The idea of supporting social change has led to more than $1 trillion in assets in impact investing. But what happens if those funds don't have the impact investors expect?
A recent study from Harvard Business School found that while impact investors behave differently in some key ways, the majority tend to invest in companies that can also raise money from non-impact investors. . More than half of funding rounds involving impact investors include co-investments with traditional profit-seeking investors.
The study found that impact investors are more likely to invest in disadvantaged regions and emerging industries, and have higher risk tolerance and patience. However, the authors also find that employee satisfaction tends to decrease when impact investments are made.
“In their minds, if you give a $1 million equity investment to a company that no one else wants to do, that company will have more capital and will be able to do things it couldn't do otherwise. It is.”
Doing well by doing good is an important trend in business in general and venture capital in particular, and as major firms like Bain Capital and BlackRock move in, the impact investing space is no longer a niche. There is. One of the key questions that the HBS study carefully addresses is “'additionality'”—were impact investors' portfolio companies able to raise money from traditional investors or because of increased risk? Was he sent off?
“Some impact investors are very focused on additionality. In their minds, if you give a $1 million equity investment to a company that no one wants to do, that company will get more capital. and be able to do things that they wouldn't otherwise be able to do,” explains John G. Kennedy's Sean Cole. Professor MacLean HBS, one of his study authors. “But even if he had 20 other venture capital funds willing to give $1 million to that company, that capital is not redundant. That seems to be the case for most people.”
But Cole pointed out that there are different approaches to impact investing. “Most of the money raised goes into funds that seek returns in the market, and many of those investors are very happy to co-invest with traditional venture companies.” may seek to influence portfolio companies in a number of ways.
Cole conducted the research with HBS colleague Senior Lecturer Leslie Jenn. Josh Lerner, Professor Jacob H. Schiff. Assistant Professor Natalia Rigor. Associate Professors Benjamin N. Ross, Purnima Puri, and Richard Barrera.
Building a database over a year
There is no truly comprehensive database for impact investing, so the authors spent more than a year compiling nine databases and lists to create their own. The authors then set out to track and compare companies and their fundamental characteristics.
After filtering 2,747 potential impact investors, the authors ultimately found 396 impact investors for analysis. They looked for more specific language than “making the world a better place” and included major companies like TPG Alternative & Renewable Technologies.
The researchers used U.S. census data to cross-reference portfolio companies and found about 84 percent matches. The team also cross-referenced data from U.S. impact investing companies and Rebellio Labs to find out how their investments affected target companies, and found a match rate of 83 percent.
Does it add value to traditional investments?
A key finding is that impact investing funds primarily buy shares in companies that traditional financiers would have financed anyway.
According to the authors, impact investors have funded 6,066 companies in 8,125 rounds, representing about 2 percent of all venture capital and growth equity rounds. Of the more than 8,000 deals, 60% included traditional private co-investors.
“The important thing is that the difference is not as big as you think.”
Both traditional and impact investors had similar portfolio sizes, with approximately 24 companies making 31 investments each, and had been in operation for an average of approximately 10 years. Impact investors' deals averaged about $5 million, lower than the roughly $8.7 million for traditional investments.
“The key is that the difference is not as big as you think,” Cole says. “Investors have a bit of a strategic choice.”
Where impact investing has the biggest impact
The authors note that impact investors approach their targets differently than traditional companies. They focus on disadvantaged regions and emerging industries, tolerate longer time horizons, and take on more risk than traditional investors.
Impact funds tend to prioritize staples, energy, finance, industrials, materials, real estate, and utilities. On average, impact investors target investments in countries whose economic output is 23% lower ($9,400 per capita) than mainstream companies. Impact-only investments can require more patience and take about 25% longer to succeed.
“This is not just greenwashing in the sense that there is a real difference between impact investing and non-impact investing,” Cole said. “But it's a matter of degree.”
Areas requiring further research
The researchers found that when impact investors bought stock in companies, employee satisfaction decreased by twice as much as employee satisfaction decreased after traditional investments. They point out that this may call into question the social benefits of early-stage impact investing and warrants further research.
The study also suggests that impact investing may most benefit companies that cannot raise capital through mainstream channels, the researchers said.
Reporting on impact investing is rapidly evolving. “There are a lot of really important and difficult questions,” Cole says. “Frankly, those answers may not be available in the venture capitalist field. Questions like 'What are the best practices for impact investing?' Our hope is that with these data we and other researchers will begin to shed further light on this important area. ”
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