Less than a month after the World Health Organization declared covid-19 a pandemic on 11 March, confirmed cases of the virus swept past one million. By 17 April, confirmed cases globally had surpassed two million, with large swathes of the world in lockdown. The coronavirus, and measures taken to combat it, have transformed almost every aspect of our daily lives and sent unprecedented shockwaves through global financial markets.
The pandemic left LPs and GPs scrambling first to identify the impact of covid-19 on their portfolio, and then to mitigate its effects – financially, certainly, but above all, with respect to human life. It could be argued, therefore, that in some respects the outbreak is turning every investor into an impact investor.
Indeed, there is a clear imperative for the burgeoning private equity impact movement to play a leadership role as we deal with the unfolding human and economic fallout of this most virulent of market disrupters. A combined humanitarian and financial catastrophe requires a business approach that looks beyond the bottom line. Impact investors specialise in bringing disciplined consideration of non-financial performance – for example, employee health, environmental mitigation and sustained educational attainment – all of which are very much in the spotlight today.
“These are the kinds of questions that impact investors have been focused on understanding and answering for years,” says Michael Etzel, a partner at social impact consultancy The Bridgespan Group. “In a sense, we’re all becoming impact investors – and those with more experience under their belts can play an important leadership role in the investing community as we navigate these joint human and economic challenges. A time of crisis is also a time to step up.”
For example, the pandemic is elevating equality concerns along a number of lines, including racial, ethnic, socioeconomic and gender. Impact investors will need to lead from the front in terms of the intentionality they bring to diversity, softening the impact of the crisis on the most vulnerable in society.
Covid-19 could also create new opportunities for impact investors, as the world focuses its collective efforts on developing a vaccine, creating a sustainable food supply chain and supporting businesses facing extreme financial pressure. Adversity, inevitably, gives rise to ingenuity, and we can expect innovative and entrepreneurial ideas for the next generation of impact enterprises to emerge from the current situation.
While the coronavirus is rapidly escalating demand for an impact approach in the short term, it also has the potential to radically shake up global capitalism and transform the profile of impact investment as an asset class.
“In the near term, every investor will be taking stock of his or her portfolio and pipeline, to try to better understand what the current crisis means for financial plans going forward,” explains Amit Bouri, co-founder and chief executive of the Global Impact Investing Network, the GIIN.
“As we move towards the broader recovery phase, however, I think we’ll see greater interest and demand for impact investing opportunities from a broad range of LPs, including institutional investors and family offices. The focus of impact investors is not only to achieve financial objectives, but also to meet a range of social impacts, which are likely to be prioritised by a broader set of investors looking to allocate capital to drive the economic recovery and support community development.”
“This will likely drive impact capital towards healthcare services generally, but also community support initiatives”
As the reality of how quickly a global emergency can unravel society sinks in, the critical nature of other impending crises is also being thrown into stark relief.
“Covid-19 is making us all focus much more on long-termism and the need to be much more thoughtful about global long-term risks that will manifest more frequently in the future,” says Shami Nissan, head of responsible investment at Actis.
“I think the pandemic will trigger people to stare harder at ‘what if?’ scenarios. This should help us realise that other issues, in particular climate, are as critical as ever. I can certainly see a post-covid-19 world where there is a reinvigorated focus on new sectors which service societal need and environmental imperatives.”
As the impact of the pandemic is felt across society, including individuals’ physical, financial and mental health and wellbeing, we are seeing, more than ever, the need for every actor to be responsible – whether it’s governments, business or even individuals’ willingness to respect restrictions.
“We are all in it together. This will likely drive impact capital towards healthcare services generally, but also community support initiatives,” says Nissan. “All of these considerations will cause businesses to invest more in social licence to operate as they realise the importance of sharing value created with local communities. We are already seeing this in many different ways.”
Weathering the storm
Of course, impact funds have financial return expectations to meet, in addition to their targets for driving environmental and societal change. As most impact funds have grown up in the wake of the financial crisis, the asset class is largely unproven in a downturn. It will not be immune to a global recession. “Impact funds bear the same risks, and advantages, as the broader universe of alternative investment vehicles,” explains Etzel.
The GIIN’s Bouri says: “Most funds, including impact funds, will be affected by this crisis in the near term.”
Bouri adds, however, that because impact investors are typically focused on a longer time horizon, he does expect impact investment, overall, to be fairly resilient.
Nuveen’s co-head of impact investing, Rekha Unnithan, also talks of her confidence in her own impact portfolio – which is focused on providing basic services, such as finance, to underserved client segments, as well as waste reduction and energy efficiency. “Over the medium to long term, Nuveen’s impact investment strategy will be resilient to idiosyncratic impacts of a large-scale covid-19 related shock as we invest in markets and sectors that are mostly uncorrelated to public markets and on basic services – fundamental consumer and business demand that is resilient to economic downturns,” she says, adding that crisis can also bring opportunity.
“Our insights and thesis-driven approach to inclusive growth and resource efficiency will allow us to potentially find value in pricing dislocations or market driven forces that are anticipated to be temporary.”
The ability of the private equity impact industry to measure both financial and impact performance through these tumultuous times will become more important than ever. “We see GPs increasingly formalising their commitments to impact measurement and management,” says Etzel. “This depth of commitment is critical as global financial markets approach an unprecedented set of challenges, as these commitments ensure impact is integral to the work of these funds, not just a nice to have.”
“Impact measurement will be critical following this crisis,” adds Bouri. “Many investors will be looking at how they can contribute to the global recovery and will be seeking data on a broader set of impacts generated by their investments. Systems which allow investors to understand their impacts across a range of sectors and issues, will be increasingly important to all investors.”