Impact/ESG

Impact & Outcomes: Looking Beyond Financial Returns

May 25, 2021
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Anyone familiar with the private markets will know that this is an asset class with plenty of jargon: J-curve mitigation. Illiquidity premium. Capital overhang. Investing for outcomes.

We worked that last one in there, but investors who are active in the impact space may be familiar with the term. Today, as investors increasingly turn their focus to opportunities that can provide ;‘returns’ beyond financial metrics alone, the concept of ‘outcomes’ has emerged. It is used to encompass both financial and non-financial results; that is, outcomes refer to the measurement of impact a given investment (or portfolio of investments) makes.

A growing number of investors are allocating capital to managers who are incorporating ESG considerations into their investment decision-making, as well as to those focused on impact investing. According to US SIF (The Forum for Sustainable and Responsible Investment), the amount of capital considering ESG factors in investment decisions has reached $16.6 trillion of managed U.S.-domiciled assets, an increase of 48% from just two years prior.1 Here’s another interesting statistic for you: During 2019 alone, $25 billion was committed to private market impact investments.2 And for good reason: In the ever-developing ESG landscape, we see a linkage between those GPs with a strong ESG framework and their ability to generate returns. But as notable as these numbers are, we continue to receive questions from some investors questioning the validity of the true impact and returns being generated by these GPs.

Defining Impact

To help demystify this bit of jargon, we’ll start by offering some clarity around the term ‘impact,’ and explain how we define it in our own investing activity. Impact relates to the identifiable and measurable effect that a company has on either the environment or society. Therefore, ‘investing for impact’ takes the foundational practice of considering ESG as a risk metric a step further — focusing on proactively investing to create or enhance a company’s influence on the planet or its people. These positive impacts are meant to address some of the most pressing challenges facing humanity and the planet today, including the climate crisis, hunger, poverty, and inequity in access to education and healthcare and employment.

Investing for Outcomes: Impact Returns

Investment into companies addressing these challenges can result in a broad spectrum of outcomes across both the environment and society, including: reduction in CO₂ emissions, reduction in waste and water usage, improved access to healthcare, housing, education, job creation, and financial empowerment. Each of these is measurable and meaningful, and identifying the metrics to measure these outcomes is a critically important element in the diligence of opportunities. Clearly, these outcomes demonstrate that the ability to align one’s investing activity with one’s unique objectives is more available than ever. Choices abound.

And yet, we can probably all agree that too much choice can be challenging for investors. Analyzing the opportunities requires a robust process that identifies individual metrics necessary to assess and evaluate the impact prior to investment, and that measures, tracks and reports on those metrics throughout the life of the investment. At Hamilton Lane, we look for companies with intrinsic alignment between the financial and impact mission, such that when the business does well, the impact is enhanced.

Investing for Outcomes: Financial Returns

Private markets investing is particularly well suited for impact investing, given its longer time horizon and control nature, combined with a value-creation orientation. Private markets too have historically been a return enhancer for portfolios, exceeding the public markets in 19 out of the last 20 years.

Buyout irr vs. pme

private credit irr vs. pme

REAL ESTATE IRR VS. PME

Infrastructure IRR VS. PME


Investors are starting to realize that an impact strategy does not need to require any concession around returns and, in fact, in some situations this approach can be a return enhancer. As mentioned, there are myriad approaches to impact investing, but we believe that it is possible to achieve both financial and impact returns while investing in the private markets.

In fact, in our experience, many investments in the impact space are backed by strong macro tailwinds and underpinned by innovative technologies that are driving change and increasing efficiencies in connection with meaningful impact. The intersection of growth, innovation and impact makes this a particularly interesting place to invest. Investing for outcomes requires distinct analytics and underwriting to vet and understand the business and financial case for each opportunity. Strong deal flow and careful diligence is essential to successful investing in all strategies in the private markets, and investing for outcomes is no different.

Conclusion

Today’s private markets investing admittedly comes with a lot of jargon (TVPI Multiple, anyone?). But if you can look past the quirky nomenclature, there are unique benefits that the asset class offers as well. We believe this to be true when it comes to the opportunity to invest for outcomes that combine financial return with positive impact. Achieving these outcomes not only requires access to robust deal flow, but also extensive analytics and underwriting to source, assess and invest in companies that are generating both compelling performance and meaningful, measurable impact. And maybe also a dictionary.

1 US SIF Foundation, November 2020.

2 GIIN Annual Impact Investor Survey, 2020.

Strategy Definitions

Corporate Finance/Buyout: Any PM fund that generally takes control position by buying a company.

Credit: This strategy focuses on providing debt capital.

Infrastructure: An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.

Real Estate: Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.

Index Definitions

Credit Suisse Leveraged Loan Index: The CS Leveraged Loan Index represents tradable, senior-secured, U.S. dollar-denominated non-investment grade loans.

FTSE/NAREIR Equity REIT Index: The FTSE/NAREIT All Equity REIT Index tracks the performance of U.S. equity REITs.

MSCI World Index: The MSCI World Index tracks large and mid-cap equity performance in developed market countries.

S&P Global Infrastructure Index: The S&P Global Infrastructure Index tracks the performance of 75 companies from around the world that represent the infrastructure industry.

Disclosures

This presentation has been prepared solely for informational purposes and contains confidential and proprietary information, the disclosure of which could be harmful to Hamilton Lane. Accordingly, the recipients of this presentation are requested to maintain the confidentiality of the information contained herein. This presentation may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane.

The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future.

All opinions, estimates and forecasts of future performance or other events contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable, but the accuracy of such information cannot be guaranteed.

This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affiliates. Any such offering will be made only at your request. We do not intend that any public offering will be made by us at any time with respect to any potential transaction discussed in this presentation. Any offering or potential transaction will be made pursuant to separate documentation negotiated between us, which will supersede entirely the information contained herein.

Certain of the performance results included herein do not reflect the deduction of any applicable advisory or management fees, since it is not possible to allocate such fees accurately in a vintage year presentation or in a composite measured at different points in time. A client’s rate of return will be reduced by any applicable advisory or management fees, carried interest and any expenses incurred. Hamilton Lane’s fees are described in Part 2 of our Form ADV, a copy of which is available upon request.

The following hypothetical example illustrates the effect of fees on earned returns for both separate accounts and fund-of-funds investment vehicles. The example is solely for illustration purposes and is not intended as a guarantee or prediction of the actual returns that would be earned by similar investment vehicles having comparable features. The example is as follows: The hypothetical separate account or fund-of-funds consisted of $100 million in commitments with a fee structure of 1.0% on committed capital during the first four years of the term of the investment and then declining by 10% per year thereafter for the 12-year life of the account. The commitments were made during the first three years in relatively equal increments and the assumption of returns was based on cash flow assumptions derived from a historical database of actual private equity cash flows. Hamilton Lane modeled the impact of fees on four different return streams over a 12-year time period. In these examples, the effect of the fees reduced returns by approximately 2%. This does not include performance fees, since the performance of the account would determine the effect such fees would have on returns. Expenses also vary based on the particular investment vehicle and, therefore, were not included in this hypothetical example. Both performance fees and expenses would further decrease the return.

Hamilton Lane (Germany) GmbH is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (Germany) GmbH is authorised and regulated by the Federal Financial Supervisory Authority (BaFin). In the European Economic Area this communication is directed solely at persons who would be classified as professional investors within the meaning of Directive 2011/61/EU (AIFMD). Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.

Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorised and regulated by the Financial Conduct Authority (FCA). In the United Kingdom this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.

Hamilton Lane Advisors, L.L.C. is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the financial services by operation of ASIC Class Order 03/1100: U.S. SEC regulated financial service providers. Hamilton Lane Advisors, L.L.C. is regulated by the SEC under U.S. laws, which differ from Australian laws.

Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specific accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.

The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.

The calculations contained in this document are made by Hamilton Lane based on information provided by the general partner (e.g. cash flows and valuations), and have not been prepared, reviewed or approved by the general partners.

As of May 25, 2021

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