Impact investing: Considerations from an LP perspective

The opportunities for deploying capital to address the world’s largest ESG challenges are as numerous as the questions facing investors, writes Hamilton Lane’s head of product management Jackie Rantanen.

Jackie Rantanen

It is a rare conversation with an LP today that does not touch on impact investing at some level, ranging from “What is impact?” to “What impact strategies are best positioned for success?” Undeniably, impact as a strategy has gained significant traction over the past several years as preferences and priorities have evolved, and investors increasingly are seeking to identify investments capable of delivering social benefits in addition to expected financial returns.

The draw

The value proposition of impact is particularly well positioned in private markets given the control nature of the investment coupled with the longer time horizon, which can allow managers to drive and influence change in their portfolio companies. We’ve observed that the level of interest in impact investing varies from LP to LP – some already have a well-developed impact or ESG portfolio and are looking to add to their exposure, while others are new to the space and are seeking guidance on how best to build a programme. In either case, investors are taking action – a recently published Global Impact Investing Network study estimates the total size of the market to be $502 billion. And the opportunities for deploying impact capital to address some of the world’s largest societal and environmental challenges are vast and numerous.

Metrics and measurement

For many investors, broad-based guidelines are setting the framework (and a bit of a standard for the industry) for their portfolio development. The most significant, and oft-quoted, of these guidelines is the United Nations Sustainable Development Goals, but beyond these, many other sets exist that may appeal to investors with specific religious, ethical or moral agendas.

These sets of guidelines often share common goals that help define the target “impact”:

  • Protecting the environment;
  • Supporting clean energy and water;
  • Fostering economic justice; and
  • Providing education and healthcare to promote human dignity.

Expanding options; increasing complexity

As the interest and sophistication in impact has grown, the bar for measuring outputs and outcomes has been raised, and the sector is growing more complex.

For LPs, that means making choices between specialists versus generalists and where within the investment cycle to focus their exposure, as well as how to diversify across geographies and regions.

Regardless of the strategy, sector or geography, a resounding theme we hear from investors is the need for greater transparency. And while that theme is by no means new to private markets generally, in the realm of impact investing, transparency can mean quite specific deliverables. Limited partners want to understand the process general partners are undertaking to underwrite both the investment thesis and the impact thesis. Further, they want to be assured of the ongoing monitoring and reporting of the impact thesis with identifiable metrics and regular measurement.

Yet, measurability is still very much a work in progress. In fact, we hear from LPs that this is one of the most challenging aspects of impact investing, because the impact being generated isn’t always clear or quantifiable. As the market continues to mature, we expect managers will improve on transparency and be able to deliver more quantifiable metrics and results. The important strides being made in this area will add greatly to the overall approachability and, ultimately, wider adoption of impact investing. We continue to believe that data – and the use of technology to analyse, understand and utilise that data – will transform private markets broadly, and impact specifically.

Opportunity and momentum

Within private markets, the dollars dedicated to impact represent a meaningful amount of capital invested into a significant number of companies: over $35 billion into 11,000 companies in 2017 alone.

As the universe of opportunities grows, we predict the spectrum of how we look at and define impact will also increase in sophistication. In the (not too distant) future, we can envision LPs’ questions shifting from “What is impact?” to “How much of my portfolio should I allocate to impact strategies?” or “What types of impact strategies are best for my organisation?” And, as the outcomes of these strategies become more measurable, private markets capital will stand to represent an even larger piece of the impact investment pie.