In some ways, this is all new – yet in others, the song remains the same. Over a decade ago, following a presentation at the World Economic Forum in Davos that included a description of the vision and practices of what may now be defined as impact investing, an audience member rose to express how powerful he felt this new vision to be – and to point out that in many ways it was simply a return to the fundamental principles of the traditional, privately held family business managed not only for the benefit of the founding family but also for the community (if not the region) as a whole; the family's prosperity could not be separated from the place they called home.
Impact investing is old-school, fundamental investing and economic development with a twenty-first century sustainability wrap. It is what good business practice was, is, and will ever be. It is earth economics and family values and profit with purpose. In short, it is the visible tip of the iceberg within the larger global system of Collaborative Capitalism.
In the research on which our partnership is based, the three of us (re)discovered a set of truths that communities and societies have forgotten:
• The most effective strategies operate with awareness not simply of the corporate or capital context but with linkage to the “great around” represented by the public sector and the enabling environment it creates.
• The strongest form of capital is a “stack” of all capital coming from a variety of private and public investors – each tranche of which buys down risk, and positions enterprise for optimal performance, thus enabling opportunity to be captured for the benefit of shareholder and stakeholder alike.
• The best teams are diverse, with leaders who build from past experience a complex future that transcends silos and singular disciplines or doctrines.
• The organizations – whether for-profit or nonprofit or hybrid – that are built to best stand the test of time are those that do not seek to artificially separate corporate mission from financial discipline, but rather maintain mission as the touchstone on which financial sustainability is grounded.
As harbingers of a new way of doing business generally – or, more accurately, a revitalized understanding of back-to-basics truths – these axioms offer significant challenges to those who continue to maintain the illusion that the interests of capital and impact are antithetical. Business models geared only to financial performance, with no consideration of impact, will be decreasingly effective in generating consistent profits. This trend, in concert with the preferences of Millennials, who more than any generation seek to blend meaning with their work and money, mean that these models will quickly become bad business in shrinking markets.
Our Two-Year Study
We have reached the insights and conclusions in the following pages as the result of a two-year process of observing best business practices in Collaborative Capitalism through our examination of twelve outstanding impact investing funds that met or exceeded the expectations of their investors.
With a commitment to concurrently delivering attractive financial returns and intentional social outcomes, impact investors are at the cutting edge of Collaborative Capitalism, operating in markets often smaller, younger, and more idiosyncratic than mainstream investors have the stomach or capacity to tackle, and that demand cross-sector skills that many mainstream investors simply do not possess.
As a result, successful impact investing fund managers are extraordinarily creative, nimble, and resilient – all qualities we wanted to explore and learn from when we first culled an initial universe of 350 funds to 30 that were recommended by their investors.
We then decided on the final twelve funds, which were representative of the breadth of activity in impact investing, with track records of financial and social performance that were suitably robust and sharable. The twelve funds are listed here; their impact target areas are illustrated in Figure I.1. With the objective of understanding the key factors that had undergirded their success, we interviewed not only fund managers but also the investors in those funds, the recipients of investor capital, and the actors within their immediate peer group.
Twelve Top-Performing Impact Investing Funds
Figure I.1 Impact Targets of the Twelve Funds
Chapter 2 provides additional insight into the research process, which, in 2013, led to the largest-ever public release of performance data in impact investing, despite the fact that most impact investing funds operate in private markets and, with only accredited investors, are under no obligation to share information publicly. Our top priority was building trust with the funds, and holding fast to a detailed process of engagement that would ensure that financial performance was contextualized alongside the complete, detailed story of their creation, governance, strategy, deployment, and relationship with investors and investees over the entire life of the fund. The aggregate financial and social performance of the funds is presented in Figures I.2 and I.3.
Figure I.2 Fund Investors and Financial Performance of the Twelve Funds
Figure I.3 Aggregate Impact of the Twelve Funds
What we discovered was a sophisticated marketplace that is much less haphazard than many have thought, and a pathway of practice and expertise we invite you to explore in the following chapters.
Audience
Our focus is impact investing – and practitioners in the field are certainly a core audience that will benefit particularly from new insights into the structural and strategic characteristics associated with high-performing impact investing funds. However, this book also has broader application, just as impact investing sits at the apex of Collaborative Capitalism. (We will discuss this in more detail in chapter 1.)
Although there are ongoing discussions regarding the nature and practice of impact investing, the concept really is quite straightforward:
Impact investing is capital management in pursuit of appropriate levels of financial return with the simultaneous and intentional creation of measurable social and environmental impacts.
What's important to understand is that the lessons of impact investing are also the lessons of Collaborative Capitalism, a larger field of practice that encompasses everything from corporate social responsibility (CSR) to operational and supply chain sustainability, public private partnership, and socially responsible investment (all in an effort to mitigate risk).
Increasingly, financial institutions and corporations around the world are using Collaborative Capitalism as a tool to proactively generate clear, positive social outcomes in addition to profits and wealth. This is a profound and transformational shift in what economic activity and capital make possible (adding an entirely new measure of extrafinancial performance). From the capital markets perspective, impact investing has the potential to forever change the way we consume financial services.
Consider this one data point from the World Economic Forum: Although just 6 percent of US pension funds reported in 2013 that they had made an impact investment, fully 64 percent expected to in the future.2
Even if it takes these pension funds decades to follow through and just half pursue the opportunity, the ramifications are clear: impact investing is going mainstream, pushing those already engaged in “risk-mitigating” capitalism to think more clearly about outcomes, and those unfamiliar with Collaborative Capitalism to quickly get up to speed.
The Impact Investor speaks directly to numerous audiences touched by Collaborative Capitalism and