Mark Sayer, Director of Investment Platforms, IIX
There has been a significant acceleration of capital committed to impact investing in recent years with industry research suggesting that approximately 2,200 investments worth US$4.4 billion were made in 2011. This represents a 100% increase from 2010 levels and half of the 2012 estimates.
This momentum has pushed impact investing onto the world stage- UK Prime Minister David Cameron delivered a compelling keynote address on the power of impact investing to “tackle the most difficult social problems” at the G8 Social Impact Investing Conference in June 2013.
The movement has also attracted more interest from family offices, who see impact investing as the right combination between financial returns and the possibility of not only creating positive impact, but also transferring values down through their second and third generations.
Having recently joined IIX after years of experience working within family offices, I believe more family offices should embrace the opportunities to invest in businesses with a strong social mission.
Why invest?
There prevails a misconception amongst many family offices that investing in a social enterprise (SE) is akin to a charitable donation. This is not the case. Whilst SEs must have a strong social mission, they are generally for-profit businesses, implementing financially sustainable business models. I like to think of it as the deployment of capital with an expectation of financial return, and where the success of the investment is also contingent upon achieving a social goal. A recent IESE Business School study of 60 impact investors mainly from single-family offices goes one step further by concluding that in impact investing, there is no trade-off between financial gain and social impact.
This provides strong arguments for family offices to enter the impact investing space:
First and foremost, it enables investment in enterprises that are aligned with their family’s own values.
Furthermore, a family office can invest in enterprises in which they can be involved, from the provision of mentoring support to the entrepreneur to a more active role in operations (by any member of the family). Such investments are often the beginning of a legacy for future generations to build upon.
Thirdly, impact investments often enable the achievement of philanthropic goals whilst ensuring greater transparency, accountability and efficiency of capital. As stated by a partner at a multi-family office, ‘Not only do we see in impact investing a pragmatic solution that allows us to have a positive impact while making money, we also see more and more of our clients seeking to shift away from traditional philanthropy. SEs’ obligation to report to their stakeholders ensures that resources are being used efficiently and effectively.’
Jean-Philippe Crochet, Sunline Pte. Ltd
What does this mean in practice?
There is now a broad spectrum of impact investments to suit a diverse range of family office investment requirements. “Financial-first” investments tend to suit family offices seeking to optimize financial returns, while also aspiring to achieving social or environmental impact. On the other hand, “impact-first” investments will be of interest to those prioritizing social or environmental returns over monetary returns, albeit still expecting some financial return.
In fact there is no reason why a family office should not consider both financial-first investments, forming part of their private equity portfolio allocation, and impact-first investments, which would more likely fall within their philanthropic allocation.
Family offices are able to provide a highly skilled and motivated team to help SEs grow and generate return over time. Alternatively, one can assume a passive role either through a minority stake in an enterprise or through indirect investments in social impact funds.
There are many more ways in which family offices can move into this new and exciting space. With an increasing breadth of opportunities and a growing number of intermediaries and advisors with the skills to assist family offices, the foray into impact investing can be undertaken with confidence.