In Brest and Born’s excellent article (SSIR 2013) on what constitutes impact they focus a lot of attention on “additionality.” One question in particular caught my attention. Would the investment be made if the impact investor did not participate?
Impact investors sometimes view their role as being catalytic. By investing in areas that may not have been on the radar for-profit investors they can draw attention to them bringing for-profit investors in with them. Sometimes they are catalytic by taking on first risks.
However, it appears that some limited partnerships (these are investment organizations that raise money from others) view the presence of impact investors as indicating below market returns given the risk and may actually scare away for-profit investors. A recent post here on ImpactAlpha made this point.
“A growing number of limited partners allocate a portion of funds for impact investments. But the concepts of impact investing often get conflated with philanthropy or donative capital. In an ironic twist, “impact” allocations designed to seed funds have the opposite effect: traditional, fiduciary investors frequently view the presence of impact investors as a signal that financial returns will suffer. Investments from foundations or NGOs often signal greater risk or lower returns — deterring the very market rate investors that they hope to draw into impact funds.”
The author, Daniel Pianko, argues that terminology needs to change, that we should call concessionary finance “donative” to distinguish it from market-return seeking investments that also produce a positive social and/or environmental benefit. The author notes this distinction is important because impact investing funds are demontrating “better than market” returns.
“We are at an inflection point in a growing number of areas where an impact orientation is fueling better-than-market returns. As Anne Field reported in Forbes, studies show impact funds can and do outperform non-impact funds in certain market segments, such as emerging markets funds or sub-$100 million funds in the U.S..
So, lets be clear what we are talking about when we say “impact investing.” Mi3 Impact Investing program seeks returns to insure sustainability. We are doing high-risk early stage equity investing. Are we seeking market returns? Yes, because we are limiting our screening only to firms who have the potential to scale. It means we sometimes pass on some potentially very worthy investments.