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April 13, 2014 3:11 am
Although the basic tenet of capitalism might be that Adam Smith’s invisible hand will do all the work to create Utopia, the current state of the world has inspired a number of investors and investment managers to explore the concept of impact investing, using capital explicitly to create social, or other non-financial, benefit as well as financial return.
This has mostly been the preserve of rich individuals or families, foundations with a mandate to improve the world or sovereign wealth funds that may have a specific remit in their country’s strategic interest.
Now the institutional investment sector is getting involved. While a number of impact investment management companies have been in existence for a while, such as the UK’s Bridges Ventures, French insurer and investment manager Axa Group believes it is breaking new ground with its €150m social impact fund.
The fund draws its capital from the Axa insurance companies worldwide and aims to use its investments to improve access to financial services, healthcare and education for underprivileged populations.
It has set itself a significant challenge, says Laurent Clamagirand, chief investment officer of the Axa Group. Simply finding appropriate places to put that amount of money in the impact investing market is difficult. “You can’t deploy a €100m ticket just like that,” he says. “It takes time and it takes a bit of learning on both sides.”
The market is still small and under-developed, explains Adrian Brown, principal at Boston Consulting Group. Private sector investors (as opposed to philanthropists or foundations) “are looking for opportunities with measurable social impact and risk-weighted returns. The actual overlap is pretty small – there needs to be some capacity building.”
Even the €10m Axa has targeted as a reasonable allocation can be too big for some funds. “The fund has to be sufficiently big that they can take the money without us being a majority shareholder,” says Matt Christensen, global head of responsible investment at Axa Investment Managers. Another issue is that in such a relatively new sector, many managers do not have a long record or, in some cases, the corporate governance a big investor looks for automatically.
The Axa fund will be invested in a combination of private equity and microfinance funds, with an allocation to special social impact vehicles. It will target returns of between 4 and 8 per cent, potentially accepting a trade-off between greater positive social impact and lower returns.
Traditionally, there have been concerns about investment managers abandoning their strong focus on the financial bottom line. However, Emma Hunt, a senior investment consultant at Towers Watson, the consultancy, points out: “For institutional investors, regardless of type, it is in their strong financial interest that the marketplace is healthy, wealthy and wise.”
As such, Ms Hunt says it makes sense for investors to be cognisant of the social impact of their investments, whether or not they are explicitly impact investors.
While she admits the impact investment market is still fairly immature, she is optimistic that increasing interest from a variety of investors will “professionalise the market”. In the interim, the sector will have to devise ways to improve access for investors, such as funds of funds.
“In microfinance, they are finding ways to bundle up opportunities,” she says.
Axa chose the fund of funds structure in part because it was convenient for its circumstances – pooling capital from a group of insurance companies. It also overcomes some of the problems regarding size and the need for due diligence and measurement inherent in this new market.
“One of the things we have noticed in the past 12 months has been [that] the actual number of funds available to invest in has been growing fast,” says Mr Christensen. He expects the entire fund to be allocated by the end of 2014, in about 15-20 tranches.
Such a large inflow of capital would probably help develop the market significantly, but could also distort it if not allocated cautiously, warns Ms Hunt.
Other institutional investors are likely to enter the market too, according to Mr Christensen, who has spoken to industry participants following Axa’s progress with interest.
“We are on a growth curve, and it may even get a bit ebullient at some stage.”
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