Features | October 5, 2020

With policy prompts, private equity fund managers can drive social benefits, too

Daniel Pianko
Guest Author

Daniel Pianko

Against the backdrop of a global pandemic, an economy officially in recession, and a stock market that seems increasingly divergent from the experience of most Americans today, it’s fair to say that the U.S. love affair with free markets is getting a thorough re-examination.

Professor Mehrsa Baradaran’s op-ed in The New York Times this summer became the latest addition to a longstanding critique of profit-seeking capital – in this case private equity firms in particular – as a job destroyer that privatizes gains and socializes losses to the detriment of society.

She may be right: the first generation of private equity investors in the U.S. has not always delivered measurable, net positive results for all of society’s stakeholders. But is profit-seeking capital inherently flawed, or could a second generation of private equity investors do better? Can investors combine the often compelling returns of private capital with meaningful social, economic, and environmental benefits? 

We posit that by re-orienting investors’ decision-making within the existing system and greasing the wheels for that new direction with a handful of sensible government incentives, profit-seeking capital can make good on the promise of investing as a tool for social and environmental returns. 

Historically, investors have put their capital wherever they think it will be treated best in the short term. We’ve seen the consequences of this kind of investing. It can lead to decisions that disregard social and environmental risks – dangers which increasingly, over time, translate into financial risks too. The result is a slippery moral slope that produces not just some spectacular failures for investors but also tangible setbacks for workers and families.

Today, investors have an opportunity and a responsibility to rewrite the private capital narrative. We can break the dogma that it can only achieve one end, profit, at the expense of all others. Now more than ever it’s time to fully mainstream a framework for private investment that generates best-in-class financial returns while advancing objectives around sustainability, economic empowerment, racial justice and more.

This isn’t wishful thinking: studies increasingly indicate that impact investing can yield superior economic returns. Emerging research like The Alpha in Impact, produced by Tideline and the nonprofit Impact Capital Managers (ICM) network, demystifies the ways in which impact considerations drive performance. ICM itself includes over 50 venture, equity and debt funds, managing over $12 billion and investing in 900+ mission-driven, values-aligned companies. They’re supporting companies that provide last-mile education and training, local food delivery, home health care, next-generation energy efficiency and social care networks. They’re helping small businesses weather the economic storm. And they’re working to increase racial and gender diversity at the manager and portfolio company level, because changing the private capital status quo – still overwhelmingly white and male – is not just about correcting bias, it’s good business.  

Groups like ICM are taking important steps to create a framework for more intentional investing. But better policy and better data can accelerate the momentum toward this promising future. 

We need smart policy to establish new rules of the game, enticing more capital to move confidently off the sidelines and into impact. The U.S. Impact Investing Alliance has been an essential voice for advancing an agenda with bipartisan appeal. ICM’s own members are advocating for regulatory changes including the elimination of fossil fuel subsidies, the prohibition of predatory loans to America’s small businesses, tax credits for electric vehicles and charging infrastructure, a restructuring of student debt, state funding to support employer-sponsored apprenticeships that provide on-ramps to meaningful work, and a thoughtful expansion of medical reimbursements, among myriad others. 

We also need more intellectual rigor and standards with teeth to hold impact investors accountable to their commitments. At ICM, all member funds are required to demonstrate how they meet our expectations on impact best practice. The Impact Management Project and the Operating Principles have also brought a welcome level of clarity and consistency to the field, helping to guard against “impact-washing.” Practical tools like the IMP+ACT Alliance Classification Tool can make it easier for investors to make sense of various impact “classes” and showcase and organize the vast and diverse universe of impact investment opportunities.

For decades, unconscious capitalism has created the conditions for growing economic, environmental, and racial injustice; the pandemic has exacerbated these inequalities. The depth of these wounds is understandably leading some to question the “free market” and in some cases, capitalism itself. But a 180 on capitalism seems unlikely to hold broad appeal in a bitterly divided and mistrusting electorate. Our best chance may be to harness the best of what works and apply it with intentionality, skill, and a moral compass.

Professor Baradaran writes that “We can have competitive and prosperous markets, but our focus should be on ensuring human dignity, thriving families and healthy communities. When those are in conflict, we should choose flourishing communities over profits.” We could not agree more. Just as private equity investment can be a damaging force when applied with short-term agnosticism, well-regulated investing that values outcomes in addition to profit can be a tool for positive change. 

Marieke Beeuwkes Spence is executive director of Impact Capital Managers. Daniel Pianko is founder and managing director at University Ventures, and an ICM board member.