some groups have focused on education. There are some focused on disadvantaged segments of the workforce with diversity and inclusion objectives.”
Wherever the investment ends up, it’s important to actually care about the area in which you are trying to make an impact, according to Arthur Hidalgo, who founded Carpenter Community BancFund, a private equity firm that invests in local banks in underserved communities. If you are just trying to jump on the trend of impact investing but don’t sincerely have your heart in it, then you’re doing it wrong, he said.
An impact investor should pick a cause they truly care about and then determine what type of financial return would be considered a success, Hidalgo explained, because all the survey results and quotes on private equity giants’ websites can’t disguise the fact that private equity has traditionally sought returns that just aren’t easy for impact investments to replicate — at least at first.
Over the long term, however, it is possible for impact investments to be both financially lucrative and truly fulfilling for the soul, Hidalgo said, but only if the investor in question actually wants to make a difference in the world.
For instance, Hidalgo pointed to a Manhattan bank his firm has invested in that uses solar power to operate its buildings and has enabled the use of free public Wi-Fi in its surrounding area.
“What statement do you want to make?” he asked. “A more profit-motivated [person] is less likely to be an impact investor.”
– By Benjamin Horney
Editing by Christine Chun and Catherine Sum.