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.
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.
Revitalising the token market
By Gavin Smith, CEO at Panxora
With interest rates near zero and fears that whipsawing stock markets are set for further plunges, many investors are turning to alternative markets in the search for returns. Money flowing into cryptocurrency hedge funds and trusts like Grayscale is at all-time highs and the large cap coins seem to be entering a bull phase, but that capital is not trickling down into new token projects. Why are blockchain token projects struggling to attract funding?
Seed investor scepticism
Setting aside the reputational issues with mainstream investors, even those educated in blockchain tech are not signing on the dotted line. This is certainly due in part to the hangover from the early token market.
During the heady days of 2016/17, investors could buy tokens during the token sale, and if the project was legitimate – even if the business case wasn’t particularly strong – prices would soar based on market enthusiasm. Early investors purchased at a discount and cashed out almost immediately for a handsome profit – and then repeated the process again. The token sale allowed founders to amass a war chest large enough to finance the entire token project – without having to give up a large chunk of company equity. Everyone got what they needed out of the deal.
Running a token sale is far more expensive today than it was during the boom. Getting the attention of the token buying public in a market where advertorial has replaced editorial is expensive. This coupled with a regulatory framework that requires the advice of accountants, solicitors and information gathering of KYC details for investors all comes with an escalating price tag.
To accommodate the change in cost structure, tokens now need to acquire funding in two rounds. Frequently there is a first round where capital is raised from a few, large investors. This cash is then used to finance setup and marketing the main token sale. The token sale, in turn, provides the capital needed to run the entire business project.
Bridging the gap between token projects’ needs and early stage investors
To successfully get a token through the capital raising process, founders must acknowledge the risk assumed by those very early investors and reward them appropriately. And given that tokens may stagnate or fall in price post token sale means that a deep discount in token price is not necessarily attractive enough to get investors to commit.
Many tokens have turned to offering equity in the business in the effort to raise that first tranche of capital. If you look at the number of successfully concluded token sales, the downward trend has continued since Q2 2018, so offering equity is not sufficiently stimulating the market.
Two sides of the coin
So, what is the answer? It’s a complex question but one thing is certain. Any solution must be rooted in a deep understanding of what both parties need to successfully conclude the deal.
On the one hand, token founders’ needs are clear: they need enough capital to get the token ready for and through a successful liquidity event that will provide sufficient funds to build the project. The challenge lies in striking the right balance between accruing that capital and making sure not to offer so much project equity that give up either the control or the incentive founders need to drive the project forward.
On the other hand, while the needs of the seed capital investors are more complex, there are two areas of key concern: transparency and profit incentives.
Transparency can mean many things, but almost always includes providing more informative cost and profit projections, as well as answers to a whole range of questions, not least the following:
- What happens to investor capital if the token sale event fails? Token founders must be transparent from the outset. The token market is highly speculative and early investors run the risk of losing their money should the project fail. Therefore, investors require a well-established fund governance process in place throughout the fundraising so they can make informed decisions on whether the project is worthwhile.
- How are the assets for the entire project managed? Investors need to know that their money is in good hands and that proper treasury management techniques are being used to manage cryptocurrency volatility risk. Ideally, an independent custodian will be used to hold the funds and limit founders’ ability to draw down the capital – releasing funds to an agreed-upon schedule of milestones.
- How are the rights of investors protected, for instance in the case of a trade sale? Investors need to know what happens if the company they are investing in is sold. What impact could this have on the value of their stake? Would a separate governance framework need to be established? These are critical questions and investors aren’t likely to settle for any ambiguity in the answers.
Profit incentives are important when it comes to encouraging early participation in a project. Investors need convincing that the proposition will keep risks to a minimum and focus on providing a strong probability of a return. This means that founders need to be able to defend the case for the increase in the value of their token.
But this isn’t the only incentive that matters. Investors can also be incentivised by preferential offerings such as early access to projects and services that might help their own business.
Let’s not forget that investors don’t support just any project. What really matters is that there is something special and unique about the business being underwritten by the token. Preferably something that could be shared upfront and directly benefit the investor – proof that the investment is really worth it.
And that’s what it all comes down to. Ultimately, while token projects are having a hard time finding funds at the moment, if they can prove their worth and provide full transparency and clear profit incentives to ease investors’ concerns, the money is out there. And deals can be done.
Achieving steady returns in challenging times for later life planning
By Matt Dickens, Senior Business Development Director at Ingenious
The macro-economic conditions of the last five years have presented a relentless challenge for money managers seeking to produce consistent returns. It seems an all too distant memory that UK markets were caught in a happy period of low volatility and positive growth since the recovery from the financial crisis started in 2009. Enter 2016 and we have since found ourselves in an era of exceptional uncertainty. An acrimonious Brexit referendum and the following ambiguity, pressure on sterling, repeated challenges to the UK Government, a trade war between two of the world’s super-powers and now a global pandemic. All this as the world is going through a digital revolution.
Under these exceptional conditions, many investment strategies have understandably struggled to sustain the growth that investors had previously enjoyed without taking on elevated levels of risk and experiencing greater volatility and its associated negative impact. However, Ingenious Estate Planning has been operating alternative investment strategies for several years, which have produced a steady return with low volatility over this time as they possess little correlation to the main listed markets.
The affordable end of the UK’s residential real estate market has proven to be extremely robust during the recent uncertainty. The market benefits from some core fundamentals that have assisted it withstanding a lot of the pressures experienced by other sectors. Firstly, a large and sustained supply deficit. In 2018 the UK built 80,000 fewer houses than the actual requirement of 300,0001. This strong, inherent demand poses a clear investment opportunity to investors who can fund construction projects in the safe knowledge that there is an established demand on completion.
Secondly, this supply deficit has been recognised by Governments for several years and there has been a raft of policies enacted, all supportive of building more houses. For instance, the Help to Buy scheme has enabled many, often first-time buyers onto the property ladder. This scheme means there is a well-established and subsidised group of buyers ready to buy whenever developers complete construction. Thirdly, and more recently, the Government has acted quickly to identify the property sector as one that is key to the UK’s recovery from Covid-19. Through relaxing planning laws and offering stamp duty holidays, both the construction and sales market are being given valuable incentives that support an ongoing return for real estate investors.
Secured lending model
Despite these positive forces however, there remain some risks with investing in the property market, so a conservative investment strategy is key to protecting investors. Rather than take a 100% equity, or ownership, position in a house-builder, developer or single property, a portfolio-based, secured lending model, has a number of clear risk-mitigating benefits. For instance, by lending to a portfolio of developers, carefully selected on a project-by-project basis, and by earning a fixed rate of interest, rather than taking equity risk, there is inherently lower volatility in returns given the protection of a senior debt position on each development. Contracts set out clear loan terms meaning that regular interest is paid on the investment and upon final sale the repayment is made in full, all with the benefit of banking-style security protections. By contrast, equity investments and associated valuations can fluctuate over time as the asset price changes and so it is far more vulnerable to market conditions and sentiment, and ultimately any drop in value is suffered by the investor. In the lending model, any loss is initially felt by the borrower.
Benefits for estate planning
Ingenious Estate Planning Private Real Estate utilises this secured lending investment strategy. The Business Relief- qualifying service is commonly used by clients planning for later life. As savers and investors reach retirement and decumulation, they present wealth managers with a unique set of investment problems. Without careful planning, the start of this phase for many could signal the end of any capital growth and herald their savings being eroded to pay for life’s needs. Any investment offering both high volatility and potential drawdowns may therefore become unpalatable. And while many would wish to gift savings to their children to mitigate the risks to their beneficiaries of paying a hefty inheritance tax bill upon their death, the thought of losing both control and access to these savings when they may still need them, means many feel uncomfortable in taking that step.
However, this does not need to be a fate accepted by savvy investors and planners who can utilise a proven trading strategy that continues to both carefully and predictably grow their investment while also providing potentially full relief from inheritance tax.
Getting ahead in 2020: Why building an emergency fund is the way forward
By Shahid Munir, co-founder of MintedTM, an investment platform which allows individuals to buy and sell gold bullion.
2020 has forced a lot of changes, especially where personal finances are concerned; attitudes towards investment have shifted and financial security has taken priority. Knowing that high-risk investments won’t guarantee profit, individual investors are considering longer-term alternatives and opportunities to save. So, at a time when stock markets are volatile, where should individuals be investing their money for the best returns?
While no one could have predicted the coronavirus crisis or the widespread economic devastation that has come with it, tension has been growing across global marketplaces for some time. Back in 2018, there were talks of a financial crisis and, even before the pandemic, unsecured debt hit a new peak of £14,540 on average per household. Now, with the UK entering into the deepest recession on record, unemployment climbing, and government support dwindling, the true value of quick-access ‘emergency’ funds has come to the fore.
Whether it’s a failed MOT, a broken boiler, or redundancy, in the event of a financial emergency, individuals are less likely to have the time or inclination to research the options available; many may resort to quick-fixes such as a high-interest payday loans to get themselves out of a difficult situation. According to research from Which?, 30 percent of people earning up to £28,000 a year were unable to save during lockdown. However, as recovery gets under way, it’s clear putting money aside to cover any large, unforeseen expenses can help to preserve existing finances and keep stress to a minimum.
Despite there being plenty of investment options available, very few lend themselves to building an emergency fund. With government premium bonds currently yielding virtually nothing and interest rates on cash ISAs sitting far below inflation, what was once considered safe is not only under-performing but is costing investors money in the long run. To reduce risk, investors should be diversifying their portfolios and investing in cryptocurrency or physical assets such as gold. For example, gold Exchange Traded Funds (ETFs) are popular with some individuals because they provide an easy way of gaining exposure to any increases in the precious metal’s value, while still allowing easy access to the funds if they are needed
With new types of technology platforms offering easy-to-use mobile savings apps, individuals can look further than traditional ISAs and bonds and begin to start investing in precious metals, something that may not have seemed possible in the past. Being based on an average rate of return and outperforming inflation, gold isn’t just a safe haven risk-off asset, it’s a key step towards establishing a watertight emergency fund.
While many people are looking for innovative ways to maximise saving potential, it doesn’t have to be complicated. Often, taking a step back and considering both personal and financial objectives can work wonders. This may involve analysing personal expenditure, taking stock of any outgoings and gauging their appetite for risk. It is wise to work towards building an emergency fund that covers three to six months’ worth of bills and expenses or to save around 10 percent of an annual salary.
Treating an emergency fund like any other fixed cost on pay day and separating it from day-to-day bank accounts and transactions will make it easier to commit to investing. For example, taking advantage of any platform-specific features, such as setting up a minimum standing order, can take the pressure off investing a lump sum. Often, it’s easier to reach an end goal by saving smaller, regular amounts, and topping them up where possible – autosaving apps are a perfect example of how these costs can add up over time.
Kickstarting an emergency savings fund is one of the first steps investors can take towards financial health, future planning and getting out of any debt cycles. While gut instinct may tempt people to keep money in the bank, investment in physical assets, such as gold, offers individuals the opportunity to benefit from greater returns and peace of mind, providing that all-important safety net for whatever the future may hold.
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