By Fran Seegull, U.S. Impact Investing Alliance and Christina Leijonhufvud, Tideline
It’s a good problem to have: traffic jams are starting to occur in impact investing.
The growing demand and increasing capital for impact investment products and services means a growing network of consultants and advisors, broker-dealers, investment clubs, online platforms, and membership organizations. For example, nearly three dozen impact investing advisors answered the recent request for proposals from the Jesse Smith Noyes Foundation, according to Steven Godeke, the foundation’s vice-chair and an independent consultant.
The increasingly crowded field of both well-established and newly formed “intermediaries” is a sign of a growing market that is increasingly able to meet the needs of a range of institutional and individual investors. These intermediaries are the connective tissue that binds asset owners and investment managers. But while extensive discussion in impact investing has taken place regarding the respective challenges of asset owners and managers, the intermediary landscape has received comparatively less attention.
As a result, there is a need to bring greater clarity to the services that general and specialized impact intermediaries provide — from discovery through to portfolio construction and investment management — and to identify opportunities for reducing duplication, sharing best practices, and stimulating collaboration when appropriate.
Without additional clarity, many asset owners remain confused about the type of intermediary best suited to the task, or even what their specific needs are as they move though the impact investment process.
To be sure, there are good reasons for redundancy among intermediaries as every service provider seeks to respond to the evolving needs of clients and prospects.
But there are signs the market is not connecting supply of and demand for capital as efficiently as possible, leading to suboptimal investment processes and outcomes that threaten the still-maturing market of impact investing.
To create a forum for candid discussion and exploration of potential solutions, the U.S. Impact Investing Alliance and Heron Foundation recently convened a private roundtable of approximately 30 intermediaries and asset owners.
Think of the intermediary landscape as a “highway.” Intermediaries are vehicles for hire that carry passengers — the asset owners — along some part of their journey to deploy capital to impact investment opportunities that fit their values and preferences.
In an ideal world, each lane on the highway would be clearly marked for use by a particular vehicle type. Explicit rules of the road would make it safe to switch lanes and overtake other vehicles, for example. Certain vehicle types might only transport passengers for a certain leg of their trip, with passengers transferring to another vehicle for the next leg.
The intermediation vehicle or service required by an asset owner depends heavily on that asset owner’s objectives and where they are on their impact investment journey.
For the early market research and strategy development legs, a strategy consultant might be best positioned. When the time comes for specific investment or portfolio construction recommendations, an investment advisor or wealth manager is better suited to take the driver’s seat.
Similarly, an investor looking for a higher touch experience of deal sharing, due diligence and peer learning might benefit from an investment club or network as a complement to an investment advisor or wealth manager responsible for implementation across the investor’s broader portfolio.
The current state of the intermediation highway highlights a number of key challenges and risks:
1. The opacity of functions and services across categories. Intermediaries are not always playing to their core strengths as they compete to acquire clients in a growing, but still limited, market. The results are often duplication of functions, market confusion, and substandard services for asset owners. Picture our highway without lane markings or road signs, traffic weaving together in fits and starts as drivers struggle to understand the rules of the road.
2. Lack of clarity by asset owners about their objectives and requirements. At the outset of an impact investment journey, it is important to recognize the need for strategy setting and discovery processes — tasks which are even more demanding when impact goals are layered onto investment decisions.
Even when asset owners acknowledge the need for such services, the highly customized, inefficient nature of discovery can be difficult for even the most specialized intermediary to provide efficiently. Intermediary drivers on our highway are receiving unclear and inconsistent directions from their passengers, so that even when the lanes are clear, they may be compelled to make frequent and unexpected changes.
3. Both boutique and institutional intermediaries find it difficult to price their services to match the resources required to fulfill them. Pricing is especially difficult when such services are ancillary to their core business model. Hidden costs at a system level result. On the intermediation highway, large long-haul trucks are stuck in the passing lane and compacts are straining to tow heavy cargo.
A confusing, crowded, and uncoordinated intermediary landscape may be a necessary symptom of the market’s formative stage of development.
The next stage, said participants at the roundtable held at the Ford Foundation, requires greater transparency, clearer segmentation and coordination, and increased collaboration among a diverse group of intermediaries. They recommended:
- A regular forum for sharing insights and testing new ideas, which could also provide a venue for developing and defining best practices for service provision at each phase of the investment process; and
- A more unified language and taxonomy for articulating asset owner preferences and requirements, which would improve the matching process between asset owner and intermediary types.
Some roundtable participants also emphasized the importance of intermediaries’ willingness to abstain from providing services that extend beyond their core strengths, for the benefit of preserving their own business models, as well as helping clients better understand and navigate the market as a whole.
We are committed to building upon these important conversations and ideas. Tideline was a participant at the roundtable and is one of the small cars weaving in and out of traffic. The U.S. Impact Investing Alliance is a forum where passengers and drivers can meet to debate and develop the rules of the road.