Education. Health care. Rehabilitation of criminals. Investing in social causes is emerging as a new asset class on the investment market. It might be difficult to fathom why anybody would put his money on, say, criminals, but that was exactly what Goldman Sachs did in 2012 through a social impact bond which, broadly speaking, uses private capital to manage public projects and target persistent social ills.
Under this initiative, the investment bank put US$7.2 million (S$10 million) in a three-year programme aimed at reducing the re-incarceration rate among 16- to 18-year-olds at New York’s Rikers Island prison. Intervention focused on improving personal responsibility and decision-making. A drop in re-incarceration rate by anything more than 10 per cent will allow the group to turn a profit of up to US$1 million, and the city benefits – not just in terms of safety, but also saving on expenses – with better rehabilitation of ex-convicts.
But impact investments are not exclusive to the big boys of the financial industry. Social causes are now informing how the rich invest, as the advent of social entrepreneurism in contemporary economy gives a new face to philanthropy. Impact investing, a term coined by the Rockefeller Foundation in 2007, has revolutionised the mechanisms of charitable giving by empowering investors with the ability to create far wider social and environmental impact, while throwing in financial upside as a bonus.
However, impact investment calls for active management and this is where the sourcing, screening, execution and monitoring of suitable investment opportunities can be a black hole for many individual and family investors.
Such demands have led to the rise in importance of a new breed of charity connectors – private banks, specialised impact investing funds and family office consultants. Standing at the intersection between the demand and supply of capital, these wealth advisers address this latent market opportunity by offering impact investment as a strategic extension of their existing services.
One such player is UBS, which became the first private bank in 2012 to launch an impact investing fund in the region, and it counts a sizeable number of its South-east Asian clients among the fund’s participants. “We wanted to offer our clients access to a wide range of sustainable philanthropic engagement options across regions and sectors,” says Joseph Poon, head of UHNW, South East Asia. “We have witnessed increasing interest from our clients to invest in impact opportunities. Some clients approach this from a philanthropic angle and are looking for new ways to create a social impact, while others are conventional investors who are keen to explore investments which also contribute positively to society.”
LGT Venture Philanthropy (LGTVP), the impact investing arm of the Liechtenstein royal family-owned asset management firm, is another pioneer in the field, having established its fund as early as 2007. It applies a handson venture capital/private equity-style approach to impact investing, seeing through an entire investment life cycle from deal generation and portfolio management to exiting on behalf of its clients. LGTVP backs promising social enterprises with either seed or follow-on financing, and helps these companies achieve sustainable growth through management and operational value-add.
As for independent family office consultants, many partner non-profit organisations on the ground, and help match potential direct investment opportunities with client interest.
“Impact investing is gaining attention, due to its potential to bring transformative change to social and environmental problems,” says Jenny Santi, philanthropy adviser and author of The Giving Way to Happiness.
Impact investing might have started out about 10 years ago as something only for philanthropists, but the term has now entered the vocabulary of a large number of high net worth individuals, says Yash Mishra, head of private clients at multi-family office Taurus Wealth Advisors. She adds: “Impact investing is also often used as tool for inter-generational engagement within these families.”
It is not difficult to see why impact investments hold special appeal for the rich. Its very raison d’etre has been forged by the spirit of entrepreneurism, which runs ingrained in the values of families who have built their wealth in enterprise. Give the man a fish and you feed him for a day; teach the man to fish and you feed him for a lifetime.
Just what are they investing in? Having grown from the microfinance sector, the bulk of assets in the region today remains in debt investments related to micro and small medium enterprise financing. Nevertheless, advisers note that there are emerging hotspots that are also drawing investor interest.
Santi says: “A number of Asian families are combining traditional philanthropy with investments in for-profit businesses that can directly benefit the lower-income segments in Asia.
“These include investments in basic services and infrastructure that governments have not been effective at providing, such as socialised housing, clean water and sanitation, education and health care.”
One example is start-up Husk Power Systems which, over the last four years, has installed 84 small power plants that use discarded rice husks – a by-product of an Indian food staple – to generate light and electricity for 200,000 people across 300 villages, and consequently employing 350 people across the state of Bihar in India. Local businesses are now able to stay open after dark and children can study at night.
Still, for an asset class that demands risk-tolerant capital, impact investment is clearly not everyone’s cup of tea. Few investments have been able to yield market-type returns, and lock-up periods for such projects are often long. Why, then, do some investors continue to engage in impact investments?
“Returns on pure philanthropy are, by definition, 100 per cent negative,” writes Harvard researcher Maja Sostaric in a recent paper on impact investing, published by the Lien Centre for Social Innovation. “With impact investing, even if your return is below market rate, you would at least be able to reinvest a portion of your capital over time, which would make your capital more sustainable in the long run.”
In the case of Taurus’ clients, returns are indeed secondary to the impact that projects generate. “Returns aren’t the key driver for most impact investors, although we have seen returns as high as 12 per cent in one venture in India which we recently exited from. Asian impact investors are largely entrepreneurs and they prefer to drive job creation through innovation in a field where they have expertise,” explains Mishra.
According to a 2015 JP Morgan study, the value of the global impact investment market is estimated to be at US$60 billion, a figure that is projected to grow to as much as US$1 trillion by 2020. Asia’s share stands at US$7.2 billion currently, and while comparatively modest, an uptrend is expected, particularly as wealth transitions into the hands of millennials who are exhibiting a heightened awareness of impact issues, notes Mishra.
While interest is certainly growing, impact investment in Asia is still a nascent industry. A number of fundamental challenges are getting in the way of impact investing taking off in a more rapid fashion.
“It would be interesting to
eventually see a world
where we no longer distinguish
‘Impact Investing’ from ‘Investing’.”
– Jenny Santi, philanthropy adviser and author
There is a lack of information on available investment opportunities and investors have to commit for a relatively longer period of time, compared to conventional investments. There is also no standardised measurement of impact and reporting systems.
“Much of what we have is anecdotal success and, in order to encourage investors to dedicate larger sums of capital for impact, there needs to be clear evidence of impact investments’ social, environmental and financial performance,” says Santi.
Apart from conventional financial institutions, new intermediaries promoting the cause can potentially play a powerful role in transforming the impact investment industry in Asia. Singapore-based Impact Investment Exchange (IIX) is one such organisation. IIX offers various investment platforms designed to provide seed-stage social enterprises with mentorship and private capital from accredited impact investors. It also runs a first-of-its-kind impact investment exchange in Asia where the trading of impact securities can be performed. While awareness is still gathering critical mass, the establishment of such organisations point to a promising start.
And, as Santi muses: “It would be interesting to eventually see a world where we no longer need to distinguish ‘impact investing’ from ‘investing’.”
(header image credit: www.yhponline.com)