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Advisors, Private Equity

Why Social Impact Investing Is the New Frontier

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As an industry, private equity gets a pretty bad rap in the public sphere. Most people aren’t exactly sure what it is, and when they’re exposed to it, it’s generally through negative press about collusion and corporate greed in the aftermath of the 2008 economic downturn.

However, a growing sector of the industry is combating PE’s unfavorable depictions by turning focus away from strictly financial gains to the larger aim of promoting some social good with strategic impact investments. According to the Forum for Sustainable and Responsible Investment’s 2014 annual report, almost $7 trillion of US-based assets specify at least one socially-responsible investment strategy — a close cousin to the social impact investment, despite their lack of perfect overlap.

This trend emerged full force in 2014 and has been gaining steam ever since.

Doing Well While Doing Good

Social impact investing — what some have called “doing well while doing good” — has caused skepticism in some deal professionals, who worry that the social aims inherent in impact investing can take away from creating attractive returns.

However, recent work by researchers at The Wharton School at the University of Pennsylvania complicates this idea. According to the October 2015 study, one of the first analyses of private investment and social impact of its kind, market returns for social impact investors can equal those for impact-neutral investors, and 95 percent of successful exits are aligned with the stated mission of the investments. In a similar vein, Eyes on the Horizon, the 2015 edition of a joint social impact investment survey administered by JPMorgan and the Global Impact Investing Network (GIIN), sheds light on a large international community of impact investors, with survey respondents managing $60 billion in impact investments — an over 30 percent increase from 2014’s respondents. While an impressive number in its own right, $60 billion is still a small percentage of the over $3 trillion private equity and venture capital industry. But the steady growth in scope of the J.P. Morgan and GIIN study lends credence to Sir Ronald Cohen’s assertion in the foreword of The Impact Investor that impact investing may grow into its own $3 trillion industry.

Millennial Money

Social impact investing seems to have been on the cusp of a breakthrough for the last few years, and this is perhaps due to millennials — who just surpassed baby boomers as the United States’s largest living generation — eclipsing Gen Xers as the largest generation in the labor force. More than half of millennials are influenced by their employers’ commitment to social causes and service, according to research presented by the Millennial Impact Project.

As a generation, millennials are expected to inherit $30 trillion from their parents and grandparents, a massive transfer of wealth that many experts expect will drive an increase in impact investing. While Wall Street is trying to lure millennial money into more traditional investment methods through infographics, high net worth millennials are leery of investing in the stock market and significantly more interested in using their wealth to make a difference than members of the generations that precede them.

Impact investor Lisa Hodges is a prime example of this new millennial approach to investing and social enterprise. Before embarking on a career in B2B marketing at AOL, Hodges worked at a nonprofit in Delhi that focused on empowering young girls through technology education. Since then, Hodges has returned to New York to start her own impact investment fund and work with women entrepreneurs.

According to Hodges, the move into a more sophisticated impact investing market is one that’s long overdue — a shift that is coinciding with the rise of social justice-oriented millennials in the work force. “It’s clear that we can’t continue to run capitalism in the way that we have, between climate change and labor crises like the Rana Plaza factory collapse in Bangladesh, there there are too many indicators that standard capitalism isn’t really serving us and that charity, while it serves an important purpose, isn’t enough.” Millennials recognize that making money and social good aren’t necessarily at odds, and they’re confident in their power to exact change in a flawed model.

In terms of size and interests, millennials are at a point where they can change a “a niche market to a completely mainstream one.” Millennials have the power to “change the way we relate to companies and change the behavior of companies,” says Hodges. It’s a unique position as generational demographics continue to change in the United States.

As millennials continue to enter the labor market and brandish their multi-trillion dollar purchasing power, large corporations are increasingly considering social good not as an added benefit to investments, but a necessary result. Hodges cites the rise of Corporate Social Responsibility (CSR) departments and an increase in social enterprise class offerings at business schools all over the country as evidence, saying that “a large percentage of people come into business with interests in service, but without an outlet for that passion because the industry just isn’t there yet.”

Yet things seem to be changing to accommodate this demand. BlackRock launched its first impact-focused mutual fund just this past October. Goldman Sachs and JPMorgan Chase are other major industry players within financial services who have ratcheted up their Environmental, Social and Corporate Governance (ESG) initiatives in recent years.

These institutions entering the impact investing game is adding a new dynamism to the market, according to Hodges, by opening the door to different kinds of investors. The narrative of the typical impact investor is changing from a bleeding heart Richard Branson-type with extra money to spend to a savvy deal professional interested in the issues and in returns.

“Impact investing is growing because financial products across all asset classes are available now. No matter where you want to put your money, you can do it in impact. As an investor, you don’t have to drastically change your behavior — you don’t have change your job or sacrifice building a secure financial future — in order to make a difference. It’s as simple as buying different mutual funds,” says Hodges. In that light, it’s easy to see the appeal in this tenuous marriage between money and morality. It’s clear that the millennial commitment to social service is driving major change in how investments are made, and if things keep going how they are, Sir Ronald Cohen’s estimations might not be that far off at all.

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