We ring a bell and joke about taking a drink every time we can work the phrase “impact alpha” into a Returns on Investment podcast. We had to suspend the stunt to discuss a new report,“The Alpha in Impact.”
The report pulled back the curtain on 29 investments from 13 funds to demonstrate that impact be a driver of returns, not just a drag.
To produce the report, the consultancy Tideline collaborated with the Impact Capital Managers association, a network of mission-driven fund managers that are claiming the mantle of “market-rate” investing to distinguish themselves from philanthropic or quasi-commercial funds that may intentionally seek, or at least accept, below-market returns in pursuit of outsized impact. Leaders of the network include SJF Ventures’ Dave Kirkpatrick, Bridges Fund Management’s Brian Trelstad and DBL Partners’ Nancy Pfund.
The report sought to establish a more appealing identity for such fund managers. “‘Market-rate’ is not a very appealing brand,” David Bank said in the podcast roundtable discussion. “It’s saying, ‘We’re all average,’ and nobody wants to be average. In private equity, everybody wants to be in the ‘upper-quartile.'”
“Now they’re saying, there’s actually alpha, that hidden advantage. ‘There’s alpha in impact.'” (Indeed, Kirkpatrick told ImpactAlpha, “Impact is not a tradeoff, but an advantage.”)
Roundtable regular Imogen Rose-Smith, an investment fellow at the University of California, said the reframing was overdue. “It’s a more confident and more assertive marketplace,” she said. “It’s a shame it’s taken the impact community so long to get to this point.”
Bank pointed out there is a whole publication covering this very shift. “So, everyone is just now catching up to you?” said Rose-Smith. “You said that,” Bank replied.
The managers range from hybrid firms like Bain Capital and TPG Growth to impact managers like Bridges Fund Management and Impact America Fund. Among the ways impact adds financial value: stronger dealflow, lower cost of capital, reduced risk and favorable valuations. Impact, the managers say, delivers outperformance.
“This is about making impact safe for mainstream or what we call legacy investors,” Bank said. TPG Growth’s Rise Fund is raising a $3.5 billion fund, after mostly committing its first, $2 billion fund. KKR is raising a $1 billion fund. “T
The big boys of private equity are coming in and they’re not looking for sub- market returns. They’re looking for outperformance.”
Rose-Smith said the next stage of development would be an analysis of actual performance and results. “We need to talk numbers. Without that it’s all abstract.”
Bank said there was an even more profound question. “The next turn of the screw on this debate will be along the lines of … Shouldn’t be people be willing to give up something? Do you actually need to make these outsized returns? Or is there a different way to do investment altogether?”