After many years of being mooted as the next big thing in wealth management, social impact investing is becoming a reality. UBS’s oncology impact fund, which invests in early stage oncology to develop cancer treatments and cures, has raised $471 million, the bank recently announced.
The fund, the first of its kind and the largest, will give much-needed credibility to impact investing, which has struggled to establish itself.
Simon Smiles, chief investment officer for ultra-high net-worth at UBS Wealth Management, says that much of the reason that impact investing has failed to become more mainstream is because of how it has been pitched to investors. “In the main, impact investments have been promoted as ‘being the right thing to do and you may or may not make money’ – but people don’t like being moralized to, and they also give money away to charities of their choosing. Unfortunately impact investing has seemed to be neither an investment, nor giving money away, so has suffered a bit of a personality crisis.”
UBS focused instead on investment returns first, he says, and then built a strategy that would have a positive social impact. According to investor sources, the fund is targeting a 15% to 20% net internal rate of return. It’s a unique structure. The fund invests in independent research firms testing for early-stage treatment for cancer, with the aim of merging four or five firms into one company. “Combining early-stage firms prevents management teams from becoming wedded to one idea, so increases chances of success,” says Smiles.
That company will then at some point be listed or sold to a pharmaceutical firm, creating returns. There is also a structure in place whereby royalties from the drugs will be reinvested.
A portion of any performance fees generated and half of a royalty attached with best efforts to all successful drugs sales will be managed by UBS Optimus Foundation, and will ultimately fund expanded access to cancer care for children and their families in the developing world. The other half of the royalty amount will be spent on academic grants to promising oncology-related research. The minimum investment was $200,000 although it was offered to UBS employees for a lower upfront investment.
Oncology is a perfect theme for social impact requiring a large investment, while also resonating with clients globally – Asian investors provided 60% of the money in the fund. Smiles says UBS is exploring other themes such as protein alternatives. “As societies develop and become more urban they tend to increase the amount of protein in their diet, but dairy and meat production globally are under pressure and not sustainable,” he says. “We’re looking to marry those long-term structural trends to find sustainable protein sources such as insect protein or sustainable fishing.”
There is a large appetite for social impact investment opportunities if structured correctly, says Smiles, and the industry is moving towards focusing on financial returns, as well as the positive impact. Impact investing’s chances of becoming more mainstream seem to hang on the structures of the funds themselves.
In April, the MacArthur Foundation, the Calvert Foundation, and the Chicago Community Trust announced a collaboration for $100 million of impact investments for non-profits and social enterprises in Chicago called Benefit Chicago. Its participants say the fund would not have existed were it not for the collaborative nature and its flexible structure.
The Calvert Foundation will issue $50 million in notes ranging from one to 15 years in maturity sold to individual investors. The MacArthur Foundation will transfer assets of $50 million into a new special purpose fund that it has established and will use its staff to manage through a services agreement. And the Chicago Community Trust will chair an Advisory Committee that will advise on the fund’s investment strategy, as well as investing in $15 million of 15-year notes from its donor-advised funds.
Margot Kane, vice-president of strategy at Calvert Foundation, says the structure has “bridged the gap” for all three parties. Calvert would not have been able to invest $100 million and does not have the network in Chicago to identify investment opportunities. The MacArthur investment allows the fund to provide long-term capital as opposed to the short-maturity retail notes that Calvert will sell.
While the Chicago Community Trust can use its local network to identify local loans and other social investments. Debra Schwartz, managing director of impact investments at the MacArthur Foundation, expects to see more collaborations and innovative structures driving the growth of impact investing.
“More deals are done than are publicized, particularly in the affordable housing sector, but there is a lot of room for more,” Schwartz says. “The question is: how do you structure the deals so that small amounts of money can be put to work as well as large, where impact opportunities are plentiful, that investors feel that they will be supported and receive a return, and that local entities that need the investment feel comfortable with their investors?
"That’s the gap that these types of funds need to bridge, and it feels like we are reaching a tipping point.”
Several banks have reached out to the MacArthur Foundation to inquire about similar collaborative models to Benefit Chicago, says Schwartz. Even though interest in this type of investment is fast growing, she says few banks are willing or able to put in the effort, risk-taking capital and expertise needed to design and implement these kinds of marketplace solutions alone.