From the early days of impact investment, there has been a fear (and an assumption) that there needs to be a trade-off between social impact and financial returns.
While it’s a natural question to ask, our experience has shown us that an investor who wants to take a commercial approach to impact investment has many opportunities to achieve both strong financial returns and robust social impact.
Impact-focused companies can generate high returns on a regular basis
Over the last nine years, we at Unitus Capital (UC) have been working with a variety of impact-focused companies across sectors such as education, healthcare, inclusive finance, renewable energy, women’s empowerment and agriculture.
During this time, we have seen several companies that have scaled well and become attractive to investors keen on strong financial returns: mainstream venture capital and private equity firms, the kind of institutions that target investment returns of more than 25 percent per annum.
We have raised more than USD 1.7 billion for around 85 companies in nine years, most of them from India. What we found is encouraging: most of the companies have scaled and yielded high returns for their investors.
- Internal Rate of Return(IRR): The median IRR on the exits we have facilitated is 41 percent; the average is significantly higher.
- Debt: All debt has been paid back in full and at commercial interest rates of typically 12-15 percent, depending on the credit and structure.
- Equity: Many investments have not exited yet, but a good number have (we have facilitated exits for 32 investors).
We recognise that the data set has an inherent bias in it–companies that do have exits probably perform on balance better than those that haven’t yet provided exits.
Also, these returns are very high for any for investor, even for the most corrupt of hedge funds or those trading on inside information. Only a very naïve investor will come in saying, “I’m going to consistently achieve these kinds of extraordinary returns.”
Nonetheless, we have been encouraged by the profitable growth across all our impact sectors, which in turn has resulted in robust returns for investors. This positive correlation between impact and financial returns, we think, will make more investors focus on the sector — a trend that we are already seeing.
If you don’t think about impact, you are more likely to have inferior financial returns
The impact investing space was a niche sector 10 years ago; and while that hasn’t changed dramatically, we are now seeing a strong interest from global investors.
Firms like TIAA-CREF, Goldman Sachs, JP Morgan, TPG, Blackstone all have started making investments in this space. Swiss Re, for instance, now uses an environmental, sustainability and governance lens when investing its entire USD 130 billion portfolio.
The world is therefore clearly moving in the impact direction. It is our belief at UC, that if you don’t think about impact and sustainability, you are much more likely to have inferior financial returns.
Not focusing on impact means you have blind spots to factors and issues that are in the long-term interests of the customers. Great and sustainable business models don’t do things that are toxic to people.
[quote]Great and sustainable business models don’t do things that are toxic to people[/quote]
Investments in industries that are going in the wrong direction, for example, oil and other fossils fuels, are not going to do well over a long period of time. We don’t have hard data right now, but it seems very dangerous, seeing as you are investing without considering the long-term implications on people and the planet.
Ten years ago, during the mortgage crisis, we saw rogue investors and other market players not caring about their clients. The result? Many of them went bankrupt, and the big financial services firms that survived saw their stock prices decline by 90 percent or more.
Not caring about your clients and the planet is always a bad business strategy in the long-term, and investing in these kinds of businesses is dangerous.
Large investors are beginning to see the value of impact-led investments
Large global funds are beginning to allocate money to impact investment for two reasons: diversification into a new asset class, and customer demand.
One of the first large institutional investors in this space was TIAA (formerly TIAA-CREF), a USD 938 billion pension fund. A few years ago, they polled their pension clients and asked them what was important to them. Their pensioners told them that while financial returns were important, they also wanted their investments to be aligned with their values. It was at this point that TIAA decided to allocate a few hundred million dollars to microfinance, among other such investments.
We are now seeing more institutional firms go down this path. One of the very successful impact investment funds is responsAbility. They manage around USD 4 billion with the simple premise that they will give you a better return than your savings account and that your money will have impact.
Instead of the 0.1 percent that you would typically get, your investment would yield 2-3 percent and make the world a better place. This approach has resonated with people on a wide scale, thereby helping responsAbility become one of the largest impact investment funds in the world.
[quote]Investors who ignore the impact investment space risk being left behind.[/quote]
We, at Unitus Capital, do believe that companies providing essential goods and services targeting large, underserved populations will continue to grow robustly. We also believe that impact investors will continue to achieve high financial returns, often higher, than those investing in traditional venture capital (VC) and private equity (PE) investments.
As more deals happen, and subsequently more data becomes available, investors will be better able to assess their risks and returns, thereby helping them refine their strategies for financial gain and social impact. Investors who ignore the impact investment space risk being left behind.