December 4, 2013
Interviewed by: David Snow
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The Rise of Impact Investing

Three emerging markets private equity experts discuss the growing popularity of “impact investing”—a strategy that blends a chase for financial returns with social and environmental goals. Our experts also discuss the growing trend among family offices in particular to focus more on for-profit activities to accomplish goals that were once exclusively in the realm of charity.

Three emerging markets private equity experts discuss the growing popularity of “impact investing”—a strategy that blends a chase for financial returns with social and environmental goals. Our experts also discuss the growing trend among family offices in particular to focus more on for-profit activities to accomplish goals that were once exclusively in the realm of charity.

The Rise of Impact Investing

Impact Capital in the Emerging Markets

David Snow, Privcap: Today, we’re joined by Jeff Bunder of EY, Pat Dinneen of Sigular Guff and Jeff Leonard of Global Environment Fund, welcome to Privcap today and thanks for being here everyone.

We’re going to talk about a term and a concept that I’ve been hearing a lot more about recently and I’m sure all you have as well and in fact are deeply, deeply involved with and that is impact investing, impact capital. There’s a lot to talk about so let’s get started, but maybe starting with Pat, before we kind of get into the weeds about exactly how you define it, what evidence do you have that this is a trend that is actually real and that is capturing the attention of investors and investment managers around the world?

Patricia Dinneen, Siguler Guff: It’s not new. It’s not a trend, it’s serious, it’s the reason a lot of us got into emerging markets, private equity in the first place and it’s not even emerging markets, it’s much broader than that. But what is new is the accountability, the measurement and the declaration up the front that it is intentional to generate social and environmental benefits in addition to financial returns.

The estimates are now $8 billion dollars self-identified impact investors in 2012 predicted $9 billion  this year, and based on very simple assumptions about the five or six sectors of impact investing close to $400 billion or trillion potential in the next 10 years.

Snow: Jeff from your perspective, Jeff Leonard, from your perspective what evidence do you see that this is, well it’s been around for a while and defined in different forms as gaining momentum.

Jeff Leonard, GEF: Well, I think largely I see impact investing today as a label for fundraising purposes and mobilizing capital, and I say that because it’s a broad tent right now and it doesn’t have a set of defined and fixed metrics, so within the cap, within the, it is growing, it’s a growing trend and Pat’s right, there’s more and more money being mobilized under the umbrella of impact investing. From my perspective, there’s subsets of it and many firms, as Pat has articulated in a panel that she lead today, many firms will define themselves along the spectrum of pushing higher social returns and not necessarily higher returns of investment and vice versa.

From my perspective at GEF, we have always defined ourselves as a private equity investor, we see ourselves as seeking returns along the triple bottom line and so we identify very clear metrics in that regard. We need to achieve on a risk adjusted basis top cortile private equity returns, we’ve been around since 1990, we’ve been able to achieve that objective. We’ve also, on the other parts of our triple bottom line is we look at the social and environmental aspects of every investment we do and we define very clear identifiable and achievable metrics which we measure and monitor our investments. So I’m not saying every firm that says their an impact investor needs to define themselves the way we do, but I do think that the label, impact investing then has many subcategories and it is more and more incumbent, I think what Pat is implying for those who participate in that area to define those metrics, achieve them, because that’s what investors what to see, they want to see that you have articulated, whether it’s in a private placement memorandum or otherwise what your metrics are and they want to see that you achieve them over time.

Snow: Jeff Bunder, you oversee private equity for EY, has the term impact or terms sort of in the same intent as impact been popping up with greater regularity in the business that you do?

Jeff Bunder, EY: It has and it’s interesting to cover the different regions in the world because it started in my mind really in Europe and on European colleagues starting to talk a lot about sustainability pivoted to the U.S. and a lot more talk about sustainability where our PE clients are calling us and saying, can you help us from anything from measurement to reducing carbon footprint, etc., and then emerging markets, I mean it’s kind of strange because in an odd way that’s really where impact investing had started and puts you in the foreseeable future they’ll be plenty more opportunities but it’s not viewed, I think by a lot of the PE funds, especially the global ones as necessarily social benefit if you will investing, but what they are doing is investing in or looking to invest in the emerging middle class which means financial services, healthcare, energy, things like water, filtration systems etc., that’s beneficial to the environment, but it hasn’t really started from that sort of perspective if you will, and I think they’re rapidly realizing the benefits they can have to communities, but it didn’t initially start with the fact that they can capitalized on the fact that there’s emerging middle class that has needs and there’s also a number of people below the poverty line that as they move up the chain presents a great opportunity in terms of investing potential.

Dinneen: But may I ask us not to be to parochial and obviously we’re a private equity investors but one of the real drivers for impact investing is we’ve got 7.2 billion people on Earth now and four billion living on less than $8 a day, three billion living on less than $2 a day. We’ve got social unrest, we’ve got climate problems, we’ve got lots of youth in emerging markets but if we don’t employ those youth we’re going to have huge problems, and I think one of the real drivers behind the impact investing movement, and I call it a movement, is that philanthropy and government support are no longer sufficient if they ever were to solve some of those problems and private equity, I think is very well positioned to solve some of those problems.

Leonard: I just want to add to that cause I think having seen this since 1990 at least forming ourselves in 1990 as a firm that would invest in companies that were solving as part of their business model, core environmental and energy related challenges. I think what we’ve seen what we started, we started with $5 million dollars, or $5,040,000 cause I put my life savings into the firm and we didn’t know that there was a universe of investible, that small set of concentric circles, concentric circle that would come together of investible things that were really for profit, high return on both the social and environmental and rate of return spectrum, what we’ve seen today is that universe, and this is what you’re kind of implying Pat, the universe has grown vastly. We don’t need to solve every problem, we can’t solve every problem with private capital in the world, but there’s such a large number now of enterprises to be invested in people with great business model that do address all sides of that equation that can achieve social and environmental returns as well as returning high risk adjusted returns on investment.

Dinneen: But let me pick up on something Jeff just said about emerging middle class, because I think that was one of the real drivers of return 10 years ago for emerging markets, private equity, but for the next generation as you go down the pyramid, I think instead of just copying a lot of the business models from the developed world, we’re going to have to come up with radically new cost models and we’ve already seen some of this in the developing markets now, different distribution channels, different ways of delivering goods and services, and that’s where, I think it’s really exciting and then the next breed, generation of entrepreneurs are going to have to be really clever.

Snow: I want to talk a bit about definitions, as all of you are aware, there’s a robust conversation about what is impact, what should it be, what is it not, and if you talk to some, specially GP’s from larger private equity firms and you ask them if they’re an impact investor, they might punch you and someone else might say thank you and embrace you, so it seems to me Pat you mentioned intent, in trying to bring as many advocates into this class as possible, does it matter if someone actually intends to employ people, isn’t it good enough if a big otherwise greedy pro-capitalist, private equity firm builds a great business and employment happens and they count it and they say, look, we’ve created a lot of jobs on the way to profit?

Dinneen: I agree with you, I think that Jeff is right, sometimes it’s used as a tool for fundraising, but again, hurt as well as help and the intentionality is there, in my mind for accountability and sure, if you do good unintentionally that’s fine, but if you say up front that I’m going to generate 100 million new jobs and they’re going to be good jobs with fair wages and you stick to that and you come back and measure it every year, there’s some accountability and Jim, I think many of us again, have tried to achieve good ethical and Jim high social environmental benefits throughout our investment career but I think the difference now is the quantitative as well as qualitative approach.

Bunder: And I think what happened as well as the larger GP’s started focusing on this cause the LPs were asking but importantly as well, there’s a fair amount of cost savings associated with a lot of these environmentally friendly activities. So when they look at it and say okay, please LPs while at the same time will generate a return and there may be some upfront capital but I think the firms are certainly spending a lot more time investing in ideas around using less resources, using less electricity and a lot of this is happening in a developed world and I think they’re also exporting these ideas to emerging markets or in certain cases it’s the emerging markets, investment teams that are providing the ideas back to the develop.

Snow: So Jeff Bunder, it sounds like for now the most developed private equity markets, the U.S. the sort of the starting concept or that the ponderance of capital that is earmarked, whatever you want to call it, ESG impact, is looking at kind of the green opportunity, it’s a risk screen, it’s saving capital, is that, excuse me, it’s saying money to some of these companies, is that the case?

Bunder: Yeah and I think some of them early on worked with EDF in partnership come up with solutions and that’s a continued effort. I think they’re always looking to create jobs cause that means that the company’s growing, so that’s associated with their underlying attempts if you will at showing returns. So I do see not only the larger GP’s but it’s not withstanding to the middle market funds as well. There’s much more of a focus and I think it started as a byproduct but I think that in a lot of cases the top of the house or the GP’s are really convinced that this is good business and because of that they’re really emphasizing to the broader team and again, there’s a return element to this, there’s a profit motive, so in my mind, it’s not hard to sell to the rest of the team and you have a fund mandate in a sense to go out and be socially responsible while at the same time, providing the typical returns to investors.

Dinneen: So about definitions: legally ESG is a whole lot easier defined than impact investing and Jim, I’ve had personal experience with the lawyers who are concerned about compliance, and basically ESG is do no harm, it’s a basic filter and the lawyers can deal with that, but once you get into impact investing with imperfect measurements, it’s very difficult to promise that you’re going to deliver so many jobs and financial inclusion and reduced CO emissions. So I think the definition from a legal perspective gets tricky.

Snow: Has that been the case with you in your compliance set up is you say you want to deliver a return but also deliver some social and other benefits and being, having to quantify that as a bit of a challenge?

Dinneen: I think the one area that stands out for me is sub-Saharan Africa that has declared itself, on behalf of many of its managers to be a zone dedicated to impact investing and largely attributable to the development finance institutions who have been early investors in leading that development, with very high standards imposed on the managers. So they have a tradition, but also I think because sub-Saharan Africa is kind of the last continent and they can afford to be innovative, they can afford to do things a different way and Jim, we’re seeing manifestations of that now but it’s still early days in terms of the exits and the actual measures of the impact.

Snow: I think I know the answer to this question but as the impact terms sort of gains currency perhaps outside the core from where it started, does there continue to be some suspicion among the more mainstream investors

Leonard: think probably but there is some, I think in ordinary LPs and investors are still waiting for the term to be further defined and defined with some metrics and as Pat said, looking at some performance the same way most large fund to fund groups are others would wait for a first time manager until they’ve had fund one or fund two and that can show some returns. For me, I don’t really use the term impact investing but I don’t have to because I have environment in the middle of my name, it’s pretty clear what we do. There’s always been a certain number of people, it’s a little bit frustrating sometimes, I mean we’ll go into a situation where we’ll have top tier returns, we’ll be on a return fund that’s returned all its capital and has outperformed it’s been to GR substantially and we’ll go in to meet somebody and they’ll say, do you do this for profit or not and they haven’t looked at the book and they say we only invest in top tier firms etc., etc., and you don’t even, once that’s come up, saying, well we fit all those criteria doesn’t even matter because they’ve already defined you out in some other category that they don’t want to invest in. So I think there’s just an education process that we all go through and those firms that define themselves in impact investing will find over time that they are defining more and more clearly and like Pat said, along the lines of benchmarks and performance.

Dinneen: I think it is extremely important to differentiate the charity and impact investing and what I have come to appreciate and through pioneers like Jeff is that unless you have a sustainable business model and generate profit, you are not going to be able to have an impact because your business won’t work.

Leonard: I want to pick up on something Pat said cause it resonated with my personal experience for many years from GEF standpoint. We’ve had a pretty high market share of what you would say would be large family offices in the United States, household name founders of EBay, Cisco System, Yahoo, a lot of the big name families and what I found over the years from our standpoint, we don’t do well with those groups that just see us as, just do charitable stuff or that just have a family member that says, I don’t care what it is, I want to do something in the environmental area and they’re not benchmarking from return standpoint because or we tend to be folks that can market much better that don’t have to sell returns. We don’t do well with those who just send you to the bean counters because the bean counters say I can’t put this in a bucket that is meaningful to me and if you have to spend more than two sentences describing it it’s too complicate and it has too many risks. Where we do well is where you have highly professionalized staff that both know how to benchmark the environmental. So they’re looking at environmental scientists, they’re looking at people who have social, a real deep understanding of what the social employment challenges are in different markets and things like that and benchmark from a financial standpoint. When you cross section those two types of professionals as opposed to sort of amateur family type investors we do much better because we then are explaining almost professional-to-professional, peer-to-peer what we do and they really get inside it and understand it.

Dinneen: One of the trends that I think is very exciting is they are a lot of family offices now that are converting from just doing charity to impact investing recognizing that to be sustainable there’s a group called 1K1V, One Thousand and One Voices, where they had traditionally invested hundreds of millions in charity and realized that that wasn’t effectively lifting people out of poverty and now they’re focusing all of it on funding investments in emerging markets.

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