ImpactAlpha, Feb. 25 – In impact investing, smaller and newer may mean bigger and better returns.
Smaller impact funds and first-time fund managers face obstacles raising capital from investors who insist on seeing proven track records and writing big checks (but generally not more than 20% of the total fund).
Such rule-bound investors may be missing an opportunity: Emerging managers have fresh ideas, innovative theses and real-life experiences that can help them spot winning solutions for big challenges – at attractive valuations.
ImpactAssets, the San Francisco-based financial services firm, surfaced more than a dozen such emerging impact managers as part of the latest release of its ImpactAssets 50 list of private capital impact investment firms.
Emerging managers, says Jed Emerson, who chaired the IA50 committee, “have the hunger, creativity and a willingness to explore alternatives that more seasoned fund managers may not.”
There’s data to back such qualitative observations. An overlooked finding of Introducing the Impact Investing Benchmark, a 2015 study from Cambridge Associates and the Global Impact Investing Network, found that smaller and first-time funds outperform their conventional fund peers, as well as impact investment funds overall.
First-time funds are “where the biggest innovation is happening” in the industry, said gender lens expert Suzanne Biegel on ImpactAlpha’s Agents of Impact Call No. 12 last month. Many first-time managers may have other relevant experience, such as managing accelerators or making nonprofit investments, that is generally not credited by institutional investors.
“As a community we really need to dispel that perception,” says Biegel. “They’ve got the background, they’re just doing it in a new fund or vehicle.” The Collaborative for Frontier Finance, which is helping emerging market fund managers overcome obstacles to capital-raising, gathered 30 first-time and early-stage capital providers in Nairobi last month.
Among the “emerging” managers highlighted by ImpactAssets: CNote Group, Cat Berman’s suite of fixed-income products for steering cash into community investments; Illumen Capital, the impact fund of funds from Daryn Dodson, who is helping fund managers outperform by removing bias; and Indigenous-led Raven Indigenous Capital Partners, which provides rare early-stage equity capital to Indigenous enterprises across Canada.
Other fund managers on the ImpactAssets “emerging impact managers” list include Kiva Capital Management, the asset manager of Kiva.org that is raising a series of thematic funds, starting with solutions for refugees and migration; Fledge, a family of seed funds and impact business accelerators, and Tiger Grass Capital, whose Drawdown Fund backs businesses addressing major drivers of climate change.
The broader ImpactAssets 50 – actually 59 this year – includes 11 impact funds that have crossed $1 billion in assets under management. These include Turner Impact Capital, Lyme Timber Company, North Sky Capital, Local Initiatives Support Corporation and LeapFrog Investments.
Those more established managers – with a minimum $25 million in assets under management or more than three years in operation – manage nearly $40 billion in total. Repeat managers on the list include Accion, Calvert Impact Capital and Capital Impact Partners. Newcomers this year include Spain’s GAWA Capital, Geneva-based INOKS Capital and Quona Capital in Washington DC.
Such billion-dollar babies may not be where the real action lies. “The emerging managers we selected have developed strategies in new sectors and geographies, are often led by women and people of color, and add new depth to the impact investment universe,” says consultant Julia W. Sze, also a member of the IA50 committee.
Some investors steer clear of emerging and first-time capital providers out of concerns about inexperience and risk. Others, including some of the largest institutional investors, avoid first-timers as a matter of policy.
That can deprive them of exposure to energetic managers and attractive strategies. Cambridge Associates’ 2015 benchmarking effort looked at the returns of 51 private-equity impact funds. The thirteen first-time funds with under $100 million in assets returned a 12.9% pooled internal rate of return to investors versus 6.9% for the full set of impact funds in the study, and 8.1% for the comparative group of non-impact funds.
The three dozen impact investment funds that raised under $100 million returned a net IRR of 9.5%; those that raised under $50 million returned 8.2%, and outperformed similar sized funds in the comparative universe in most vintage years.
Some investors have spotted the opportunity for outperformance. Capria Network, for example, has seeded a network 21 first and second-time fund managers in emerging markets with a total of more than $400 million in assets under management.
Firms on ImpactAssets’ “emerging” list have less than $25 million in assets under management or have been operating for fewer than three years. The 16 firms are directing nearly $400 million into impact investments. ImpactAssets touts the list as “newer fund managers that demonstrate potential to create meaningful impact.”