Impact investment: An emerging asset class

Social impact investing is now high on the agenda for some of the world’s most powerful countries – and its transformational potential in developing markets is also becoming increasingly apparent.

In mid-June, the leaders of the G8 countries gathered in Enniskillen in Northern Ireland for their annual pow-wow. But UK Prime Minister David Cameron persuaded them to stop off in London on the way – to talk specifically about social impact investment (investing in search of a social as well as a financial return).

Of course, there was a degree of self-aggrandisement about this: the UK government is keen to take credit for an area where it believes that it is forging ahead of the global pack. Nonetheless, it’s a good illustration of how impact investing – which until relatively recently was virtually unknown to the wider world – is rapidly going mainstream.

To be fair, the UK government deserves some kudos for its role in this. Although the social investment agenda had progressed to some extent under the previous Labour administration (thanks largely to the tireless efforts of long-time advocate and Apax founder Sir Ronald Cohen to promote it), the current coalition has embraced and accelerated it. Now, according to the Boston Consulting Group, “the UK is rightfully recognised as the global leader for social impact investment”.

BCG has developed a proprietary framework called the ISI3 (International Social Impact Investing Index), to assess the maturity of the market in various countries. It used four criteria: activity levels, the quality of the supporting infrastructure; the range of financial products available, and the strength of the policy environment. 

The UK’s lead is due to “a range of bold moves by the UK government along each of the ISI3 dimensions”, it said – notably the introduction of ‘payment by results’ contracts and social impact bonds, plus the establishment of Big Society Capital (a publicly-funded social investment bank). Deal value in this area totalled £165 million in 2011, and probably jumped to nearly £300 million in 2012, according to BCG estimates.


But it’s not only in rich countries that the benefits of impact investing are being recognised. 

“The evidence has increasingly come in internationally that there’s an enormous opportunity in the low-income and emerging consumer space,” says Andy Kuper, chief executive of LeapFrog Investments, which backs high-growth financial services companies in emerging markets. 

Kuper points to the recent report by consultancy McKinsey suggesting that annual consumption in emerging markets could be worth $30 trillion by 2025. But his view is also formed by real-life experience. For example, in India, Leapfrog has invested in the insurance subsidiary of Mahindra, a large conglomerate. “If you’re a taxi driver in a small town in rural India and your taxi breaks down, that’s the livelihood for your family of eight gone. So you can imagine the strength of demand for some of these products.” 

On average, LeapFrog’s portfolio companies have seen their revenues increase by 25 percent in the last 12 months, often in spite of a challenging backdrop. “This notion of profit and purpose enabling one another – it’s not conceptual any more, it’s being demonstrated emphatically. There’s a series of business showing both financial outperformance and resilience in the face of challenges – [demonstrating that] purpose-driven businesses can reduce or mitigate risk too. So from a risk/reward standpoint, the opportunity has become very clear.”

Are investors now starting to buy into this? “We’re certainly seeing a number of pension funds, insurers and asset managers step up,” Kuper says. “There’s not widespread knowledge yet of the opportunity in this space. But much as happened in alternatives and venture, there are some early players that are going to do very well – if they pick the right horses.”

More mechanisms to allow investors to access these opportunities would clearly be a start. One group looking to address that issue is Sarona Asset Management, a Canada- and Netherlands-based group which used to be part of a not-for-profit that provided equity and debt to entrepreneurs in emerging markets. Now it operates as a fund of funds, backing local managers in these markets who have a clear and measurable impact – either through the way they invest or what they invest in. (Typically these funds will be smaller than $300 million, doing growth capital deals around the $25 million mark.)

“Our idea is that we want to help traditional institutional investors bridge the rather large gap between where they are now and where we think these really interesting high-growth opportunities are,” says senior partner Vivina Berla. “We’re hoping to broaden the spectrum of choices for them to access these opportunities.” As well as further fund of fund products, that could also mean separate accounts, geography- and sector- specific funds, and even branching out into more liquid debt-related strategies, she suggests. 

The hope, of course, is that the more ways there are to access this ‘asset class’, the more investors will come into it. According to Berla, European institutions are, on the whole, more advanced in their thinking around impact investing – but it’s the North American foundations and endowments that are often more likely to write the cheques, perhaps because of their non-institutional nature. “We find the demand comes from the bottom up – from individuals who want to do the right thing – rather than top-down from institutions.”


But while the impact investing cause has clearly come a long way in the last year or two, there’s a lot more work to be done. 

While praising the politicians’ efforts to date, the BCG report also identified eight specific areas where governments could do more to help, including boosting demand by offering more outcome-based contracts, encouraging charitable foundations to allocate more money to the area, helping to share knowledge and offering tax breaks. 

Similarly, an open letter to the G8 leaders by a group of organisations involved in impact investing (coordinated by the Global Impact Investing Network, the Omidyar Network and Sir Ronald Cohen) emphasised the importance of using policy to “support promising innovations and help scale market-based solutions across national borders”. 

Developing a common language around impact investing remains one of the big challenges. This is partly about having a framework to measure and describe impact; there’s been substantial progress made here, notably with GIIN’s Impact Reporting and Investment Standards initiative (IRIS), but finding a single framework that will suit everyone will always be difficult.

But it’s also about making clear to investors that the term ‘impact investing’ covers a broad spectrum of different approaches – from those who are entirely impact-driven and have no expectation of a financial return, to those who believe (like LeapFrog and Sarona) that investing in purpose-driven businesses will drive financial outperformance. 

“I’ve been losing my voice trying to tell people: there is a huge range of approaches, all of which are valid and all of which are important,” Berla says. “The key is to be very clear about who is trying to do what, to whom, for whom.” 

This kind of clarity and transparency is crucial, because it mitigates the risk that investors come into the area expecting one thing – and then promptly abandon it when their expectations are dashed. If impact investing is to have any hope of establishing itself as an asset class in its own right, as many hope it will, it can’t afford to let that happen.