Following the news that Big Society Capital CEO Nick O’Donohoe is to step down by the end of the year, James Perry looks at O’Donohoe’s legacyRead More ›
Private Wealth and Impact Investing: Structuring the Approach
In my first two posts in this series, I showed why wealthy individuals and families are attractive partners in directing more funds to impact investments and looked into some of the factors that motivate or prevent private investors to get engaged.
Now it is time to consider what we as impact investing professionals can do to increase the flow of private funds into social finance.
First, bearing in mind the private nature of private assets, we need to think about how to spread the word of impact investing and move beyond the circles that are already well-versed in the topic. Presence in traditional business and finance media – online, print, TV – is crucial. Also, the power of best-practice cases – which can act as an impact investing ‘gateway drug’ – and personal referrals cannot be underestimated in working with close-knit communities.
Financial advisors and banks are important gatekeepers and bottlenecks at the same time. Grooming good relationships with selected champions is invaluable. They may help overcome the counterproductive incentive system currently in place. Given their natural involvement in early-stage and often innovative ventures, angel investors can be important partners to create high-profile cases that reverberate within private investor circles.
Second, assuming that a minimum of information about a given potential investor is available, certain characteristics can point at an increased potential interest in impact investing:
- An individual or family is strongly involved in managing their own assets (possibly including the family company)
- There are efforts to create a family legacy
- The younger generation is actively involved in managing wealth or there are efforts to engage the younger generation
- Strong philanthropic engagement
Screening potential investors along those lines should provide some guidance in prioritizing pitching activities.
Third, impact intermediaries need to make a strong case for their services, which includes educating asset owners about impact investing definitions, concepts and activities. There is persistent confusion about what impact investing actually means, which needs to be addressed. How impact investing can be done across asset classes or the differences between impact-first and financial-first approaches are important questions. They should be addressed at an early stage; basic education can even be part of an initial pitch.
Fourth, remember that many private investors are looking for sound long-term solutions, both in terms of wealth preservation and in terms of family legacy and philanthropy. To begin with, they are unlikely to have the ability or desire to work through issues such as tax implications, legal clarifications, risk-return considerations, deal structuring or due diligence in an unexplored investment territory themselves. An intermediary should be able to provide at least some guidance across all issue areas associated with impact investing.
Then, investors can look for very different entry strategies. Some may directly go for venture capital-like deals or fund investments; others may want to start with an ESG-screened portfolio while a third group may just require basic education. A moderately flexible business model will allow you to design step-by-step approaches tailored to the investor’s priorities and risk appetite and let them get acquainted with the topic at their own pace.
Considering the importance of trust and track records, partnering with more experienced financial services providers may make sense when it comes to actually making impact investments. A prime example of this is the joint venture between California-based impact investment advisory firm Imprint Capital and Aperio Group, an investment manager. Also, in building up a track record and gaining credibility in the eyes of traditional investors, the importance of solid, comprehensible impact and financial metrics cannot be emphasized enough.
Consequently, building an integrated business model based on holistic impact investment expertise makes sense for intermediaries at this point in time. As the market matures, more specialized services will, of course, be required too.
In order to conclude this three-part series, let’s recap the most important messages: There is a highly wealthy group of asset owners out there whose investor characteristics make them ideal partners to advance impact investing. There are certain obstacles and bottlenecks to be overcome, but key trends are pointing in the right directions, and there are a number of ways to seize the ample opportunities out there.