In a recent post, we shared that impact investing is one of the top 3 family office trends this year. While no two family offices are the same, many view impact investing as an attractive method to align their wealth with their values, and there is no doubt that there is a big movement toward impact investing. In fact, our CEO Sang H. Lee recently presented a talk at Financial Advisor Magazine’s 4th Annual Impact Investing Conference on the rise of impact investing and the challenges that investors in this realm face. Below are some of the top trends and challenges investors should be aware of as they explore this growing asset class.
Trends in Impact Investments
1. What sectors are trending in impact investments?
As interest and allocations to impact investments continue to rise, a 2015 survey conducted by J.P. Morgan and the GIIN highlights what sectors are trending in impact investing. The survey discovered:
- 27% of investments are allocated to housing
- 16 % of investments are allocated to Microfinance
- 10% of investments are allocated to Financial Services
- 10% of investments are allocated to Energy
- 5% of investments are allocated to Healthcare
- 5% of investments are allocated to Food & Agriculture
The survey showed that investors most expect to increase allocations to Energy, Food & Agriculture, Healthcare, and Education. On the other hand, Microfinance was the largest sector that investors indicated a likelihood of decreasing their allocations. In the past, Microfinance was a leading impact investing strategy. This divergence is most likely an attempt made by impact investors to diversify their strategy given the historical prominence and domination of Microfinance in their portfolios.
2. What financial structures are trending in impact investments?
The same survey found that:
- Private debt and equity were the two largest structures being utilized to finance impact investments, making up 73% of total AUM. Private debt accounted for 40% of AUM, whereas private equity accounted for 33% of AUM.
- The 3rd largest instrument used was equity-like debt, which represented 8% of total allocations made by impact investors.
- Other financial structures that are being used to finance impact investments include public debt, public equity, real assets, and others.
3. Which stages of business are attracting impact investments?
With an estimated $60 Bn allocated to impact investments, it’s interesting to see which businesses are acquiring impact funding. Overall, nearly 91% of total impact investment AUM has been allocated to companies in the Growth or Mature stage.
- 52% of impact investment AUM allocated to mature, private companies
- 28% of the AUM allocated to growth stage companies
- 11% of the AUM allocated to mature, publicly-traded companies
- 6% allocated to venture stage companies
- 3% allocated to seed-startup companies
4. Exits in Impact Investing
The J.P. Morgan and GIIN survey respondents reported a total of 76 exits in 2013 and 2014. It showed that Microfinance had the largest number of exits, representing 22% of total exits.
- Financial services (excluding microfinance) represented 12% exits. Microfinance and financial services combined, these two categories accounted for 34% of exits in the survey sample.
- Food & Agriculture and Healthcare each made up 12% of exits.
Top 3 Challenges Investors Face in Impact Investing
Despite rising allocations and interest in impact investing, there are several constraints that investors are facing. The below chart displays the top challenges to the growth of the impact investing industry felt by investors via the J.P. Morgan and GIIN survey.
#1 Challenge: The #1 challenge echoed by investors is the lack of appropriate capital across the risk/return spectrum. Even within impact investing, there is a spectrum of capital (see Bridge Ventures’ map below) that adheres to various impact and return appetites. Different asset owners have different preferences when it comes to impact vs. financial returns, and a challenge currently faced by the impact investing ecosystem is the lack of capital across the spectrum.
#2 Challenge: The second challenge shared by investors was the shortage of high quality investment opportunity deal flow with track records. Given that there are limited channels or networks for investors leverage for deal flow and pipeline, many investors who may want to explore impact investing face the issue of limited access. Due to the nascent market, investors tend to rely on word of mouth and informal networks. This may certainly serve as a barrier to entry for newer investors.
#3 Challenge: The third biggest challenge when it comes to impact investing is the difficulty in exit strategies. Impact investing is still in its infancy for the most part, and like many alternative investments, patient capital is needed until capital gains are to be realized. Most of the current impact investment deals are medium-to-long-term and haven’t realized a significant returns yet. As a young sector, impact investing may be challenging, but once track records of success and proof points are realized, there will be a greater opportunity for impact investing to garner interest and capital from investors.
Many family offices are exploring impact investing as a way to create both financial returns and positive social/environmental impact. Nearly $1.6 trillion in assets are managed by single and multi-family offices in North America, and a 2013 survey found that 17% of these family offices have already allocated to impact investments. For family offices, financial advisors, and investors looking to allocate to impact investments, the World Economic Forum has published a 5-step impact investing process for family offices and investors.
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