Market-Rate Impact Investing in Context

In April 2019, The Global Impact Investing Network (GIIN) published a set of principles to help determine what counts as impact investing. These complemented its existing framework, below:

  1. Intentionality – the investor must intend to have a positive impact
  2. Positive return expectations – impairment of capital or philanthropic grants are excluded
  3. Range of return expectations and asset classes – return expectations can vary from below market (“impact-first” or “concessionary”) to market rate (generally associated with “impact-at-scale”)
  4. Impact measurement – commitment to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.

U.S. state pension plans, among other large institutional investors, generally have a fiduciary duty to seek market-rate returns for their plan participants. Hence, they are often precluded from investing in impact strategies unless item #3 is not concessionary — no matter what the societal benefits might be.

If an investing firm can credibly seek to achieve market-rate returns and rigorously document its impact, then the pools of capital available to impact investors increase by orders of magnitude. This is what TPG and Bain found when they launched in 2016. The chart above, originally developed by TPG, is a useful framework for placing different types of market participants in the right category.

The Rise of Impact-at-Scale

The term “impact investing” in its current connotation, was coined during a Rockefeller Foundation conference in 2007. A year earlier, the United Nations launched its Principles of Responsible Investing (PRI), with 100 signatories. Yet it took another decade for the “impact-at-scale” business to launch properly. This space is characterized by the following:

  1. Associated with an established investment firm
  2. Fund size of around $1billion
  3. Commitment to deliver market rates of return
  4. Commitment to estimate impact rigorously at the time of underwriting
  5. Commitment to audit impact results

In 2016, Bain Capital launched Bain Capital Double Impact (BCDI), which closed at $390m, and TPG launched its first Rise Fund, which raised $2bn. Each started investing in 2017. KKR closed its first Global Impact Fund at $1bn in August 2019, and as of January 2020 had made five investments. Partners Group is underway with fundraising against a $750m target, and Apollo in August 2019 announced a plan to raise $1bn. Blackstone and Carlyle each hired a head of impact in mid-2019.

What is the significance of these funds and firms? In the context of a private equity industry that took in $778bn inflows in 2018, these sums are still tiny. But next to the fund sizes previously seen in impact investing, they are enormous. The Global Impact Investing Institute (GIIN) published a report in April 2019 that estimated, for the first time, the size of the global impact investing market. It put the total AUM in the space at $502bn, but one of its most striking findings was how fragmented the space still is. Over 1,340 entities were counted in the space, and the median fund size was $29m, with, to state the obvious, 670 entities investing even less.