The impact investment community has seen a surge of enthusiasm of late.
At the end of April, KKR became the latest private equity firm to announce a billion-dollar impact investing fund that will reportedly focus on themes tied to the UN Sustainable Development Goals (SDGs). It follows Swiss-based Partners Group, the second-largest private equity group by market cap, which launched a $1 billion impact fund in March this year (again based around the SDGs), TPG’s $2 billion Rise fund last year, which invests in areas like agriculture and education, and Bain Capital’s smaller double impact fund.
For more than seven years, I’ve watched the size of the impact investing market creep upwards. Last year, the Global Impact Investing Network (GIIN) reported a “floor” estimate of $114 billion – likely several billion less than the true amount because GIIN only counts those funds that report to it – yet it is a drop in the ocean compared with other markets. Are private equity houses the answer to the big issue that the impact investment community talks about – scale? Can these larger firms help the market finally be taken seriously?
I think we are missing the point. I’m not saying that now the large PE funds are in the game we won’t see the figures get a boost, but I do not anticipate that GIIN’s floor will reach half of the $350 billion some are predicting by 2020. And that is perfectly OK.
A look at the portfolios of the large private equity houses’ impact investment funds gives a more realistic impression of the pace of growth. The Rise fund, for example, lists among its investments a mobile-banking platform for the underbanked in the US, a dairy company in India that helps farmers pool their products and a data platform for NGOs. At Bain, listed investments include two sustainable restaurant groups (By Chloe being one), a green materials recycling company in Texas and an affordable fitness franchise in Michigan and Indiana.
These are not large businesses (not yet anyway) and therefore are not large investments. By Chloe is a case in point. It is an organic vegan fast-food restaurant that only uses sustainable packaging and it got a $31 million injection from several investors – that’s a small amount from some very large institutions.
Impact fitness, part of the Planet Fitness Group, was a recipient of Bain Capital’s investment. It aims to provide affordable fitness in states known for high obesity
It shows us what we keep forgetting: to expect the impact investment market to double overnight is simply unrealistic when the notion of companies having a positive social and environmental impact is new. There just are not that many investments out there of a reasonable size – or not yet, at least.
But we have to start somewhere. Is By Chloe going to change the world? Probably not, but it appears to be better for our health and the planet than the ubiquitous burger chains. Without the impact investment phenomenon one has to wonder if it would have ever got that crucial $31 million (even if the Duchess of Sussex used to eat there in her plain Meghan Markle days).
It is a similar situation for Bain’s investment in an affordable fitness franchise. Encouraging people to join gyms in states known for high obesity probably wasn’t high on the investment agenda and may even be sniffed at as being too small a goal to be impactful – but why? I hope it works and offers a model for other states. Do we have any better ideas? If so, let’s fund them too.
The impact investment community is often focused on scale and I too have felt an impatience for it to grow. But now I would argue that what is needed is just lots of investments in firms that we suspect will have some positive impact – and they are likely to be small. The data we can collect on what works and what doesn’t will be incredibly useful too. Private equity firms seem prepared to go a little smaller, but there is no reason they should be the only large financial players to think this way.
Focusing small is a new concept and one that seems contrary to the ethos of financial markets that want big returns, scale and efficiencies as fast as possible. But the challenge is, if we keep waiting for the big investments to come along, we will be waiting for ever, because no one invested in them when they were smaller.
Take blue finance – Euromoney’s cover story this month. We don’t have a blue bond market yet. We don’t even have blue notes yet. But we do have a very large problem with the health of our oceans and a lot of small companies that could provide solutions if they could only attract the attention of investors.
Why hit pause while we wait for the blue bond market to get going? It could well end up being too late. This is what impact investment is perfect for.