Impact Investing | February 27, 2024

Impact value-creation playbooks provide X’s and O’s for generating alpha 

Ben Thornley and Alok Patel

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Guest Author

Ben Thornley

Guest Author

Alok Patel

Limited partners are becoming more adept at asking their impact-oriented managers a key question: Does it matter to financial performance if an impact-aligned company is owned by an impact investor rather than a traditional investor?

At the same time, ESG strategies face growing pressure to substantiate their contribution to improved risk-adjusted financial returns. 

And with sustainable investing approaches coming under greater scrutiny amidst economic and political uncertainty, “materiality” is increasingly taking center stage. 

In our collaborative research report, New Frontiers in Value Creation, Tideline and Impact Capital Managers seek to deepen our understanding of the unique actions that private market impact investors take during the period in which they hold an investment to enhance meaningful impact and financial returns.

We are more convinced than ever that impact investors are better owners of impact-aligned companies than traditional investors might be. Through extensive research and market engagement, anchored in 13 in-depth case studies of market-rate-seeking, private-markets-focused impact investors, the report shows that impact value creation playbooks are a key tool for unlocking the “alpha in impact.”

Operationalizing strategies

Value-creation playbooks are not unique to the impact world. However, impact investors do bring differentiated capabilities that allow them to identify and capitalize on opportunities that may be obscured to investors without an impact lens. Impact value creation playbooks describe how investors can actively engage during the holding period to help a business succeed.

We identified seven key impact value-creation levers, from impact positioning to impact risk management, that are commonly used by leading impact managers (see figure 1). 

Many of these levers overlap with traditional value-creation tactics. Our contention is less that impact investors have invented new ways to create value, but rather to demonstrate that impact investors bring unique capabilities that, at least for impact-aligned investments, can provide them with a competitive advantage against their traditional, non-impact oriented peers. 

A diagram of a company's strategy

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Figure 1: Overview of seven distinct levers of action frequently used by impact capital managers in their value creation playbooks

LeapFrog Investments: Leveraging stakeholder focus and thematic expertise

Consider LeapFrog Investments, which focuses on expanding access to financial services and healthcare for underserved populations in Asia and Africa. Like many traditional investors, LeapFrog has dedicated value-creation specialists, but they are differentiated by their focus on underserved stakeholders and thematic impact expertise. 

In 2022, LeapFrog invested in Redcliffe Labs, a healthcare diagnostic service provider operating in India. With its deep understanding of emerging consumers’ needs, LeapFrog’s helped Redcliffe elevate its product through its customer experience expertise and social listening analytics. Updates to the web user experience and a new online app led to stronger customer retention and increased call center conversions, resulting in successful sales. Revenue growth among repeat users increased from 9% to 45% in just over a year and customer acquisition costs dropped from $12.50 at the time of investment to $3.00 in September 2023.

This example illustrates LeapFrog’s commitment to stakeholder engagement, as well as its expertise in serving targeted impact markets. These unique capabilities enabled LeapFrog to shape product and service development more effectively than other investors would likely have been able to. 

Two Sigma Impact: Data and disciplined execution

Two Sigma Impact specializes in workforce impact, strategically investing in businesses where it believes workforce engagement can be an outsized driver of financial performance. It aims to drive change in the broader market by demonstrating the relationship between job quality and positive business outcomes. Its 2021 investment in Circle of Care, a Texas-based pediatric therapy provider, exemplifies Two Sigma Impact’s thesis. 

Drawing on its workforce development and healthcare expertise, Two Sigma Impact supported Circle of Care in formulating solutions to attract, retain, and upskill high-quality therapists to address the lack of qualified pediatric behavioral health professionals. It helped establish the company’s proprietary “Flight Path” training program to expand the pipeline of therapists by training entry-level behavior technicians to become board certified behavior analysts. The resulting gains in Circle of Care’s workforce engagement addressed a key growth bottleneck to expand the company’s impact and revenue.

Two Sigma Impact’s success in this and other investments is built on hard-earned human capital expertise, informed by rigorous data analysis and direct stakeholder engagement. The firm’s “impact value creation playbook” is centered around its proprietary Good Job Score Assessment Tool. This framework operationalizes Two Sigma Impact’s approach to efficiently develop and execute its value creation strategy. 

What it takes

Effective “impact value creation playbooks” go beyond articulating a strategy; they integrate value creation throughout the investment process and include concrete tools to facilitate efficient implementation.

The importance of disciplined execution was a recurring theme in our research. Managers must recognize that businesses have limited bandwidth, which means that minimizing friction through streamlined processes and user-friendly tools is paramount.

While LeapFrog, Two Sigma Impact and our other case study subjects demonstrate that leading impact managers do provide differentiated value creation potential, it is important to note that such capabilities require investment and experimentation to develop. The most effective investors we studied embodied a “learning culture” that included regular review of their strategy, practice, and performance, as well as continual refinement of their value creation playbooks. Critically, LPs can play an enabling role by providing managers the time and resources needed to develop effective impact value creation approaches. 

The opportunity in impact

Our research identified and coined a number of additional concepts and terms. For example, the “Financial Materiality of Impact” describes the relationship between impact and financial performance drivers. Impact value-creation “sources” capture the distinctive skills, resources, and information that impact investors bring to the table to fuel impact value creation, namely their high degree of intentionality, understanding of stakeholders, and impact expertise, data, and networks.

We hope the research provides useful guidance – but more importantly, we envision a future in which growing evidence of the alpha in impact helps elevate the unique capabilities of impact investors as a model for all investors.

Ben Thornley is a managing partner at Tideline with responsibility for leading the firm’s client-facing strategic and impact management advisory practice.

Alok Patel is an associate at Tideline focused on project research and client engagement support.