Impact investing: it’s complicated

Debate at the New Mexico State Investment Council about an impact fund shows that investing with purpose may not be the simple ‘win-win’ it first seems.

Once you satisfy yourself that returns are roughly in line with those in the more ‘mainstream’ segments of the private equity market, it’s hard to see the downside of impact investing. Your money is hard at work, and as well as producing that return, you’re doing good for society and the environment. It’s win-win.

But it may not be that simple.

In a 27 June meeting of the New Mexico State Investment Council, executives from TPG tabled a $50 million commitment to the firm’s The Rise Fund.

The board discussed the fund’s strategy, its investment team and the way the vehicle fits into the TPG Growth platform. Then a board member, Leonard Lee Rawson, raised a concern: “Until this investment opportunity was presented, the SIC has not participated in social and environmentally beneficial investing, and had based all its investment decisions strictly on financial returns and portfolio fit”.

So far, so predictable; voicing apprehension about a new strategy and about evaluating opportunities by a new criterion is, after all, what the board is for.

But, say the minutes, “Mr Rawson stated that this type of investment would raise the questions of whose agenda and whose values was it fulfilling, and he saw it as a strategic conflict.”  (Our emphasis).

Rawson added if the SIC invested in The Rise Fund then “the opposition would view it as a social and economic investment decision benefitting those outside the State”, and would question why these dollars were not being invested to benefit New Mexicans.

“Mr Rawson believed that by making this investment, there would be political consequences and it was wrong for the SIC as fiduciaries to participate in an investment with the specific purpose of social and environmental impact, regardless of the financial return,” the minutes read.

And Rawson was not the only board member with reservations. At least one other agreed the investment would “do damage politically”, while a third said he would vote against the investment because such an investment would “undercut the Council’s position” on investing purely with financial returns as its objective.

Rawson raises the possibility of delaying a decision until further consideration could be undertaken by the council, but was told the fund would hold a final close “in a matter of weeks” and a decision should be made immediately.

New Mexico SIC did eventually approve the commitment – by a 5-4 vote – but the debate raises an important issue.

Several board members reiterated that the fund has not made an investment of this kind before, and the board did not seem to reach consensus as to whether it should begin making them. Those in favour argued that the impact element is merely “a positive incidental outcome”.

What’s more, while every public body will have its own political sensitivities that need to be taken into account, it’s clear impact investment does come with political implications – not least the argument that the pension plan should be looking first and foremost to make social and environmental impact in its own state.

With brand-name private equity firms like TPG, Bain Capital and the Abraaj Group raising hefty sums for the segment, it’s more than likely LPs will be evaluating funds of this kind with increasing frequency. A clearly defined policy would no doubt smooth that decision-making process.

Don’t miss our Impact Investing Special in the November issue of Private Equity International and online now.

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