With Impact Investing, a Focus on More Than Returns

Article from The New York Times by Peter Sullivan 

The very phrase “impact investing” sounds rapacious, but it is an emerging hybrid of philanthropy and private equity that proponents say is about to become more widespread. It is also something that has some very rich people intrigued.

“It’s filling the space in between this historical space around philanthropy — charitable giving to fight poverty and alleviate misery — and the traditional investing space that is return-driven,” said Julia Sze, director of investments at Wells Fargo Family Wealth, who ran an impact investing conference in San Francisco on Thursday.

 More often, impact investing is described by what it is not. It does not work in the same way as socially responsible investing, which excludes areas a person does not want to invest in — like tobacco or guns — through a simple screening process. Impact investing focuses more on bringing about change — helping the working poor in India buy a home, for instance.While most of the money is going into areas like helping to reduce poverty and improving the climate, it is not philanthropy. Investors expect at least a return of their capital with an adjustment for inflation and, in many cases, a lot more than that.And while microlending is a part of it, impact investing is different from what is offered by Web sites like Kiva. With minimum investments often around $1 million, it is also more sophisticated. In addition, these investors have a defined plan to sell their investments after a specific amount of time.

I came to think of impact investing as a private equity fund for social change. This may sound like an oxymoron, given the criticism that private equity funds have faced recently over their management of companies they have taken private. But the structure is similar: there are three or four capital calls in the first year, and the fund is not fully invested until the fourth year. As the end of its investment period nears, the fund then starts to look for ways to sell its investments. Doing good matters to investors, but they also hope for private equitylike returns of close to 20 percent a year.

And like private equity, these investments are illiquid and can be risky. Because the area is so new, the funds lack the traditional track records and transparency.

For this reason, many of the people interested in impact investing are focused on more than the returns.

“I think we have to look at investment as a positive tool in advancing human goals,” said Chris Redlich, who sold his family’s company, the Marine Terminals Corporation, in 2007.

He has taken $10 million, or about 1 percent of his net worth, and started to invest it in a series of funds. One fund is run by Grassroots Capital and makes traditional microfinance investments. Another is a fund focused on affordable housing in India. A third concentrates on energy technology in China.

As for returns, Mr. Redlich said he expected his children and grandchildren to reap the benefits from what he was doing now. He is also realistic about the pros and cons of what he is doing. “With each dollar, you have to understand both the positive side — building up societies — and the dark side — the impact of industrial growth is significant. We have Superfund sites today where people didn’t think what they were doing was a bad thing at the time.”

The glow of doing a social good mixed with high returns would seem attractive to high-net-worth individuals. But impact investing is still in its infancy. The Global Impact Investing Network, a nonprofit group, said that current impact investments amounted to about $50 billion. It projects this area to grow to $500 billion by 2014, putting it at roughly 1 percent of all managed assets.

“I think the tipping point is now,” said Camilla Seth, director of programs and operations. “This activity has been happening for 10 years but investors have been insulated.”

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