logo

State of the US Impact Investing Market

Introduction

Impact investing is defined by some as “doing well by doing good.” However, over the course of the past year, it has become an established asset management practice focused on generating social and environmental impact together with financial risk-adjusted returns. Impact investing is an approach or lens through which investment opportunities across many asset classes are identified, assessed, and selected for capital investment. Impact investment returns are often referred to as double bottom line returns.[i]

Essentially, investors pursue traditional asset management strategies while incorporating significant and measurable environmental, social, or governance (ESG) factors in the analysis. Both are given equal weight in the investment decision-making process. Impact investing does not involve a trade-off between social outcomes and financial returns, but rather is characterized by an intentional, simultaneous, dual-objective of social and financial returns.

An impact investment spectrum, based on various levels of impact incorporated into the investment analysis, consists of: [ii]

  • Responsible investment, which utilizes negative screening
  • Sustainable investment, which uses positive screening of investments that stand to benefit from ESG trends
  • Thematic or Mission Related Investments (MRI) with a particular impact theme
  • Impact First investments, which are principally based on social or environmental impact and are financially concessionary. Impact First investing practiced by US foundations also includes Program Related Investment (PRI)
  • Philanthropy, which is at the furthest end of this spectrum

 

Within this impact investing spectrum, we view impact investments with competitive financial rates of return as those to be included in the Thematic investment group. The various asset classes in this group would largely include private equity at various growth stages, venture capital, mezzanine debt, real assets, and private debt placements. As impact focused or true impact investing is still in the early stages, the size of the investment opportunities and consequently the funds that currently exist are much smaller than would be found in the traditional private equity or venture capital sectors. Impact investors seeking broadly diversified exposure to the various impact investment themes, together with risk-adjusted financial returns and potentially lower market correlation, would be able to gain such exposure through a fund of funds managed by an asset manager with both financial and impact portfolio management expertise and track record. Given the current state of the market, an impact investment fund of funds structure would be able to accommodate investors that require larger, single investment sizes.A notable advance in the progress of impact investing is the commitment of US billionaires who have signed the Giving Pledge to provide a lead in the development of the impact investment market. Some of the 120 members of the group have already specifically directed funds into impact assets, and are arranging study groups aimed at creating a forum for Giving Pledgers to learn more about impact investing through experiences of their peers.[iii]

Impact Investment Sector and Opportunities

Over the past few years, the World Economic Forum and the Global Impact Investment Network (GIIN) have been tracking developments in the impact investing sector. According to their findings, the sector continues to gain momentum, but is still relatively small in the context of overall global assets under management, estimated at $72 trillion. [i]

A diversified impact investing strategy can provide a proactive approach to societal and environmental risk factor mitigation. Not surprisingly, successful impact investors are transparent about their intended impact and expectation of financial returns, set tangible goals and actively measure projected impact metrics and financial objectives.

Societal and environmental forces, or the “Five Forces of Global Change”,[ii] which are transforming our world at an unprecedented pace, include:

  • Global population growth
  • Fast-growing global consuming middle class
  • Resource scarcity and rising prices
  • Technology and biotechnology
  • Climate change and man-made carbon pollutants

 

U.S. Trust and Bank of America also summarize these five forces as People, Earth, Innovation, Markets and Government.In September 2013, the World Economic Forum estimated an impact investment market size of $25 billion, globally. Since that time, the market size has more than doubled, and is currently estimated at $50 billion of assets under management. Some have suggested that it could grow to $500 billion by 2020.[iii]According to a report conducted by McKinsey, corporate pursuit of sustainability practices actually has a material impact on financial performance, rather than just as a public-relations device or luxury investment window dressing. [iv] Examples include, the reduction of operating costs through improved resource management (e.g. water, waste energy, carbon, employee engagement), as well as more efficient production processes. Especially, given rising resource prices and scarcity.

Increased revenue and growth prospects were also noted by companies that are discovering new product innovations that meet specific social needs and trends, and address changes in demand, as well as capturing price premiums, and increased market share by marketing sustainability attributes to customers. The value at stake from sustainability challenges is also substantial with the potential risk to earnings before interest, taxes, depreciation and amortization (“EBITDA”) reported at somewhere between 25% to 70% by companies surveyed in the report.[v]

From a financial performance perspective, MSCI ESG indexes, both for the US and globally, have closely tracked MSCI non-ESG indexes over the past seven years. Needless to say, the key advantage of an ESG index is that it includes companies, which are focused on bringing about positive environmental and social change.[vi]  The Dow Jones Sustainability Index is also proving that green businesses are outperforming the non-green Dow Jones Industrials Index.

Given the risk profile and method in which intended impact can typically be achieved, private equity is the most common asset class of impact investment funds. Currently, there are 343 funds listed on ImpactBase[vii], which is managed by GIIN, and is the most comprehensive database for impact investment funds, similar to the Preqin database used by the traditional investment market. While ImpactBase includes impact funds of varying asset classes, investment strategies and geographies, approximately 230 currently fall under the private equity/venture capital asset class.[viii]

Other sources include the annual reports published by Impact Assets of 50 global fund managers, Bank of American Capital Access Funds Management 2014 Social Impact Report, and the Small Business Investment Company (SBIC) Impact Investment Fund.

According to these sources, impact investment funds focusing on North America included in the private equity, venture capital, real assets, real estate, or timberland & agriculture asset class categories, comprise approximately 132 funds with estimated assets under management of over $19 billion.[ix]

Broadly, the North American investment themes fall into seven categories:

  • Affordable Housing & Community Development
  • Clean Energy Supply
  • Education
  • Health & Wellness
  • Small and Medium Business Development
  • Timberland & Sustainable Agriculture
  • Wealth Creation

 

Social impact goals cover objectives such as affordable housing, employment generation, health improvement, educational access, economic improvement of workers and community support. Target beneficiary demographics are typically incorporated, such as, gender, diversity, settings (urban or rural) and varying socioeconomic levels (poor and low income).Environmental impact goals include themes such as biodiversity conservation, energy and fuel efficiency, natural resource conservation, clean energy supply, sustainable land use, water resources management and greenhouse gas emissions.The growing number of impact entrepreneurs are a key driver to the underlying investment potential of the impact investing landscape. Some of the leading impact entrepreneurs have created very successful and profitable social enterprises, which have developed very innovative and sustainable ways of addressing social issues. Such impact entrepreneurs include Sal Khan with a new approach to learning through his Khan Academy, Kristen Richmond and Kirsten Tobey through their organic food business, Revolutions Foods, which provides one million healthy meals each week to school children in the US, 75% from low-income families, and Andrew Youn whose sustainable agriculture business, One Acre Fund, has trained over 200,000 small farmers in Africa.Similar to how the global growth in venture capital and private equity financing since the 1980s has led to a huge increase in the number of entrepreneurial start-ups developing into large, successful companies, finance linked to social objectives, from seed and early stage risk capital all the way through to debt and growth capital, is stimulating the strong growth in impact enterprises.[x] As with the venture capital and private equity fund market, impact investment funds will continue to attract capital and attractive investment opportunities will continue to emerge.Standardized impact ratings and reporting continue to develop through initiatives such as the Global Impact Investing Ratings System (GIIRS) by B Lab, the US organization behind the B Corp certification, the GIIN’s Impact Reporting and Investment Standards (IRIS), the Sustainable Accounting Standards Board (SASB) and integrated double and triple bottom line accounting.The GIIRS rating system uses IRIS metrics together with more traditional measurement criteria to determine an overall company or fund-level rating. 96% of funds reflected in ImpactBase currently use performance metrics to quantify their social and environmental impact.[xi]

Financial target net internal rates of return (IRR) on impact investment funds are relatively in line with traditional investment funds of respective asset classes:[xii]

  • 35% have a target net IRR of greater than 20% p.a.
  • 35% have target returns of 11% -20%p.a.
  • 12% have target returns of 6% -10% p.a.
  • 18% have returns of less than 6% p.a.

 

These return figures are also consistent with data found in ImpactBase, which reflects an average target IRR for the private equity/venture capital asset class of 19.3% and for real assets of 14.9%.[xiii]In addition to financial return, the effective establishment of social and environmental targets, as well as measurement tracking of impact, is crucial. The ability to link the progress in achieving impact outcomes to financial returns is a significant performance indicator for impact asset managers. The most successful managers have the ability to project social returns and benchmark them against similar risks. Effective impact measurement is at a granular level through metrics established and monitored by government entities, impact driven businesses and impact investors, in conjunction with each other. The metrics chosen for each investment are customized and reflective of its social or environmental goals. As the impact investment sector is becoming ever better at measuring impact, it continues to attract capital from a variety of investors seeking differing combinations of financial and social returns.

According to Institutional Investor, institutions are increasingly finding attractive yields and allocating funds to real assets, including infrastructure, real estate, farmland and timber.[i] The agriculture sector is particularly attractive for long term investors with an 8-10% current return and 12-14% IRR on average.[ii] A recent survey of 201 institutions by Blackrock also shows that 46% of investors have boosted their allocations to real assets and 60% are expected to do so within the next 18 months.

The majority of interview respondents to the 2014 survey, Spotlight on the Market, by JP Morgan and GIIN, reported that their portfolios’ impact and financial performances were in line with expectations, with some outperforming.[iii]

Impact investment fund economics by asset class reflected in ImpactBase are also relatively consistent with the traditional fund investment market in that private equity/venture capital funds on average have management fees of 2.4%, carried interest of 18.2% and hurdle rates of 6.2%. Real asset funds on average have management fees of 1.7%, carried interest of 18.1% and hurdle rates of 7.7%.[iv]

Related investment approaches, such as responsible and sustainable investing mentioned above, which incorporate exclusionary (positive/negative) investment screens or simply incorporate ESG factors into the overall investment analysis, do not precisely qualify as impact investments, as they do not intentionally seek to create social or environmental impact together with financial returns, which are both actively measured and managed. The comprehensive approach to impact investing already implicitly incorporates these processes.[v]

While responsible and sustainable investing are not the same as impact investing, growth trends in these markets, including ESG criteria incorporated as a result of client demand, provide potential indicators of growth trends for the market. From 1995 to 2012, US sustainable investing grew by 11% p.a., while ESG incorporation grow by 19.3% p.a.[vi]

US Impact Theme Drivers

The key drivers of the need for impact within the seven impact themes identified for North America provide significant investment opportunity for impact investors, as well as a diversified impact fund of funds structure.

Small businesses in the US comprise over half of the private sector and are key drivers to job creation and economic development in underserved communities, according to the US Small Business Administration and the Bureau of Labor Statistics. Small businesses comprise 99.7% of US employer firms and 64% of net new private sector jobs. Investment in small businesses in underserved communities by impact investment funds meet an essential need where traditional financing options may not be available to companies in these markets.

To further support the impact investment mission, in 2011 the SBIC program established an Impact Investment Fund to support small business investment strategies designed to both maximize financial return and generate enhanced social, environmental and economic impact. It is committed to allocate $200 million in annual SBA-guaranteed leverage commitments, which are available to funds licensed as Impact SBICs. With each new Impact SBIC licensed, the SBA hopes to contribute to the impact industry’s growth, demonstrating that investors can use their capital to affect positive change in their communities while also earning strong financial returns.

Impact SBICs make a commitment to deploy at least 50% of their invested
 capital in impact investments. These investments may be either pre-approved, SBA-Identified impact investments or Fund-Identified impact investments as defined in their licensing application. SBIC Impact investments are made in economically distressed areas; low to moderate income areas (22% of SBIC financings over the past 5 years); rural areas; qualified low income communities; SBIR/STTR recipients; and energy saving investments.

Impact themes and investment opportunities identified by SBIC licensed impact funds, include:

  • Cleantech, resource efficiency and sustainability, and technology enhanced service sectors
  • Education including, traditional models, professional certification, content, technology, corporate training and human capital businesses
  • Reviving business communities in economically depressed or underserved areas, such as Detroit or locations in California and Texas, which create jobs and promote economic development
  • US businesses owned by ethnic minorities, veterans and women (8% of US small businesses are women-, minority- or veteran- owned)
  • Health and wellness.

 

McKinsey Global Institute estimates that over 60 million urban households in the US, European Union, Japan and Australia are financially stretched by housing costs. They have concluded that affordable housing is an overlooked opportunity for developers, investors and financial institutions.[i] Affordable housing impact funds have focused on the large, growing and unmet need in the US for quality affordable workforce rental housing. Communities, the environment, worker productivity and household well-being, suffer when housing is not proximate to employment, education and healthcare resources.

Rental households in the US are projected to reach approximately 47 million by 2023, a 34% increase from 2001. However, the supply of multifamily housing units in the B/C category class (US government defined) has been flat from 2000 to 2012 at 5.75 million units, which presents a substantial demand opportunity. Workforce lessees are also suffering from increasing land affordability with one in two renters spending more than 30% of their income on rent, and one in four renters spending more than 50%.[ii]

Other housing impact funds are focused on addressing the rising demand for sustainable workspace and habitat in the US. The demographic shift of Millennials toward renting and deferring home purchases, present significant retrofit opportunities and superior returns on LEED rated green design products. LEED green categories include sustainable sites, water efficiency, energy and atmosphere, materials and resources and indoor environmental qualit

In regard to wealth creation, the US under banked market is underserved and provides numerous attractive investment opportunities. The 100 million under banked consumers in the US earn $1.1 trillion annually, and spend $25 billion on financial services fees and interest, often at highly inflated prices due to lack of competition, automation and other inefficiencies.[iii]Specialized education funds are focused on technologies to advance education in the major education subsectors including K-12, post-secondary and continuing education. In the US, education is the second largest sector of the economy of which 10% or $129 billion was allocated to for-profit education providers in 2012. Key drivers to this market are the increased requirements for technological proficiency, as well as the expansion in the use of technology, especially by children, which has made learning more interactive, personalized, social and engaging.Other US impact funds are addressing the affordability issue for US university education. Even after exhausting financial aid options, the average university student in the US is left with a $5,000 balance due to the educational institution, for which they must find alternative financing. An investment opportunity currently exists to provide a flexible source of financing to cover a student’s gap in funding. Instead of a loan, the student agrees to pay a percentage of job income earned, around 4-8%, for 120 months after graduation. This strategy is especially compelling to lower-income and immigrant families that are debt averse and therefore uncomfortable with traditional student loans.[v

Clean energy supply investors are focused on energy efficiency, demand reduction, building automation and smart grid technologies, clean energy, solar, wind, geothermal, biomass, water and wastewater technology solutions. Project level investing in development to later stage renewable energy infrastructure is growing across North America

The development of urban agriculture is another way of addressing the rapid growth of urban areas (82% of the US live in urban areas) through fresh, pesticide free local produce and products, creating jobs and businesses around it, as well as creating new sources of income for building owners.[vi]

US timberland and sustainable agriculture fund managers have been successfully managing real assets in the timberland and agriculture space using a variety of localized and specialized approaches. Timberland or environmentally focused funds are approaching the production of timbre with ecosystem services such as clean water, endangered species habitat and carbon storage while focused on financial value of the assets. They specialize in the creation and sale of carbon credits, the sale of conservation easements, tax credits, habitat reconstruction, sustainable agriculture, and alternative bioenergy leases. Investors in the timberland asset class often are focused on rural economically distressed areas to create jobs and local economic development

The US population is currently around 316 million people, and the US Census Bureau projects the population will increase by 42% in less than 40 years. The UN Food & Agriculture Organization (FAO) has estimated that global food demand will double by 2050 and that 70% of the required supply-increase will have to come from efficiency-enhanced technologies. Especially, as overall production capacity appears to be declining. Food and agriculture represent an emerging, attractive investment sector, which impact funds have been approaching in a variety of ways

One significant approach to wealth creation in the US is the offer of employee benefit programs such as, 401(k), stock options, phantom stock, ESO/ESPP, pension or other savings/retirement plan. Impact funds focused on small and medium business development offer such programs to employees of businesses in which they invest.[iv]

Current Investor Composition

Although US institutional investors, such as pension funds and insurance companies are increasingly committing funds to various impact investment themes, the most active segment of investors in the impact investment market currently, are high-net-worth (“HNW”) individuals and family offices, as they generally have greater discretion and flexibility in investment allocation.[vii]

Private wealth managers and banks have also been taking advantage of this trend by launching impact investment fund of funds product to their clients. These banks include several European private banks such as, the oldest private bank in Geneva, Lombard Odier, French BNP Wealth Management, German Private Bank Berenberg together with LGT Venture Philanthropy, as well as Deutsche Bank, JP Morgan and Morgan Stanley in the US.[viii]

Initiatives such as the roundtable of 20 investors held at the White House in June 2014, where $1.5 billion of new commitments were made to impact investing,[ix] as well as institutional funds such as the BAML Capital Access Fund (CAF) managed by Bank of America Merrill Lynch, which explicitly invests in emerging US domestic impact investment funds, are contributing to the growth of institutional money being allocated to the impact strategy. In their report, Spotlight on the Market, JP Morgan and GIIN found conclusions on the development of the market both promising, and reflective of a market moving from a proof of concept phase, to a growth phase.[x]

Investors in the CAF fund include the California State Teachers’ Retirement System (CalSTRS), the California Public Employees’ Retirement System (CalPERS), the New York State Common Retirement Fund (NYSCRF), the New York State Teachers’ Retirement System (NYSTRS) and the Pennsylvania State Employees’ Retirement System (SERS). As of March 31, 2014, CAF had committed more than $865 million across 47 funds, which were primarily of the venture capital, private equity growth, buyout and mezzanine asset classes. CAF reports that its investment opportunities have increased 58% since 2008, and that it had reviewed 262 potential fund investments in 2013 that presented strong financial returns and met emerging manager or underserved mandates.[xi]

Pension fund and insurance company investors, which typically are liability constrained, are seen to be allocating more capital to impact investments as they increasingly see that there is no trade off between the financial return and the impact return. In addition to pension fund investors listed above, other active institutions in the impact investing space include, Aviva France, AXA Group, Legal & General, PGGM, Zurich Insurance, Prudential Financial, Teachers Retirement System of the City of New York (TRSNYC), TIAA-CREF and five of the UK local authority pension funds.[xii]

To support this view, Equilibrium Capital’s agricultural fund, ACM Permanent Crop Fund recently raised $250 million, of which the majority of investors were institutional in nature, such as Washington State Investment Board and Maine Public Employees, which each committed $50 million to the fund.[xiii]

Prudential Financial committed to investing over $1 billion at the Whitehouse roundtable in June 2014. Additionally, 39 institutional investors who responded to a survey conducted by the Aspen Institute and the Global Social Enterprise Initiative at Georgetown University, reported they had committed $2.5 billion to impact investments, and that an overwhelming majority of these investments had met or exceeded financial and social goals.[xiv]

Trends with the Millennial (age 18-32) generation also hold out much hope for increased allocation of funds to the impact investment sector. As confirmed by a Deloitte Millennial survey, the new generation of Millennial wealth holders are more socially and environmentally conscious with nearly 30% of Millennials responding that the top priority of businesses today should be to improve society, and produce goods and services that overwhelmingly make the world a better place. More specifically, 56% believe businesses could do a better job of addressing society’s resource scarcity, 55% feel strongly that businesses should have an increased focus on climate change and 49% are of the view that the problem of income inequality should be confronted.[xv]

According to U.S. Trust, US HNW family assets currently comprise approximately $15 trillion. Around 35% of US HNW investors and 65% of Millennials currently own or employ social impact strategies. 60% of US HNW investors, and 73% of Millennials believe it is possible to achieve both an environmental or social return together with a financial market rate of return on investment.[xvi] The younger generation of millionaires reportedly make more that $30,000 per annum in charitable donations as compared to 6% contributed by baby boomers, which is further validation of the current trends referenced above.[xvii]

Impact investment themes of US HNW investors include healthcare quality and access; disease prevention, treatment or cure; environmental protection and sustainability; access to education; and the development of children and youth. They are also interested in alternative investments such as real assets and private equity, with 51% of Millennials showing interest in private equity and 46% in real assets. 71% of Millennials are also focused on meeting personal goals and expectations, rather than measuring investment performance against standardized benchmarks.[xviii]

Projected risk-adjusted financial and social returns of varying social impact themes, which can be benchmarked against other financial assets, are at the crux of attracting additional capital to the impact investment sector. Social return performance metrics are of equal importance to traditional financial performance measurements utilized in the asset management world.

 

Balanced Investment Strategy

Impact investors looking to achieve a balanced impact theme strategy within North America, might consider focusing on the seven impact sectors or themes listed above including, affordable housing and community development, clean energy supply, education, health and wellness, small and medium business development, timberland and sustainable agriculture, and wealth creation. Investment funds that invest in companies addressing these themes may very well outperform the market given the focus on forward-looking societal trends.

Thematic or Mission Related Impact Investment funds tend cover assets classes such as, private equity funds of various growth stages, venture capital, mezzanine and real assets. Established impact investors typically look to establish a portfolio of impact investments or impact fund investments, which in aggregate produce a blended return to investors of greater significance than the sum of the individual investments through overall coherence between both impact and financial returns goals.

Currently, there do not appear to be any fund managers specifically focused on investing in a diversified group of North American impact investment funds and themes with alternative investment risk profiles such as private equity, venture capital, mezzanine debt and real assets. However, much like the European private banks, US private wealth managers and banks are likely to launch such a product in the future to accommodate the demand mentioned above by HNW individuals and family offices.

 

Impact Investment Process

Rigorous focus on financial and impact strategy, due diligence and investment selection processes are key elements to the assessment of investment fund managers, together with understanding the key drivers to returns and risk exposure. Extensive financial, operational and impact due diligence is required for all fund investments. Ongoing close monitoring following investment is imperative. Overall asset allocation diversification discipline to avoid overexposure to a particular theme, sector, manager or company.

Investment funds should be analyzed by their individual investments, including the products and services delivered based on the particular theme. Compliance with the terms of its mandate, including measurement and reporting methodology, and how impactful the industry sector or theme is to which the fund is dedicated are equally incorporated into the investment analysis.

Key factors of potential investment fund assessment include:[xix]

Fund Management Professionals

  • Backgrounds and track record
  • Commitment to a focused strategy and defined investment criteria, both financially and socially, demonstrating management’s expertise in social impact and financial performance
  • Intuitive and adaptable approach to potential investment opportunities and trends

Key man policies and conditions

Mission

  • Projected future social or environmental outcome
  • Additionality of social or environmental outcomes that would not have otherwise occurred but for specific capital investments.
  • Value creation through the investment fund’s utilization of environmental, social and economic development factors
  • Mission alignment success between the fund and its investors

Business Model

  • Target risk-adjusted returns based on a distinct investment strategy and selection across the impact investment fund universe
  • Many funds across the asset class spectrum of private equity, venture capital, mezzanine and real assets have projected yields of approximately 15% – 20%, as referenced in ImpactBase[xx]
  • Fund management fees also tend to be around 2% of committed capital with a carried interest of 20% after hurdle rates of 5-8%, which is substantially in compliance with current ILPA guidelines and targets. Also referenced in ImpactBase[xxi]

Quantifying Impact

Impact measurement of potential fund investments is a combination of a fund manager’s in-house impact methodology overlaid with our proprietary set of impact investment criteria.

Potential impact risk and impact return are both factored into the investment analysis, and a risk/return rating is assigned for each proposed investment. Risks and mitigating factors are assessed and analyzed using specific impact investment criteria for each investment proposal.

In addition to traditional financial performance, monitoring post-investment, impact measurement of projected impact goals set at initiation of investment, and performance reporting are part of the full investment cycle. Internal risk/return ratings are also reviewed and updated on a semi-annual basis.

The Global Impact Investing Rating System (GIIRS) is a globally recognized impact investment rating organization. GIIRS ratings are often used by impact investment funds to measure and benchmark impact. GIIRS Ratings are comprised of scores in leadership, employees, community and environment for enterprises, and are often used to benchmark companies across industry sectors.

GIIRS Fund Ratings are comprised of a fund manager assessment (10% of total score), and a weighted average investment impact score for the portfolio (90% of total score). The aggregate weighted average investment impact score can further be compared to a fund market benchmark score, which is an average impact score for all GIIRS rated companies in the same sector.[i]

Impact Reporting and Investment Standards (IRIS), which includes certain operating and financial metrics and criteria for reporting on impact, are also broadly used in the impact investing world.

The Sharpe Ratio is calculated on most traditional financial investment funds, and can also be applied to impact investment funds as another data point to assess performance. What the Sharpe Ratio tells us is whether a portfolio’s returns are due to smart investment decisions or a result of taking excess risk. Although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance.

 

Summary

Investing for impact beyond philanthropy and concessionary return is growing rapidly given the attraction of capital which would otherwise have been simply deployed in traditional investment products without having the intent of inclusive environmental or social return.

Perfect World Capital has identified both a need and an opportunity for investment across a diversified range of asset classes and impact themes in North America. Especially, given strong demand and need identified across seven impact themes within the US.

Impact investors seeking diversified exposure to social and environmental impact themes through Thematic or Mission Related Investments, together with risk-adjusted financial returns, are able to gain such exposure through impact investment funds whose underlying investments are typically comprised of investments in social enterprises in the form of private equity at various growth stages, venture capital, mezzanine debt, real assets, and opportunistic direct corporate debt placements and project finance.

Based on projections provided by current impact investment funds referenced in this report, a net rate of return on average of 15% 20% is potentially achievable today in the impact investment fund sector.

Perfect World Capital Group

Perfect World Capital Group is a financial consulting firm founded by Cynthia Taylor and dedicated to advising impact and sustainable investment funds, which in addition to risk-adjusted financial returns, are investing for social and environmental impact. She has had several lives of great accomplishment and depth that have provided her with the knowledge, resources, experience and perspective to launch Perfect World Capital.

Following a 25-year career in international investment banking and investment management, as well as many achievements in the arts and philanthropy, she is well-positioned and passionate about utilizing all of her education, experience and networks to make a significant contribution to the impact investing mission.

While managing an approximately $2 billion portfolio of investments for MetLife Investments in London, she was given the opportunity to invest in both the private and public investment markets across Western Europe, as well as the then emerging countries of Europe, principally Slovakia, Czech Republic, Poland, Hungary and Slovenia. These investments were essentially impact investments in the development of infrastructure in developing Europe, such as communication networks, water, power and transportation.

Prior to her 16 years in London, she was fortunate to have started her career with Prudential Capital in New York, which has had a dedicated impact investing unit since 1976. Social and environmental factors are an integral part of the investment decision process at the Prudential. As a life insurance company, negative screening of investments in companies engaged in tobacco, gaming or alcohol production has always been part of the culture.

At both Prudential Capital and MetLife, she was actively investing in long-term private debt, which is typically structured to include legally enforceable covenants and reporting requirements that are quite adaptable to social performance.

Later in her career with Washington Square Investment Management, an alternative investment fund manager, she successfully listed an alternative investment fund on the London Stock Exchange. Listing an impact investment fund on such an exchange at some point in the future to provide both diversification and liquidity for impact investors would be an outstanding achievement.

Additional information on Ms. Taylor’s background and expertise can be found on her personal and impact investment websites, www.cynthiataylor.org and www.perfectworldcapital.com, including her curriculum vitae.

 

Disclaimer

Information contained herein and any other forms of communication related thereto are for information purposes only, and should not be regarded as an offer to sell or a solicitation of an offer to invest in any security. Past performance is not indicative or a guarantee of future performance. Perfect World Capital is not a registered investment advisor and does not provide tax, accounting, or legal advice. Investors are advised to consult with their tax, accounting or legal advisors regarding any potential investment. This information and all the material shared in conjunction with it whether verbal or oral are confidential.

 

End Notes

[1] World Economic Forum, “From Ideas to Practice, Pilots to Strategy, Practical Solutions and Actionabl How to Do Impact Investing,” December 2013.

[1] Sonen Capital in collaboration with the KL Felicitas Foundation. “Evolution of an Impact Portfolio: From Implementation to Result,” October 2013. Bridges Ventures, “Building Impact-Driven Investment Portfolios” by Clara Barby and Emilie Goodall published in World Economic Forum, “From Ideas to Practice Pilots to Strategy II- Practical Solutions and Actionable Insights on How to Do Impact Investing,” September 2014, section 3.2.

[1] Report of the Social Impact Investment Taskforce, established under the UK’s presidency of the G8, “Impact Investment: The Invisible Heart of Markets. Harnessing the Power of Entrepreneurship, Innovation and Capital for Public Good,” September 15, 2014. Active supporters within the Giving Pledge group include the Case Foundation, Gates Foundation, Milken Foundation, Omidyar Network and Skoll Foundation.

[1] PwC: Global assets under management (AUM) to exceed $100 trillion by 2020 with nearly 50 percent residing in North America, New York, February 10, 2014.

[1] U.S. Trust Capital Acumen Issue 28: 2014, “ESG Investing Goes Mainstream,” by Ian Prior

[1] According to “Perspectives on Progress: The Impact Investor Survey” (J.P. Morgan and the Global Impact Investing Network), 124 impact investment funds manage $46 billion in impact investments. Considering there are over 300 impact investing funds, according to ImpactBase, the estimate is understated

[1] McKinsey & Company, “Profits with purpose: How organizing for sustainability can benefit the bottom line,” July 2014.

[1] McKinsey & Company, “Profits with purpose: How organizing for sustainability can benefit the bottom line,” July 2014.

[1] U.S. Trust Capital Acumen Issue 28: 2014, “ESG Investing Goes Mainstream,” by Ian Prior.

[1] As of March 2015

[1] As of March 2015

[1] Bank of America Merrill Lynch, “BAML Capital Access Funds Management, LLC 2014 Social Impact Report,” March 31, 2014, and ImpactBase data as of March 1, 2015.

[1] Report of the Social Impact Investment Taskforce, established under the UK’s presidency of the G8, “Impact Investment: The Invisible Heart of Markets. Harnessing the Power of Entrepreneurship, Innovation and Capital for Public Good,” September 15, 2014.

[1] ImpactBase Impact Investment Fund Database, “ImpactBase Snapshot: An Analysis of 300+ Impact Investing Funds,” March 2015.

[1] World Economic Forum, “From the Margins to the Mainstream – Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors,” September 2013.

[1] ImpactBase Impact Investment Fund Database, “ImpactBase Snapshot: An Analysis of 300+ Impact Investing Funds,” March 2015.

[1] The real estate asset class includes renovated and managed properties in US government-defined low to moderate income areas with a social and environmental objective, such as green and affordable housing and urban regeneration.   Sustainable real estate development covers mixed use properties in growing urban centers, which capture the Millenial generation demographic, focused on green buildings where they would like to live and work, as well as those that are more energy, water and waste efficient.

[1] Institutional Investor, “Institutional, Impact Investing Field Common Ground in Agriculture” by Imogen Rose-Smith, January 16, 2015.

[1] J.P. Morgan and GIIN, “Spotlight on the Market: The Impact Investor Survey,” May 2014.

[1]ImpactBase Impact Investment Fund Database, “ImpactBase Snapshot: An Analysis of 300+ Impact Investing Funds,” March 2015.

[1]World Economic Forum, “Impact Investing: A Primer for Family Offices,” December 2014.

[1] World Economic Forum, “From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors,” September 2013.

[1] McKinsey Global Institute, “A blueprint for addressing the global affordable housing challenge,” October 2014.

[1] Turner Multifamily Impact Fund (“Fund”) Executive Summary. January 2015.

[1] Core Innovation Innovation Capital I L.P. Executive Summary, as shown on ImpactBase, March 2015.

[1] Huntington Capital 2012 Annual Impact Report.

[1] Lumni USA. ImpactBase. March 25, 2015.

[1] US Census Bureau 1990-2000, Urban/Rural Census Data 1900 to 2000.

[1] Ibid.

[1] Report of the Social Impact Investment Taskforce, established under the UK’s presidency of the G8, “Impact Investment: The Invisible Heart of Markets. Harnessing the Power of Entrepreneurship, Innovation and Capital for Public Good,” September 15, 2014.

[1] White House roundtable on impact investing on June 25, 2014: private sector investor commitments of $1.5 billion included Prudential Financial ($1 billion commitment over 5 years), Abacus Wealth Partners ($126 million), the McKnight Foundation ($200 million) and Capricorn Investment Group ($100 million over 3 years), as well as 16 other foundations, family offices and asset managers.

[1] J.P. Morgan and GIIN, “Spotlight on the Market: The Impact Investor Survey,” May 2014.

[1] Bank of America Merrill Lynch, “BAML Capital Access Funds Management, LLC 2014 Social Impact Report,” March 31, 2014.

[1] Eurosif, European SRI Study 2014. Created with the support of Edmond de Rothschild, Generali Investments Europe, Inrate, an independent sustainability rating agency based in Switzerland, and Nordea.

[1] Institutional Investor “Institutional, Impact Investing Field Common Ground in Agriculture” by Imogen Rose-Smith, January 16, 2015.

[1] Philanthopy.com, “Impact Investments Show Strong Returns, Survey Says,” by Alex Daniels, December 11, 2014.

[1] “Big demands and high expectations”, The Deloitte Millennial Survey, January 2014.

[1] U.S. Trust, “2014 U.S. Trust Insights on Wealth and Worth,” Annual survey of high-net-worth and ultra-high-net-worth Americans.

[1] Fidelity Millionaire Outlook, September 2013.

[1] U.S. Trust, “2014 U.S. Trust Insights on Wealth and Worth,” Annual survey of high-net-worth and ultra-high-net-worth Americans.

[1] Clara Barby and Emilie Goodall, Bridges Ventures, “Building Impact-driven Investment Portfolios.” World Economic Forum.,“From Ideas to Practice, Pilots to Strategy II,” September 2014.

[1] As of March 2015.

[1] As of March 2015.

[1] Sonen Capital in collaboration with the KL Felicitas Foundation, “Evolution of an Impact Portfolio: From   Implementation to Result,” October 2013

Leave a Reply

*

captcha *