Brian: So what does the impact investing market look like right now?
Here’s how you can think of it:
It’s a bit like the rise of tech start-ups and venture capital decades ago, and we’re seeing more and more “investment-ready” opportunities – so these groups actually need ex-bankers and other financial experts.
But the risk is still very high with these investments. It’s hard enough to create any type of financially sustainable business, let alone one that is also doing social good.
So you also see people involved with “capacity building,” which is sort of like what incubators do in the tech space – the idea is to get these earlier-stage ventures up to speed and advance to the point where professionals can invest in them.
Geographically, most impact investing is still based in the US since there are close to $1 trillion USD worth of foundation assets there (most of which is currently donated to charities and NGOs, instead of being invested in social enterprises).
Brian: So based on all that, I’m assuming that investors are willing to accept lower returns in exchange for doing social good?
Sort of. On some of the projects I’ve seen, a 1-2 percent yield is an acceptable floor for investors.
But expectation management is a huge issue. We need to explain that to potential investors who walk in expecting 20-30 percent returns, which just won’t happen in this sector.
So part of our role is to manage those expectations and get them into more of a “Well, as long as I don’t lose money” mindset.
Brian: Yeah, that’s a tough one for traditional LPs. Anything else you want to add or any recommendations for more reading on the sector?
The general consensus is that the industry is growing very quickly, even though it currently attracts less than $10 billion per year.
It’s very policy-driven, and you see a lot of initiatives in the UK such as Big Society Capital – an investment fund to grow financial intermediaries for the social sector – that have started due to government policy. Big funds such as the Social Innovation Fund launched by the US government also attract a lot of attention.
If you want to learn more, check out the JPMorgan report “Impact Investing 101,” where they predict that it will emerge as a real asset class. Some large banks are even hiring people with NGO backgrounds to work in this area.
Personally, I’m still a bit skeptical about the forecast growth in capital because the returns are unproven.
It’s also very dependent on government policy/funding and philanthropic money, which aren’t the most reliable sources in the current environment.
Brian: Ok, thanks for sharing all of that – now to get back into how you won the job after you had done all this research.
It all came down to networking. There were very few formal interviews, but a lot of quick coffee meetings asking about my background, how we might work together, and what they needed help with.
They never asked finance questions or anything like that – they assumed that since I had worked at a well-known bank, I knew all of that fairly well.
Part of it is also demonstrating that you’re actually interested in the field and are not just jumping in because it’s the trendy thing to do. I had spent a few months volunteering in India and China and had done other advocacy work in the UK before, so I fit what they were looking for.
Another big factor is proving that you can work in a small, entrepreneurial environment – a lot of people at big companies reach out to these groups, but they still carry the mindset of working in a huge organization and think you need to push all decisions through a committee before acting.
But that is not helpful in these places – it’s such a new field that you need to move quickly and figure out things on your own without much direction.
Brian: So you just continued with all these networking meetings and won the offer without a formal interview process?
Pretty much – I did go into the office to meet with everyone toward the end, but it stayed very “fit”-focused.
They were mostly probing to see how well I meshed with the team and how committed I was.
Brian: And is everyone else there also from the world of finance? Or where do they come from?
It’s a wide range. Many people who founded social enterprises or other intermediaries are here, but you also see quite a few MBAs from top schools and former bankers and lawyers joining as well.
The culture here is quite relaxed – there are experienced people, some with 2-3 years of experience elsewhere, and some who have “retired” after 20+ years working at corporations.
Since there’s such a range of backgrounds, it feels much different from the typical bank or investment firm where everyone is pushing ahead 24/7 and never takes their foot off the gas pedal.
Brian: OK, great. So you haven’t been working there for too long, but what are your early impressions of the job so far?
So far it has been great.
We do a bit of everything here – direct investing, fundraising, grants to charities, and even “capacity building” for non-profits and social enterprises.
So it’s the equivalent of a traditional finance firm that does everything from PE and VC to funds of funds and even operational consulting, but all focused on social enterprises.
Surprisingly, the skill set is quite similar to what you need in banking or PE roles:
These days, we’re also seeing a lot of people inside big companies who come to us and ask about how to incorporate a social mission into their businesses.
Brian: You mentioned how your firm does a bit of everything – if that’s the case, how do you report to LPs? I’m assuming there are separate funds for charity/grant work vs. profit-seeking investments?
Yes, we’re split into different divisions and a separate team focuses on the charity and advocacy work.
But the actual division of labor is less clear than you’d think because the two groups find ways to help each other out – for example, a social entrepreneur might start out by seeking a grant from us, but then when the business matures, he might seek a traditional investment from the other team here.
Brian: And what do you look at when you analyze these investments? Are there different benchmarks for social investments?
Yes, there are some differences. For an affordable housing or education project, for example, we might look at:
The Global Impact Investing Network (GIIN) also provides benchmarks for different projects and they may “certify” certain companies depending on their results.
So far, I haven’t done much sourcing on my own – the senior people here are fairly high-profile and are able to bring in a lot of opportunities.
Brian: Great. What has surprised you so far?
A while back, I worked on some analysis and created a presentation on several different social innovation funds to help our team prepare for a meeting with the government.
It was a very in-depth presentation backed with a lot of numbers, but then when I finished they asked me a simple question: “So what’s your recommendation? What should we do and how should we structure this new fund we’re considering?”
Working in banking makes you very process-oriented rather than decision-oriented, so you run into the same challenges bankers face when moving into traditional buy-side roles.
Brian: The more things change…And I realize you started recently, but I have to ask this one anyway: what are your future plans?
I’ll stay for the foreseeable future – I’m still undecided about my long-term plans, but I’ve had a great time here so far and want to learn as much as I can.
Since this is such a new asset class, it’s hard to say exactly what I’ll do in the future – if it takes off and keeps growing, I might stay in the field for years; if it doesn’t catch on as quickly, I might consider other options, including going to a more traditional non-profit or NGO.
Brian: Great. Thanks for your time!
Brian DeChesare is the founder of Mergers & Inquisitions.
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