Money vs. Impact

My friend Jean-Luc Park recently published a guest blog for the Aspen institute on the topic of whether Impact Investing can make money - The importance of area expertise in impact investing.

The answer from the blog is yes you can make the same risk adjusted returns in Impact Investing just like any types of investment but similarly to other investment field, experience and specialized knowledge is key.

I agree, just like any type of investment, a competitive advantage is gained by focusing on one's strength. And there are definitely benefits of focus, which I feel some funds currently lack.

A more subtle question is how much is the "right" amount of money to make in the Impact space. There are financial first investors that has a goal of making as much return as possible while having a floor of "minimum" level of impact, and there are impact first investors who focuses on impact and are happy to only get a portion of their principle back, it being still a better outcome than granting.

I can see the arguments from both sides. At the "proof of concept stage"of the Impact investing space and when trying to attract money from main stream investors and fund providers, to be able to make money is important. I was recently at an LP conference for one successful Impact fund, and asked the various LPs whether they devoted a special pot of money for Impact Investing. All of the answers were a resounding "no" - they support this fund first and foremost because of its attractive returns and it's great that they are also socially / environmentally conscious and impactful, but that is just a secondary feel good factor.  Some industry participants may feel this is moving away from the core of the Impact Investing industry. After all, if the primary purpose is to make money, then what is the point of creating a new asset class. My own feeling is that if this encourages more funding to flow into this philosophy of investing, even though the impact is restricted (and this is another debatable point, is there always a necessary trade off between impact and returns?) by the focus on financial returns, then it is good for the industry.  These funds, by attracting mainstream LPs, serves to promote a new, responsible, actively progressive way of investing. This helps the industry to increase in scale and promote the new philosophy to investing.

Another school of thought is that the justification and necessity for the creation of a new asset class, is to support the types of businesses that actively addresses a social / environmental problem and are finding it difficult to attract funding from the traditional sources. This maybe because they are too small, considered too risky, "too" innovative or that the traditional investors simply do not have the expertise to analyze their value. This is where the impact investors come in. By this definition then, it seems reasonable to assume a certain amount of trade off between impact and financial returns. Thus, the other end of the spectrum is that its ok to just get one's principle or even a fraction of the principle back.

My own view is that a balance between impact and financial return needs to be achieved. I'm attracted to this industry precisely because I believe in solutions to some of world's problems can be found in for-profit business models that brings discipline and attract talents.  And these are the type of social enterprises that impact investing is trying to support. I believe the same philosophy should apply to the fund level too, in order to bring discipline and attract talents at the investment level.  We should not call it impact investing if we cant make money, and we should not call it impact investing if we cant make impact. So far, of all the funds I have seen, I am mostly attracted to funds that promotes hurdle rates below market returns for top tier VC funds (so at a high single digit or inflation + for as appropriate), and also has a carry systems that depends on both this financial hurdle rate as well a rigorous impact measure.

Would love to hear other people's thoughts on this topic.