The Brief’s Big 8: The beyond-tradeoffs era, private-equity watch, impact integrity, acquiring impact customers, Agent of Impact Kelly McCarthy



TGIF, Agents of Impact!

Flipping the script. Trade-offs are so last year. Halfway through our “Beyond Trade-offs” series of podcasts, it’s clear we’re already in a new era. Rather than debating, investors are integrating impact into their particular portfolios of risks and returns. Prudential’s Ommeed Sathe can quietly state that returns from the insurance giant’s impact portfolio match and sometimes exceed Prudential’s portfolio as a whole (see No. 1, below). Lok Capital’s Vishal Mehta makes a compelling case for investments in “public goods” that lift whole markets (No. 2). Coming next week in the series, produced in collaboration with Omidyar Network: the Ford Foundation’s Roy Swan and Christine Looney and Elevar Equity’s Sandeep Farias.

So what lies beyond trade-offs? Perhaps it’s “utility,” in the economic sense of the useful-ness of a thing to a particular buyer or investor. Ares Management’s new “climate infrastructure” fund aims to meet investor’s needs for greenhouse-gas reductions and more efficient natural-resource use (No. 3). TPG Growth’s Evercare Health Fund (formerly Abraaj’s Growth Markets Health Fund) has pledged to deliver health improvements for underserved populations in Africa and Asia. A raft of sustainable banks and brokerages are letting retail customers align their finances with their values (No. 8). New tools are helping investors know whether they really are getting the impact they are aiming for (No. 4). Investors who want risk reduction, growth potential, or even a better world, are finding utility in strategies for driving impact. That’s not a trade-off. It’s the new face of finance.

Join me in conversation with guests in the Beyond Trade-offs podcast series, on Agents of Impact Call No. 9, Thursday, May 30th, at 10:00 am PT / 1:00 pm ET / 6:00 pm London. RSVP today.

–David Bank, editor

Featured: The Brief’s Big 8

1. Prudential Financial leans on the 80/20 rule to manage risks, returns and impact (podcast)… “Having this resource to do things that are catalytic, that can change the shape of an industry or change entrenched patterns, is really, really important,” Prudential Financial’s Ommeed Sathe, says in Episode Three of our “Beyond Tradeoffs” podcast series. Omidyar Network’s Robynn Steffen boiled down the interview in a tweetstorm, with timecodes:

  • “Can impact investing deliver strong financial returns? The $1 billion impact investing portfolio sits on Prudential’s balance sheet (8:45); 80% seeks risk-adjusted, market-rate returns. Track record to date: hitting that threshold, and at times exceeding it (12:30)…
  • “But, if an investment offers above-market returns, is your capital truly contributing to impact that would not happen but for Prudential? (15:00) It’s all about our “impact value-add” strategy, Sathe says…
  • “If you can generate real impact alongside commercial returns, why sacrifice that win-win in 20% of your impact investing portfolio? “There are really important, vital opportunities that are absolutely not market-rate,” says Prudential’s Sathe (18:53). #BeyondTradeoffs.”
  • Listen in.

2. …While Lok Capital is blending capital for transformative impact (podcast). “It’s not simple binary outcomes that you can expect,” says Lok Capital’s Vishal Mehta. “You have to split the risk, return and impact in many thousands of ways.” For Mehta, what lies beyond tradeoffs is more shades of gray, more nuance, more complexity. The investability of microfinance, health care and education for low-income customers is the result of firms like Lok that saw opportunities in unproven markets, unprepared enterprises and unappreciated customers. In Beyond Tradeoff’s Episode Four, Mehta explains how Lok blends commercial and catalytic capital to open new sectors. “The market looking for market-rate returns won’t allocate enough capital on these spaces for them to grow by themselves,” Mehta says. Embrace the complexity.

3. Private equity watch. A billion is the new baseline. ImpactAlpha’s “Institutional Shift” podcast in January predicted “major asset managers from Ares Management to Blackstone to launch billion-dollar ‘sustainable infrastructure’ funds.” Last week, Blackstone (with $512 billion in assets under management) tipped its strategy on impact infrastructure, real estate and private-equity. This week came word that Los Angeles-based Ares (with $137 billion in AUM) has launched Climate Infrastructure Partners, aimed at cutting greenhouse-gas emissions and making better use of natural resources. Who’s next?

  • Surviving scandal. Two storylines converged with TPG Growth’s acquisition of Abraaj’s $1 billion health fund. Now called the Evercare Health Fund, the fund will use the “impact multiple of money” methodology developed by TPG Growth’s Rise Fund. Does the fund pass the “charitable purpose” test for the Gates Foundation’s $100 million “program-related investment”? What impact multiple?

4. Can IRIS+ set a baseline for impact performance? A new tool may burst the bubble of impact investors who believe they’re getting the impact performance they expected. IRIS+, from the Global Impact Investing Network, promises to boost the quality and comparability of impact data. Unlike financial performance, investors know very little about the true impact of impact investments across portfolios and across the industry. By guiding investors to specific metrics that can move the dial on a particular issue, IRIS+ will push investors to use common metrics. A clearer picture of impact performance should emerge. What to know about IRIS+.

5. Agent of Impact: Kelly McCarthy, Global Impact Investing Network. Back when evaluating impact was still an afterthought, Kelly McCarthy, a director at the GIIN, was recruiting agents of impact measurement inside the world’s asset owners and managers. As capital markets come to value social and environmental impact, they have a measurement and management infrastructure built by McCarthy and other underappreciated pioneers. McCarthy led efforts to develop IRIS+ (see No. 4, above), “perhaps the most important public good in impact investing,” according to Tideline’s Ben Thornley. After nearly a decade of stockpiling metrics and best practices and seeking consensus and input from hundreds of experts and investors, McCarthy has the chops to say, “These are the five or 10 things you should be looking at if you want to drive results.” Follow ImpactAlpha on Instagram.

  • Follow the talent with ImpactAlpha’s weekly report on career moves, job openings, events and opportunities.

6. New business models for basic services are challenging old assumptions in emerging markets. “Business model innovation, more than strictly inventive technology, may hold the key to delivering real value and impact in emerging economies,” FINCA Ventures’ Ami Dalal writes in a guest post on ImpactAlpha. Kenya-based Sanivation, for example, partners with local governments to convert human waste into alternative fuel, turning waste from a cost center into a revenue generator. Business-model innovators need new types of capital, says Dalal, giving impact investors the opportunity “to fundamentally reframe how, and to whom, capital is delivered.” Business model disruption.

7. Deals of the week. Stay on top of the dealflow all week long on ImpactAlpha.com. A few that stood out:

8. Breakin’ up (with a financial advisor) is harder to do than we thought. Millennials and women were going to jump ship from their family’s financial advisors, we were told. Impact robo-advisor OpenInvest is learning otherwise. After trying to acquire retail customers, the company has pivoted to providing tools to their existing financial advisors, as Ethic and others already do. Most people are going to stick with their existing financial-services providers, OpenInvest’s Joshua Levin told ImpactAlpha. “So you have to allow people to overlay their personal values on their existing portfolios.” The increasingly crowded field of sustainable investment providers for retail customers may be due for a shakeout. “There’s so much noise in the market,” Levin says. “To go out and acquire people head-to-head costs more money than you’ll make.” Standing out.

May 17, 2019.

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