Beats | February 27, 2020

Prudential’s $1 billion portfolio of impact investments offers a blueprint for institutional investors

Dennis Price and David Bank
ImpactAlpha Editor

Dennis Price

ImpactAlpha Editor

David Bank

ImpactAlpha, Feb. 27 – Long before $1 billion became table stakes for impact investment funds, Lata Reddy went to the White House to announce Prudential Financial’s plan to build a $1 billion impact investment portfolio by 2020.

Today, back in Washington D.C., the Newark-based insurance company will announce it has surpassed its $1 billion goal at an event dubbed “Toward a New Capitalism” at the Aspen Institute.

“If you’re willing to put in the time and energy and effort to understand those markets, we do think from an investment perspective you can generate good returns, if not slightly better than if you were in more of the vanilla parts of the economy,” Prudential’s Ommeed Sathe told ImpactAlpha on a podcast last year.

>>Tune in. ImpactAlpha’s David Bank is moderating “Next Generation Finance” at the Aspen Institute, with Capital Impact Partners’ Ellis Carr, Morgan Stanley’s Audrey Choi, Social Finance’s Tracy Palandjian and MacArthur Foundation’s Debra Schwartz. Catch the live stream, beginning at 2pm ET.

Prudential’s billion-dollar pledge was market-making back in 2014. The company’s commitment made up the bulk of the pledges rounded up by the Obama White House to show support for an impact investing policy agenda.

Even more significantly, Prudential committed not foundation funds, but corporate balance-sheet assets, the same capital used to pay off insurance claims and other liabilities. The move sent a signal to other institutional investors that the universe of impact funds and products and vehicles and companies was ready for prime time, capable of not only impact but of risk-adjusted market-rates of returns as well. 

Lata Reddy: Prudential Financial’s investments in equity and inclusion – and Newark

Prudential has helped anchor many signature impact deals. In 2016, Prudential funded much of Leapfrog Investments’ $350 million Strategic African Investment Fund. Prudential also backed a $12.4 million “social impact bond” in Massachusetts to fund immigrant and refugee workforce development and Washington D.C.’s $25 million “environmental impact bond” to finance green infrastructure to reduce stormwater overflows.

Last year, Prudential made a $100 million commitment to Invest4All, an initiative to bridge capital gaps in underserved communities of color in Memphis, New Orleans and Atlanta. In downtown Newark, Prudential investee AeroFarms, which grows leafy greens indoors under LED lighting, trains and hires local residents.

Catalytic capital 

One of Prudential’s biggest contributions in the past five years may be its “80/20” blueprint for managing risks and returns in its impact investment portfolio. By investing across the full continuum of return expectations, Prudential has demonstrated it’s possible even for traditional institutional investors to intentionally drive inclusion and sustainability. 

The firm invests across asset classes, in the U.S. and abroad. It targets an array of outcome areas including financial inclusion, affordable housing preservation, workforce development and more.

The bulk of Prudential’s $1 billion impact portfolio is expected to generate the same kind of returns as the rest of the huge portfolio. A 20% carveout is able to take on a small amount of additional risk. Returns are expected to trail those of similar assets in the impact-managed portfolio.

“The great part of so much of the impact investing landscape is that these are complicated sectors, complicated problems, government overlays, different and unusual forms of payment streams that have to be understood,” Sathe says. “If you’re willing to put in the time and energy and effort to understand those markets, we do think from an investment perspective you can generate good returns, if not slightly better than if you were in more of the vanilla parts of the economy.”

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

In the Washington D.C. stormwater initiative with The Nature Conservancy’s NatureVest, Prudential used its ‘catalytic’ portfolio to seed D.C.’s cap-and-trade marketplace. Prudential couldn’t underwrite the unproven storm-water credits from its main impact-investing portfolio before they priced on the market. Once the market established pricing data, the firm better understood the opportunity.

“That’s something that can go in our main portfolio,” says Sathe. What began as a ‘catalytic’ pilot deal of a couple million dollars became $15 million deals in the main, market-rate portfolio. “Both portfolios work in symbiosis, and both are crucial.”

To be sure, $1 billion is at best a blip on the road “toward a new capitalism,” and a rounding error in Prudential’s total assets of more than $1.5 trillion. The big question for the financial giant now is can it turn a billion into $10 billion, or $100 billion or… $1 trillion.