MaRS Centre for Impact Investing is now seeking a Senior Associate, Capital Advisory Services! From persistent poverty to climate change, we face entrenched social and environmental problems. Fortunately, a growing number of charities, non-profits, co-ops and for-profit companies are building business models to tackle these problems. They are turning to investors for the financing to […]Read More ›
Private Wealth and Impact Investing: Let’s Have a Closer Look
What can we do to increase the flow of capital into innovative social businesses? How can we spread the word about impact investing? I’m sure that many of you are asking yourselves these kinds of questions on a regular basis.
I would argue that the first step is doing more to strike a chord with private investors, specifically high net worth individuals or family offices. In this post, I’ll look at a couple of reasons why exactly I believe they’re such an important investor group.
As you might know, less than 40 billion US dollars are currently committed to impact investments. In comparison, as the world’s largest traditional wealth management firm, UBS alone manages client assets of more than 40 times that amount. Clearly this leaves a considerable amount of potential to engage asset owners in discussions about changing the way they invest, thereby creating immense value for them and society.
Why private asset owners?
As it stands today, private wealth is the most common source of capital for impact investment funds. In the past, wealthy families and individuals have often been at the forefront of new approaches to investing. Impact investing is no different in that regard.
One of the key factors to consider is that private asset owners tend to be quicker and more flexible than other types of investors. In private wealth, the proximity between asset control and asset ownership is closer than any other investor type. Typically, wealthy individuals or families are advised by one or a few financial advisors, or a family office. Through this intimate structure, based on long-standing relationships and trust, asset owners exert a high degree of control over how their capital is invested. This makes them uniquely nimble and ready to respond to new trends and ideas.
The asset allocation strategy of high net worth individuals and families also often includes a personal or emotional component, be it by retaining a share in the family business or dedicating some funds to charity. Particularly in the case of wealthy families, there are often efforts undertaken to create a family legacy, both by strengthening family cohesion across generations as well as by philanthropic engagement.
You know where I’m going with this. Those investors – ones with simple and flexible decision-making processes – are the kind of investors we’re looking for. These investors, while never abandoning reason and due diligence, do not shy away from including personal values in their investment strategy. They have an entrepreneurial mind-set and don’t mind trying out something new.
Bringing us back to where we started, less than 40 billion US dollars are committed to impact investments. I’m aware that overall market sizes don’t necessarily say much about business potential, but do consider this for a moment: North America has the world’s biggest population of high net worth individuals, and they hold about 12.7 trillion US dollars.
Accelerating social finance by tapping these enormous funds isn’t straightforward, of course. But it is definitely worth looking into. In my next two posts in this series, we’ll discuss some of the challenges and opportunities out there.