Impact Investing for Family Offices

Introduction

Over the last year or so, we have witnessed more widespread evidence of increasing interest and awareness around impact investing both among our clients and contacts, as well as more generally in the media, market discussions and commentary.

It can prove difficult to track the extent to which proclaimed interest is being converted into executed investments and it is likely that the volume of capital committed remains relatively insignificant. However, the intent and appetite amongst investors, particularly family offices, across the globe, for stakes in impactful businesses looks to be fairly well established and on an upwards trajectory.

Why Might This Be Happening?

Many wealthy families have, of course, long been associated with philanthropy, often seeking a social impact via purpose-specific donations or endowments. Under this traditional model, these philanthropic endeavours would typically be undertaken entirely independently of the family’s commercial and investment activities. It is successful execution of the latter that generates the funds required to engage in the former, but there might otherwise be very little overlap or connection between the two concerns and, indeed, in some families that dichotomy might even extend to the individuals involved.

What appears to be happening more frequently, however, is that investors are targeting assets through which they can simultaneously make a positive social impact and achieve market or risk-adjusted rates of return. For reasons touched upon in this piece, these types of assets seem to be attracting family offices, in particular.

In the family office space, one of the most oft-cited explanations for this development is that we are going through an era of significant wealth transfer. As a consequence, the next generation of younger family members, who may be more socially conscious than their predecessors, are taking up decision-making positions and demanding that their family’s wealth be deployed in a way that benefits a broader group of stakeholders. While this seems to hold true across the world, it is most apparent in Asia, where a tremendous amount of family held wealth has been generated since the start of the new millennium.

Another observation is the rise of for-profit businesses and entrepreneurs that are developing innovative, tech-enabled ways to tackle specific social and environmental problems in the renewable energy, healthcare, and financial services sectors, among others. Whilst a widespread strengthening of social conscience is at the heart of this, the tremendous advances in technology, and/or perceived failings by the non-profit or public sector are also catalysts, with the overall effect that for-profit enterprises are increasingly finding market-orientated solutions to issues that historically may have been the preserve of governments and non-profit organisations. In some jurisdictions, we are also seeing this facilitated by other means, such as through innovative legal structures. These include the development and growth of the “benefit corporation”, or “B Corp”, in the United States and elsewhere, which enable directors to move away from a “shareholders first” fiduciary model and commits companies to promotion of the so-called “triple bottom line” (social, environmental and financial) approach to business.

It is these sorts of businesses that may present Investors with opportunities to invest capital for growth and profit as well as contributing social impact of which they can derive personal satisfaction. Funding and supporting these businesses as a financial partner, rather than as a donor, so they can continue to grow and innovate, may also be better for the overall ecosystem as, whilst some will undoubtedly succumb to market pressures and fail, the longer-term effect should be the promotion of self-sustaining, scalable enterprises that have a greater potential to survive and make a lasting, more profound, social impact.

Family Offices Are Well-positioned…But There Remain Challenges

Given its innate flexibility, family capital seems well placed for allocation to impact investments, especially those early-stage, higher-risk undertakings that might not otherwise be in a position to take investment from more mainstream, institutional investors. Family offices are also often able to provide the “patient capital” that is required to tackle many of the long-standing, global social and environmental problems. Unrestricted by investment mandates, return targets and fund life spans, wealthy families generally have the freedom to determine their own requirements as far as the return on investment is concerned, both economic and social.

On the other hand, family offices will not always have the resources or expertise to identify, monitor and support these businesses in, perhaps, the same way that more sophisticated or institutional investors would. Whilst there may be approaches to mitigate this through co-investments or investing through impact funds, this may preclude some family offices from investing directly in higher risk enterprises. Complexity relating to structuring and/or challenges relating to certain geographic locations can also present significant obstacles, making investments prohibitively inefficient in terms of the execution time/cost required. Whilst these hurdles are by no means unique to impact investments, they may be felt more acutely given the nature of the underlying businesses in the impact space.

An impact investor will also need to decide what kind of impact it wishes to make and then find a way to measure and assess the way in which an investee business provides that impact or value-add to society or the environment. This may not be straightforward. In instances, the impact itself may be somewhat intangible or difficult to quantify, which obliges investors to put considerable thought into determining the most appropriate methodology or units of measurement and how accurate data can be obtained and then purposefully interpreted. Non-financial metrics will be unfamiliar to some investors and that may bring its own challenges. Finally, as impact investing moves into the mainstream and more businesses inevitably position themselves as creating positive social outcomes, a degree of personal judgement may also be involved in deciding whether a business can truly have the kind of impact that the investor wishes to associate itself with.

Being able to assess and monitor impact in a meaningful way will also be important for governance and accountability purposes, both for investors and investees, and effective monitoring will help the investor with managing reputational risk/benefit. In addition, generating data that demonstrates clear and positive outcomes may also kick-off a domino effect of positive media  which has the potential to improve the overall environment for and narrative around impact investing, setting off the virtuous circle.

Looking Forward

Encouraging transparency from investors about their impact investments, raising awareness through public dialogue and the emergence of common standards and analytical tools may all assist with some of the difficulties facing investors, though impact assessment is likely to remain, to a degree, quite a subjective and imprecise exercise. However, with regulatory mandated reporting in some jurisdictions, classification systems – such as the UN’s Sustainable Development Goals which are becoming more widely adopted and understood, and the rise of ‘benefit corporation’ or “B Corps” systems –  significant progress in these areas is being made.

Notwithstanding the difficulties around defining and measuring the concept of impact, given the wider social forces at play, it seems likely that we are going to hear more from the businesses and investors involved in this space and can expect to see family offices playing a significant part in this story.

Robert Shakespeare is Of Counsel at Squire Patton Boggs, where his practice includes all aspects of corporate work including mergers and acquisitions, capital markets, joint ventures, group restructurings and funds structuring. He advises both public and private companies, partnerships and funds across a wide range of industries.