How TPG’s Rise Fund underwrites impact to guide its global investments

The global impact investing market doubled to $228 billion in 2017 and now counts among its supporters both many of the world’s largest asset managers as well as asset owners.

Yet, this fast-developing industry struggles at times to answer a fundamental question: how do we know impact investing is creating real impact, and how can we better inform decision-makers to help guide them in pursuit of that same impact? 

Good intentions among fund managers and investees don’t make up for the sometimes confusing and wide variety of standards and frameworks for impact measurement. Such uncertainty opens the door to both selling the concept of impact investing without delivering on actual impact—so-called impact washing—but also that dollars invested towards impact might not be going towards effective solutions.

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Against this backdrop, the Rise Fund, a $2 billion impact-investing fund managed by TPG Growth, with The Bridgespan Group, a global social-impact advisory firm—has attempted to bring the rigor of financial performance measurement to the assessment of social and environmental impact.

After wide consultation with experts in the field, we have developed a methodology to estimate—before any money is committed—the economic value of the social or environmental good that that we believe is likely to result from each dollar invested. The methodology uses publicly available research to calibrate impact potential, which must cross a minimum threshold for approval, similar to the return on investment threshold built into financial due diligence.

With this methodology, The Rise Fund assess potential investments through a measure knows as the Impact Multiple of Money (IMM)™.  In a piece out today in the Harvard Business Review, we take a deep dive into how the IMM works, which we’ve laid out here in brief.

IMM puts impact underwriting on a similar field with financial underwriting by producing a single number to inform decision-making. Rise will invest in a company only if the IMM calculation suggests a minimum social return on investment of $2.50 for every $1 invested—an IMM expressed as 2.5X—a threshold the fund set as its own minimum goal. The methodology can be used to monetize outcomes ranging from lower greenhouse gas emissions, to higher educational attainment, to better health. Here are the six steps involved:

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Assess Relevance and Scale: This is the initial qualitative screen. Does the company have an intentionality directed at creating positive social or environmental impact, and can it be measured?  How many people will its product or service reach? Just as investors filter out deals that don’t show financial promise, IMM filters out companies with low impact promise.

Identify Evidence-Based Outcomes: Identify social or environmental outcome targets—linked to the UN’s Sustainable Development Goals—and determine whether existing research and data verify that the outcomes are achievable and measurable. Evidence is the bedrock of IMM and the antidote to impact washing; it anchors impact projections in best available research.

Estimate the Economic Value of Those Outcomes to Society: Utilize research that provides an evidence base for claims of impact. Then use economic research to put a dollar value on the projected social or environmental change.  

Adjust for Risks: IMM uses an “impact realization” formula that discounts the likelihood of achieving the projected social or environmental value. The formula takes a number of factors into account, including the rigor of the anchor research and the relevance of the research to the company or product.

Estimate Terminal Value: A concept used in the business world, terminal value in this case estimates the probability that the social or environmental value created will continue for five years after an investment terminates. IMM adjusts that residual value downward to account for expected diminished impact over the five-year post-investment period.  

Calculate the return on every dollar invested: Start with the total projected value created by the investment and right-size it to reflect the investor’s proportional ownership stake. For instance, if Rise invests $30 million to buy a 40 percent ownership stake in a company projected to generate $600 million in social value, it can take credit only for the proportion of that value reflected by its stake: $240 million. Rise divides $240 million by its $30 million investment and arrives at $8 in social value for every $1 it invested—an IMM of 8X.

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IMM is rigorous and deeply rooted in peer-reviewed research, but given the number of assumptions and choices involved, it does not claim to provide a definitive return-on-investment number. It should be viewed as a directional estimate of the potential magnitude of a company’s social or environmental impact, not a precise calculation. Nonetheless, we believe IMM provides valuable guidance regarding which investments will or will not have a significant social impact, allowing investors to have increased insight at the start of the process to better guide their decision-making. And it can be especially helpful for calibrating investments within a sector, permitting comparisons between deals.

At this early stage in IMM’s development, we expect to identify and make adjustments as we apply it to a variety of investments. It also has limitations. It is difficult to apply to an earlier stage investment where growth numbers skew very high, to investments in innovations that lack an impact research base, and to topics of equity and justice that are hard to monetize.

Limitations aside, we believe IMM is a timely and valuable tool that demonstrates the value of evidence-based impact investing, and can help better inform decision makers as they act in pursuit of positive impact. Through this, we believe we can help enable the kind of impact investment at scale that is necessary to truly address the UN’s Sustainable Development Goals. Time, and rigorous evaluation, will determine whether our optimism is justified.

Maya Chorengel is a senior partner at the Rise Fund and Michael Etzel is a partner at Bridgespan Group.

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