Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
return expectations, risk appetite and impact goals. These sources can include local,
regional and multilateral government-sponsored development finance institutions,
institutional-scale private foundation investment programs, angel investment capital 18
and impact investment funds. Successful impact investors will know how to navigate
these capital sources, partnering with investors whose different risk/return appetites
allow structured transactions that can incorporate mezzanine finance, concessionary
capital 19 or subordination for their own investments.
Political insight
The best impact investors will have a deep understanding of the social and political
dynamics that will influence investment outcomes, especially for investments into
companies that provide basic goods and services to underserved market segments.
They must manage the emotionally and politically charged dynamics of applying forprofit
business models to communities in need, as some opponents will brand it:
“profiting from the poor”. Mishandling these dynamics can have dire consequences,
such as inhibiting exit from investments, eroding the social impact if consumers
boycott the products/services sold, inducing restrictive government action, or
tarnishing the reputation of the investor in the region.
Collaboration
Impact investors draw on strong personal relationships and institutional affinity with
each other in the full range of investment activity (from deal sourcing, due diligence,
investment structuring, syndication and post-investment management), for several
reasons that are both structural and transitional:
• Impact investing is new and poised to grow substantially. For many investors,
this growth is expected to more than offset any loss of market share and therefore
facilitates collaboration.
• Transaction costs will be high until the infrastructure that supports investors –
e.g., deal clearing mechanisms, benchmarking data, and investment banking
services – is built. Until then, impact investors mitigate these operating costs
through formal or informal collaboration.
Indicator #2: Demand organizational structures to accommodate this skillset
Impact investing emerged from the entrepreneurial initiatives of professionals
integrating the investment discipline traditionally housed in financial services firms
with the social-welfare focus traditionally housed in foundations and development
agencies. While these individuals began impact investing part-time within a broader
and more traditional professional practice, they are increasingly organizing into
distinct structures that enable the dedicated attention to and cultivation of impact
investing.
New business units: Initiatives within organizations
Some impact investors have created organizational structures within established
institutions. Some examples of such commercial business units include J.P. Morgan
Social Finance (2007) 20 , TIAA-CREF Social and Community Investing (2006) 21 , and
18 Angel capital refers to financing from individuals in exchange for equity or convertible debt.
Angel investors operate like a venture capital partner in the company, but typically service
financing requests of a smaller size than venture capital firms tend to consider.
19 Below market-rate financing.
20 http://www.jpmorgan.com/pages/jpmorgan/investbk/solutions/ssf
26