Greetings, ImpactAlpha readers!
We ring the bell (and joke about taking a drink) every time we can work the phrase “impact alpha” into one of our podcasts. With lower-case letters (and a space), we don’t mean our own growing media platform. Rather, “impact alpha” is the set of advantages that come from creating social and environmental value. The thesis: impact can be a driver, not a drag, on returns.
The bells are ringing nonstop (and we may get a little tipsy) with “The Alpha in Impact,” the new report from the consultancy Tideline, which uses “impact alpha” more than 60 times. The new report provides “a more general articulation and demonstration of the ways in which impact contributes to investment performance,” say SJF Ventures’ Dave Kirkpatrick and Bridges Fund Management’s Brian Trelstad. Many of the insights will be familiar to readers of ImpactAlpha (going all the way back to “Impact alphas stake their claim”) and of our column (called, of course, The Impact Alpha). Tideline has identified 10 specific drivers of impact alpha (see below) that enhance dealflow, create value and strengthen outcomes. Ring the bell.
– David Bank, editor
Featured: ImpactAlpha Original
The Impact Alpha Report: Private funds managers deliver outperformance by driving impact. Tired: Tradeoffs. Wired: Impact alpha. A growing network of private fund managers is seeking to prove out the thesis that social impact can deliver higher, not lower financial returns. The shorthand for the emerging approach: impact alpha. A new report, “The Alpha in Impact,” identifies drivers of such alpha, pulling back the curtain on 29 investments from 13 funds (see, “Ten drivers of impact alpha,” below). 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.
“Our analysis found many case studies of fund managers achieving strong returns by investing in firms that have a positive effect on society,” said Ben Thornley of the impact consultancy Tideline, which produced the report for Impact Capital Managers, a network of more than three-dozen venture capital and private equity, debt and hedge funds managing some $8 billion in assets. The more assertive framing could signal a new stage of development in impact investing. Some impact managers have identified their funds as “market-rate,” in distinction to quasi-philanthropic efforts. But “market-rate” connotes “average. Investors want alpha. “We’re solving some of the world’s biggest challenges,” University Venture’s Daniel Pianko said at the launch of the report in New York yesterday. “So we’re making more money. Period.”
Read, “Private funds managers deliver outperformance by driving impact,” by Dennis Price on, yes, ImpactAlpha.
Dealflow: Follow the Money
Ethical bank Good Money raises $30 million. Good Money has taken a page from cooperative banks and credit unions in launching a member-owned conscious bank. The company offers FDIC-insured checking and high-yield savings accounts. Account holders can get a stake in the bank when they sign up. The firm pledges to invest its profits in sustainable causes, like conservation and green energy. Good Money was founded by Gunnar Lovelace, the founder of organic e-commerce company Thrive Market. Investors have backed other retail financial services companies, like Aspiration, CNote, and Swell. Good Money’s Series A round was led by Galaxy Digital. Read on.
Accion Venture Lab exits Aye finance. The seed-stage investment initiative of Accion has sold its stake in the Indian fintech company. The deal comes six months after Aye snagged $21.5 million in Series C funding, led by CapitalG, Alphabet’s venture arm. Since 2014, Aye has loaned more than $120 million to 70,000 small businesses in India that are otherwise underserved by financial institutions. Accion’s Michael Schlein said Accion Ventures Labs sold its stake “knowing Aye is on a clear trajectory to grow and continue to help the underserved.” It is Accion Venture Labs’ third exit. Dive in.
Eco.business Fund scores $60 million in debt for Latin America conservation. The Frankfurt-based fund invests in sustainable agriculture, fishery, forestry and tourism initiatives in Latin America and the Caribbean. The fund, launched in 2014 by German development bank KfW Conservation International and Finance in Motion, has a portfolio of $230 million. IDB Invest, part of the Inter-American Development Bank, is backing the fund with $60 million in debt. Here’s more.
Signals: Ahead of the Curve
Ten drivers of impact alpha. “Impact is not a tradeoff, but an advantage,” says Dave Kirkpatrick of SJF Ventures. The drivers of impact alpha identified in Tideline’s “The Alpha in Impact” report can help investors access opportunities, create value and strengthen outcomes, providing the “roadmap for how we do this better,” Kirkpatrick told ImpactAlpha.
1. New networks. Impact alpha investors go beyond the Silicon Valley herd to source investments through other mission-aligned investors, universities, foundations and non-governmental organizations. Going beyond the usual suspects provides a more differentiated set of mission-aligned opportunities.
2. Deep market expertise. Tuning into overlooked and untapped markets allows impact alpha investors to see value and execute deals where others don’t. Less competitive deals mean more economic upside for managers.
3. Eye-to-eye with founders. Mission-driven founders and owners want impact alpha investors. A laser focus on purpose can lead to constructive negotiations, invitations to invest in later rounds and favorable valuations.
4. Impact trends are business trends. Impact alpha investors understand values-driven consumers and meeting other human needs. Impact alpha managers can help entrepreneurs hone their value-propositions and design solutions that meet real needs to drive growth in revenues.
5. Impact is authentic. Which makes it good branding. Impact alpha investors can help investees tell their impact stories, driving both new revenues and customer retention. Differentiation can mean pricing power for purpose-driven brands.
6. Impact is a talent magnet. Purpose is sticky. Impact alpha investment firms attract and retain top talent, and invest in companies that do the same. That lowers the cost of recruitment and turnover.
7. All capital on deck. Impact alpha investors and their portfolio companies align with philanthropic and public funders that can deploy grants, low-interest loans, guarantees, and other alternative forms of financing. Such funding can lower the cost capital and broaden investment sources.
8. Accounting is destiny. Good impact measurement practice unlocks business value (see, “Measure Better”). Impact alpha investors drive discipline and efficiency around operational metrics that deliver long-term economic returns.
9. License to operate. Impact goals, reporting and transparency help win the hearts and minds of policymakers, advocates and other beneficiaries in sometimes tough operating environments. Favorable policies can bolster the bottom lines of mission-driven companies.
10. Impact beta. Impact alpha investors generate data and insights that expose hidden or long-term environmental, social and reputational risks. Such visibility can help optimize supply chains and operations and avert product- and worker-safety problems.
Read, use and share, “Ten drivers of impact alpha.”
Agents of Impact: Follow the Talent
Carbon Tracker’s Mark Lewis joins BNP Paribas Asset Management as head of climate change investment research… Principles for Responsible Investment is looking for a U.S. network manager… Elemental Excelerator is recruiting a portfolio manager for energy and mobility… Root Capital is hiring an impact analyst.
— December 12, 2018.