How Private Equity Is Heeding the Call of Impact Investing
The sector is a natural source of capital for projects seeking to generate positive social or environmental impact.
The call to address the world’s social and environmental issues is yielding a response from what some may consider an unexpected place: private equity. The reality is, however, that not only are private equity investors logical partners for anyone seeking to bring about impactful change — but they are also critical to building a better world.
I’ve seen this potential unfold firsthand over the course of my nearly three decades in private equity and investment banking. Like many people in the financial industry, I have come to believe deeply in the efficacy of private equity’s analytical, methodical, data-driven approach to investment. As I’ve become more familiar with impact investing — investments made to generate a social or environmental benefit as well as a positive financial return — I’ve become a determined advocate of private capital being harnessed for positive social gains and confident that the rigor of private investors could best harness the forces of capitalism to tackle some of society’s most pressing concerns. I have also been encouraged to see that, as in the nascent days of private equity, trailblazing impact investors have formed vibrant networks to help source deals and build a strong, collaborative foundation.
These pioneers — many of whom are active in the Investors’ Council of the Global Impact Investing Network (GIIN), a group of leading impact investors — have recognized the convergence between private equity and impact investing. This partnership can be described succinctly:
• Impact investing seeks long-lasting change.
• Focusing on supporting profitable businesses is one of the best ways to create an enduring impact.
• The private equity approach to nurturing and building businesses aligns with that ideal.
Private equity and angel investors were among the initial financiers to champion impact investing. The first generation of practitioners is just beginning to realize exits and capture positive returns. Building momentum among the next generation of impact investors means updating perceptions of the sector.
Investors who research impact investing will be pleasantly surprised to find that it includes a wide variety of opportunities in both emerging and developed markets that fall into familiar and proven sectors. And although there are many worthy projects that reside in the more traditionally minded impact space of clean water or infrastructure projects in the developing world, some of the best impact investing opportunities are right here in the U.S. The country has an array of committed entrepreneurs working to address domestic issues from affordable housing to quality education to access to health care and beyond. No matter what your focus or field of expertise, there’s an opportunity in impact investing.
That’s one of the reasons why private equity is so suited to the task. 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. What’s more, private equity executives have specialized in the kind of management mentoring that is priceless for start-ups and younger organizations.
Of course, there is still a long way to go before the vast majority of the private equity world fully embraces the potential of impact investing. Part of the reason we haven’t seen more activity is that getting a market rate of return has not been proved consistently, even though great progress have been made. Also, impact opportunities are usually not of the scale sought by large private equity funds.
Yet the proof of concept has been established. The inaugural Impact Investing Benchmark Report, published by the GIIN and Cambridge Associates, shows that private funds with an impact focus can earn returns that are comparable or superior to similar funds without an impact focus. And measurements such as the IRIS standards support the tracking of social or environmental impact. Because this is a relatively young field of investments, track records are still being built. This will change — and the GIIN and our network are working to accelerate this — but it will take time.
Still, we are starting to see more large private equity firms become active in impact investment. In the past year Bain Capital has launched an impact investing program headed by former Massachusetts governor Deval Patrick, and Goldman Sachs Group purchased impact investing specialist Imprint Capital Advisors.
Looking forward, there are several steps that private equity professionals can take to help advance the industry’s involvement in impact investing. One is to encourage more executives with strong investment backgrounds to get involved. Having that background is a must. There is no substitute for such experience, and having a roster of seasoned specialists will earn a lot more confidence — and money — from private funds.
Another way private equity can help impact investing is for those who are already involved to become more vocal. Impact investing continues to prove itself, but input from private equity experts will go a long way to bringing others along.
Awareness of our environmental and social problems is on the rise. So is the desire to work for change and the optimism of people who work in the investment field to make a difference. Impact investment is the logical nexus for these forces to make a positive difference, and private equity can play a bigger role in the future.
Susan Balloch is chief operating officer of the Global Impact Investing Network in New York.
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