As the private equity asset class continues to mature, investors increasingly are looking to identify new areas in which to invest. Against that backdrop, 2017 appears to be a pivotal year for impact investing. It’s a topic often discussed lately and is clearly becoming a driving area of interest for LPs.
What is "Impact Investing"?
In general, the term refers to "investments made with the intention of generating both financial return and social and/or environmental impact." One source credits the term as coined at a Rockefeller Foundation Conference in 2006, but the concept derives from other strategies that have been around for decades, including "Economically-Targeted Investing” (ETI) and "Mission-Related Investing” (MRI).
Interest in impact investing is growing rapidly. The Global Institutional Investor Network (GIIN) reports that over the past 3 years, impact investing has grown at an 18% CAGR, and constitutes more than $35 billion today.1
Why such rapid growth? Increasingly, investors are looking for ways to put money to work that align with their values and interests: Why not generate both a financial return and deploy capital in a way that meets other institutional goals? It sounds great. But if it's that easy, why hasn't even more of this happened already?
Questions like these are being discussed at conferences, meetings and in board rooms all over the world. In fact, Hamilton Lane’s Impact Investing team recently returned from a trip to London, during which we met with a large institutional client who is interested in putting significant amounts of capital into a long-term impact investing program. This client alone was discussing allocating billions of dollars in new impact investments over time.
I’ve also participated on a couple of panels recently focused on impact: at SuperReturn East in Boston and the Chief Investment Officer Summit in New York. I moderated the impact discussion at the CIO Summit and was joined by several LPs from around the country. The panel had a geographic impact focus, and was attended by roughly 250 CIOs and other C-suite investment decision makers from corporate, public, foundation and high net worth institutional investment groups.
In each discussion in London, Boston and New York, the questions covered much of the same territory: "Where is this demand coming from?"; "What qualifies as impact?"; "How do you balance the impact with the financial return?"; and "How is the impact measured?"
The Hamilton Lane Impact
Hamilton Lane has become a leading voice and a pioneer in the impact category within private markets through our global platform and our tenure investing across private markets. We've even built our own suite of customized, mission-driven impact products -- perhaps the most notable of which is our in-state investing platform. We have invested more than $1.4 billion over the past 15 years on behalf of multiple institutions to achieve financial and social goals in New York, Florida, Nevada and California.
The market for impact investing will likely morph into multiple sub-categories across asset classes, including public markets, credit and real estate. Specifically, housing has long been a subject of mission-critical investing programs supported with tax structures and credits to direct dollars. We have also seen forms of clean tech investing in the past. But, the impact approach this time appears broader and is taking a more sophisticated, metrics-based approach than in previous waves of ETI investing.
In studying the impact market opportunity, we have identified several target areas of investment where we believe we can achieve both the financial and impact performance objectives that meet our own high standards: "Health and Wellness," "Community Development," "Financial Empowerment" and "Energy and Environment." Hamilton Lane has made direct investments in each of these strategies that achieve measurable goals such as increasing access to healthcare, bringing infrastructure to underserved regions and supporting renewable energy growth. Impact metrics range from amount of CO2 emissions reduced, to health care savings, to quality job growth or increased access to education, to name few.
Investors at each of the three recent conferences asked increasingly complicated questions about impact investing. Debate abounded around tradeoffs between emerging market impact investing and developed market investing. One individual asked: "What's worth more, a new job in upstate New York or a new job in Africa?" Others asked about goals and orientation of the lead investor: "How important is the dedication of the investor toward achieving the impact?", "How do you measure or offset potentially negative effects with the positive impact objectives being achieved?" and "How do you differentiate between successful outputs and outcomes?"
The fact that Hamilton Lane has institutionalized the architecture and systems to manage these issues made discussing the topics much easier. Beyond our well-established investment processes, our data and reporting teams, Responsible Investment Committee and commitment to ESG throughout the organization will continue to be crucial resources as we consider our role in the world of impact investing.
While the discussions ranged from the practical to the professorial, it was clear that impact investing had taken hold in the minds of investors across these financial centers. Like so many burgeoning investing topics, the ability for impact investing to become a consistent component of institutional investors’ portfolios will depend on the objectives established, how well these programs are implemented and the ability to develop the appropriate capabilities to manage them.
1GIIN Impact Investing Trends Report, December 2016: https://thegiin.org/assets/GIIN_Impact%20InvestingTrends%20Report.pdf