When TIAA Global Asset Management made its first impact investment in 1992, investors in the community called it different names, such as social investment or targeted geographic investment.
Since then, the term impact investing has been coined to describe what TIAA director Rekha Unnithan calls “the intentional desire to create social and environmental impact along with the financial returns.”
TIAA, which manages $861 billion in assets across various subdivisions as of 31 March, has $845 million of assets under management allotted for impact investing, specifically around three themes of affordable housing, financial inclusion, and community and economic development. This is a 7 percent increase from $790 million at the end of 2014, according to TIAA’s 2015 responsible investment report.
A near-billion-dollar allocation to impact investing is significant, considering this particular space within private equity tends to see smaller deal sizes of well below $100 million.
Of the total amount, 60 percent is targeted in the US and the rest in emerging, frontier markets, Unnithan said. The US impact investments are focused mainly on affordable housing, such as its $50 million investment in 2014 in the Rose Affordable Housing Preservation Fund, managed by Jonathan Rose Companies.
According to TIAA, its average impact deal size is between $10 million and $20 million.
“We expect to continue to grow this type of investing,” Unnithan told Private Equity International. “The market has grown significantly over the past six or seven years and, as a result, our portfolio evolved and we’ve found more opportunities to invest in.”
Unnithan added that, while she cannot predict a specific dollar amount for allocation increases, TIAA has invested roughly $100 million per annum and has always met its annual allocation.
“My sense is that the same trend will continue,” she said. “As the market grows, we might increase our allocation as well.”
She names multiple reasons for the growth of the impact investing industry. The possibility of a doubled or tripled bottom line from untapped or underserved markets is attractive to investors.
But there are challenges that come with the growth potential. The deal sizes are much smaller than regular private equity investments, which builds a barrier for investors looking to write $100 million cheques.
Being able to scale down requires flexibility and understanding that you can’t just pour in huge amounts of capital where it’s not necessary. This is also a largely un-intermediated market, so brokers aren’t calling investors pitching potential deals. It takes extra work and presence on the ground to see a deal flow.
The investors in this community are constantly talking to each other to collaborate or co-invest, Unnithan said. Because TIAA has been in this space since the ‘90s, however, it was able to learn from its existing investments. For example, TIAA started out investing in non-banking institutions that provide micro-credit in underserved areas. Now, it has expanded its financial inclusion investment strategy to financial technology, affordable housing lending, and small-medium enterprises.
Because TIAA invests across sectors all over the world, it can’t possibly do direct investing for every deal. TIAA prefers at this point to have a diverse portfolio rather than invest directly, so most of its impact investing is carried out via funds. But this isn’t like a typical private equity fund investment, according to Unnithan.
The general partners that TIAA invests with tend to be first-time fund managers, although not first-time investors or operators. Their investor base is small, so each limited partner, like TIAA, has a loud and important voice sharpening the deal flow and management of the fund, she said, adding that it’s more hands-on than investing in regular funds.
“In some ways it feels like direct investment because you’re talking to [the GPs] constantly,” she said. “But you’re also learning a lot as a result. Because we’re so involved, we have a lot of information on underlying investments, and when co-investment opportunities present themselves, we are evaluating them with a lot more rich set of data around the industry sector and the particular companies.”
In terms of opportunities, Unnithan sees India remaining a big source of deal flow, given its sheer population size and a lot of entrepreneurs thriving there. The francophone and sub-Saharan Africa plays around TIAA’s regionally focused strategy to develop impact investing there, and financial inclusion is particularly a big focus in Latin America for TIAA.
Back home, in the US, it maintains its strategy on the preservation of affordable housing. Because this market is not intermediated, a lot of TIAA’s investments tend to be off-market, with the local housing agencies and local developers, she said. There’s limited capital in this particular sector, so TIAA can be picky about the assets it chooses to invest in and get reasonable valuations.
Investors are also making sure there are no unintended consequences of capital.
“We don’t want to flood our market with capital that is unnecessarily driving innovation just for the sake of innovation as opposed to having a real impact on the communities we’re trying to solve for, and keeping a check on that.”