Beyond Trade-offs | June 3, 2019

Call No. 9: Impact investors move “beyond trade-offs”

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ImpactAlpha, June 3 – The early days of impact investing were all about proving that you didn’t have to sacrifice financial returns to do good. By now, that ‘trade-offs’ debate has grown tired.

“There’s no one right way to be an impact investor,”  Omidyar Network’s Robynn Steffen said on ImpactAlpha’s Agents of Impact Call No. 9 last week. “What’s important is that, as a market, we can invest across the returns continuum.” Listen to a replay: 

Seasoned players are helping to populate a “master map” that informs what to expect in terms of risk, returns and impact along that continuum. They do that by knowing—and sharing—their own expectations.

More than 300 ImpactAlpha subscribers signed up for The Call, on which Steffen and ImpactAlpha’s David Bank spoke with three such investors about what it means to move “beyond tradeoffs.” Ommeed Sathe from Prudential Financial, Sandeep Farias from Elevar Equity and Liesel Pritzker Simmons from family office Blue Haven Initiative, elaborated on insights and examples shared in their podcast interviews in our Beyond Tradeoffs podcast series, produced in partnership with Omidyar Network.

For Prudential Financial, carving off 20% of its $1 billion impact portfolio for catalytic, high-impact investments is a way to test opportunities for mainstream potential. “If no one invests when things are more nascent, nothing moves into traditional markets,” Sathe said.

Beyond Trade-offs: How leading commercial and catalytic investors are managing for impact, risks and returns

Until mainstream financial markets change, concessionary capital will have to do a lot of that work, he argued. “On Wall Street, people are compensated by working on bigger things… commodifying things.” Risk factors deter them from investing in small, difficult or untested markets. Much of that perceived risk may not be real, Sathe added.

Market-rate catalyst

Debunking perceived risks has worked for Elevar Equity – without concessional capital. Elevar has raised four market-rate funds around an impact thesis that zeroes in on essential services for low-income, emerging-market customers. Markets like India and Latin America, with hundreds of millions of underserved customers can support distribution models that are built for scale, in which profit and impact impact can increase together.

For Elevar, investing early mitigates the risk of backing the wrong entrepreneur or business model. It’s a position few investors yet embrace. “At that stage we don’t face any competitive pressures,” Farias explained. Elevar often helps usher private equity capital into later-stage rounds, which both validates Elevar’s thesis and is catalytic in growing the market.

Elevar admits there are limits to what its flavor of impact capital can do. “[For] the poorest of the poor, philanthropic and concessionary capital is probably better suited,” Farias says.

Know thyself

Blue Haven Initiative, a $500 million family office, invests to help smooth the boundaries and fill the gaps of other investors’ more structured capital. Its a role that Pritzker Simmons says the more than 3,000 single and multi-family offices commanding more than $1.7 trillion in assets can, and should, fill.  

“I’m in a lucky position where I have flexible capital and don’t have a third-party that’s setting return expectations across the entire portfolio,” Pritzker Simmons said.

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Pritzker Simmons said Blue Haven is clear about what its “buckets of capital” are designed to do. She acknowledges it’s often difficult to know “when are things are a good concessionary investment or a bad market-rate investment.” 

As part of its commitment to building a 100% impact-aligned portfolio, Blue Haven Initiative has segmented different pools of capital that stretch across the risk-and-returns continuum. That includes a dedicated catalytic capital pool that targets early, unproven opportunities.

A key part of moving the impact investing sector beyond tradeoffs is getting investors to understand their own appetites for risk, returns and impact. “Everyone should know where they play, and what they’re trying to accomplish,” said Bank.

Beyond finance

Thinking beyond tradeoffs, and even beyond finance, could be the key to ensuring impact investors’ relevance and influence. The impact investing community has more resources at its disposal to influence change than capital alone. Family offices have significant social and political capital that they can and should leverage, Pritzker Simmons argued.

“When we see things that markets can’t fix, can we call our senators? Is this a policy issue?” she said. “How do we use other forms of influence in an impactful way as well? There are other forms of capital that family offices underutilize.”

One such policy issue, she says, is taxes. “I think families like mine should get taxed significantly more than we already are, and take some of the decision-making onus off of me and put it in the hands of elected officials who are democratically elected,” Liesel Pritzker said. “I think it’s hypocritical if families like mine didn’t support a wealth tax and a tax-system overhaul.”

Beyond Trade-offs is an ImpactAlpha podcast series, produced in partnership with Omidyar Network, in which impact investors look across the returns continuum at investment strategies to scale capital for impact.