The Pioneering Impact Investor

Impact investing is not for the faint of heart.

The practice is unconventional and unpredictable. It requires key actors to step outside their comfort zones, in underdeveloped markets.

  • Rather than just find and invest in funds, investors/asset owners are creating intermediaries from scratch and working much like an investment bank to bring co-investors, legal advisors and other key stakeholders to the table;
  • Rather than just find and invest in enterprises, funds are supporting and creating the very market ecosystems in which the companies they invest are supposedly doing business, identifying and building demand for product and even pressing governments to create enabling policy infrastructure.

That was the message at a recent SOCAP12 panel discussion in San Francisco, building off a new research report -- A Market Emerges: The Six Dynamics of Impact Investing - published by PCV InSight, together with CASE at Duke and ImpactAssets.

The following four videos provide a snapshot.

Because impact investors are identifying and capitalizing innovative business models, typically at the bottom of the pyramid, they usually confront significant market failures and almost no sector ecosystem. Building that ecosystem is par for the course, including by developing infrastructure, consumer demand, supply chains, and an enabling policy environment, as Alvaro Rodriguez Arregui, Ignia, explains:

According to Vineet Bewtra, Omidyar Network, the truth is that most impact investors cannot take a passive, fund-driven approach. The data simply does not exist to understand how funds are likely to perform and complement each other in an investment portfolio, meaning that actively shaping investments is inevitable. At the same time, prominent European investors are seeing the benefits of certain impact investments with modest, but consistent and uncorrelated financial returns:

The John D. and Catherine T. MacArthur Foundation is an asset owner that has taken a similarly active approach to impact investing. And as Debra Schwartz explains, the benefits include the development of significant new networks of practice, and the realization of systemic change, particularly at the policy level. "If you want to change the way capital is allocated, you need to be in that market," Schwartz says.

In conclusion, it takes some distinctive qualities to succeed in impact investing:
  • From Debra Schwartz: Real-time market intelligence, embodied in the development of networks
  • From Joe Ludlow, Nesta UK: Clarity around the outcomes being sought through investment
  • From Vineet Bewtra: An understanding of what can realistically be achieved under an investor's particular time horizon and risk appetite constraints
  • And from Alvaro Rodriguez Arregui: Courage (or thereabouts... I strongly recommend you watch the video for Alvaro's perspective)