ImpactAlpha, July 3 – Once ‘Next Gens’ who want to shift more of their family assets into impact investing master the basics of sourcing, diligence, and structuring deals, they may face a tougher challenge, “How do I convince my parents?”
In principle, family offices are ideally positioned to take advantage of the shift of assets towards impact investing underway. They can set their own investment targets in accordance with the best of their principles (and principals), and they benefit from more nimble decision-making systems than institutional investors.
Delivering on an impact-oriented strategy, however, runs up against a number of obstacles: a lack of clarity around impact investing products; specialized terminology and jargon that can be confounding for traditional advisors; a bewildering array of impact measurement frameworks; high transaction and due diligence costs; and difficulty assessing the risk profile of individual deals – just to name a few.
Wealthy families seek – and find – market-rate returns from ‘values-aligned’ investing
For advisors, close personal relationships with family members provide a natural advantage in empowering those they advise to create social impact, which at its core is a deeply personal and meaningful journey.
Although a number of platforms and networks have emerged over the last fifteen years to convene advisors and asset managers and make ‘impact finance’ generally more accessible, it is not yet the case that standardized language, return expectations or the holy grail of the ‘impact metric’ have been discovered.
In our respective roles as head of impact investing for an advisory to a family trust focused on base of the pyramid customers in India and co-founder of a SaaS investment platform (Audrey), and former head of a private European foundation focused on social entrepreneurship (Katherine), we have over three decades of experience in impact investing and market-based models to addressing social problems. We offer five suggestions for how family offices may create meaningful impact strategies tailored to an individual family’s needs.
1. Passion is the driving force. A desire to have “positive social impact” is the most commonly cited reason that high-net worth families engage in philanthropy and impact investing strategies. It is time well spent to unpack that desire.
Before formulating a practical investment strategy, a tangible (and often unifying) exercise for families is drafting a “statement of wishes” or constitution, which serves as a formal text enshrining the shared vision, desires, and modus operandi of all living family members.
Start by exploring the social and environmental issues family members feel most passionate about – perhaps using a comprehensive framework like the UN Sustainable Development Goals – to whittle down the range of all possible options to a manageable set of priority areas.
For example, education is the most common cause for high-net worth family charitable giving. Yet, a 2017 study by The Millennial Impact Project found that a majority of millennials care most about social justice issues including discrimination, employment, healthcare, and climate change.
2. Impact is about more than money. Once you’ve probed for passion and have a set of priority areas, determine how these map against other resources the family can bring to bear. After all, crafting a robust impact strategy is about much more than contributing financial capital. There are so many other types of capital high-net worth families possess in addition to money: material capital (physical infrastructure, distribution and retail channels, commercial buildings, etc.), human and intellectual capital (expertise in areas like human resources, technology, marketing, logistics, R&D), and social capital (networks of influence, introductions to other funders, access to partners and conveners).
A family whose primary business holdings are in the retail sector will have a different set of resources and relationships to leverage in service of solving a social problem than a family who made their wealth in, say, agriculture or real estate. Mobilising the engine of wealth creation to serve the family’s impact aspirations is a critical yet often under-utilised point of leverage.
3. Strive for lean operations – and collaboration. The enormous amount of duplication of effort generates an unconscionable level of waste – waste of time, money, and process re-invention. As Audrey recently lamented, impact investment officers are taking the same business class flights to travel long distances to the same hard-to-reach destinations, using up a lot of (highly compensated) staff time to do the same due diligence that others (they happen to know, if they ask) are doing around them. Do we really need to fly expensive consultants out to far-flung places to interrogate financial projections?
We strongly recommend that one identify and cultivate relationships with trusted investors and philanthropists in order to share deal sourcing costs – or better yet, co-invest together. We have been working on exactly this question for the better part of a decade and are heartened by the increasingly loud drumbeat of collaboration. We are also involved in the creation and curation of co-investment platforms (like Artha) that have emerged to support more systematic collaboration. The number of such impact platforms has increased almost exponentially and is well-documented in a study several of us undertook together for the Bertelsmann Foundation last year.
Prioritize accountability to the clients. Much of the talk about accountability concerns the entrepreneur’s accountability to the investors. But what about the investors’ accountability to the underserved populations the impact enterprise purports to serve? If it’s meaningful impact we’re after – whether that impact is measured by the number of women who earn a living wage, the reduction of preventable chronic illnesses, or improvements in educational outcomes – investors and entrepreneurs must be closely aligned on who we’re accountable to and how we measure results.
The development finance market is one of the only markets in the world where those who pay for a good or a service are not the ones to consume it. This is changing with inclusive last-mile service models private investors have been part of recognizing and supporting. The dynamics of supersession vis-à-vis direct feedback loops from target communities are still not fully corrected.
Many novice impact investors spend inordinate amounts of time sifting through scores of impact measurement frameworks and creating sophisticated (and burdensome) impact metrics that aren’t realistic or feasible in practical, operational terms for the people carrying out the work on the ground. Those who’ve been in the game for a while tend to dismiss all that noise and those fancy powerpoints in favour of a razor-sharp focus on the “delta” the enterprise is creating, measured by two or three simple, straightforward metrics at most.
Investors must pick measurable elements that are simple enough to embed into a term sheet, and thereafter into an actual legal agreement regarding what gets reported, by whom and when. Impact metrics are only as good as the ease with which entrepreneurs can track and report on them. Putting them on a blockchain will not make them more credible.
The relevance of those metrics should be validated by the clients of that social enterprise or impact venture directly: what do they think about the job training program they enrolled in or the solar-powered water pump they purchased? Too few impact investors even think about this, much less actively encourage it; yet, we’re pretty sure our preferences and satisfaction as consumers are studied meticulously when we buy the Unilever or Siemens products that shape our lives.
Measuring the impact of impact investments – by talking to customers themselves
5. Invest in leaders your trust, and build trust with your investees. Our most important recommendation is to cultivate relationships of trust and radical transparency with entrepreneurs, social change leaders and peers alike. Most social change leaders are conditioned to think small and hide problems lest investors get skittish. This stems from their daily realities of operating on a shoestring budget, barely taking a salary while they struggle to keep the lights on and meet payroll until they close their funding round. But social change on a scale that matters, and on a scale that matches the urgency and the magnitude of the problems we face, requires partners willing to stay in it for the long haul.
This may mean that a typical fund’s “2 and 20” remuneration structure simply does not work 100% for the heavy lifting of emerging market impact fund deployment. No one knows until they start doing it how much effort it takes to deploy early / growth stage capital in high impact ventures serving the underserved. This is not the stuff of typical private equity. Someone somewhere has to absorb the cost. Unfortunately, that tends to end up on the entrepreneur, one way or another.
Once trust is built based on empathy and humility, co-creating strategies for scale will emerge naturally. There is no metric or methodology in the world that can anticipate the complexities of operating realities on the ground, especially in challenging economies riddled with staggering gaps in infrastructure and lack of basic services for millions. The only way to weather the inevitable storms and setbacks is deep confidence that you’ve invested in competent, mission-driven leaders. It is impossible to develop that confidence and trust if your nose is buried in pre-determined milestones and outcomes on termsheets and legal agreements. Remember, you will only ever revert to those documents if things go badly awry.
Structured legal documents and discipline around projected outcomes are important, of course. But as investors and partners, we must build and assiduously cultivate our capacity for discovery, emergence, and humility. If we do not maintain genuine concern and care for the welfare of an impact enterprise, its management team and the clients it serves at the forefront, we’ve already diverged from the path of least resistance in the wrong direction.
Last year marked an important tipping point for impact investing, according to research by Campden Global and Fidelity. One-third of HNW families, and two-thirds of affluent millennials, are actively engaged in impact investing strategies looking to deliver more than just financial returns.
By 2021, High Net Worth Individuals (HNWI) will have almost $70 trillion at their disposal. By all estimates, the generational transfer of wealth is expected to accelerate this trend given the progressive value systems of so-called Next-Gens and their attraction to the value proposition of impact investing strategies.
Reconciling generational perspectives on the role and purpose of investment and navigating the family politics around it can be tricky territory. But when approached with care and tact, impact strategies can unite family members behind a common cause and catalyse profoundly fulfilling experiences that foster harmony and alignment across generations.
Audrey Selian is the director of the Artha Initiative at Rianta Capital. Katherine Milligan is the former head of the Schwab Foundation for Social Entrepreneurship.