Plentiful. Flexible. The power and desire to move first. Of all investor groups, family offices and private individual investors, particularly ultra-high net worth (UHNW) are the ones driving impact investing forward and getting behind the innovative strategies we need to solve our biggest environmental and social challenges. Over the past couple of years, we have seen numerous surveys, such as the GIIN’s 2020 report, showing that nearly every investor of this type has already or is considering a shift toward sustainable investments of some kind. In this column I explore why private investors and family offices have quickly moved to the front-lines of impact investing, allocating their capital to an array of solutions that provide a range of financial returns and impact outcomes – and all of which are laying the groundwork for institutional capital to follow. I’ll also share some first-hand anecdotes from my experience interacting with individuals and family offices as part of my day job.
You can chalk up part of the reason for this trend to the simple laws of supply and demand. Right now impact investing options, particularly in the private markets (think venture capital and private equity) match up nicely with these investors’ preferences. As evidenced by the growing ranks of fascinating collaboratives like AVPN, Toniic, CREO, and Gratitude Railroad, there’s a group of UHNW and family offices – not just here in Asia but around the world – that are trying to put more money to work to create more impact, but they simply can’t find the opportunities via the conventional wealth managers and services or local communities.
When discussing an impact investment strategy with one wealth manager years ago, he told me, “Look, I like what you are doing, but I don’t need another “dog” in my portfolio. I don’t want to take the blame for this if it doesn’t work.” It’s not that UHNW or family offices don’t care if they make money, but they have a broader prism through which they evaluate the viability of an investment.
Private capital is also more flexible. Family offices and UHNW investors are often more comfortable making long-term investments – even with investments that may lock their capital up for decades. Which makes sense as they are more focused on wealth preservation than outsized returns. Their capital is more flexible in that they don’t have an annual giving obligation like philanthropies and there’s no institutional-style decision-making body with strict fiduciary criteria or looming perceptions of career risk, no theme or topic area off limits.
And because many of these types of investors are impact driven as well as returns driven, their capital often falls into the bucket of “patient capital” – capital that is often the most well-suited to impact investing initiatives that may take years to come to fruition.
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But you can also invest in private impact transactions and achieve a variety of investment returns that suit the risk / return profile of your portfolio – including market-rate returns, if that is what you seek. And here, too, we see a difference. While all investors are looking for risk adjusted returns, these types of first movers define risk / reward differently, which is proving crucial for the seeding and development of important impact-oriented solutions. Unlike most institutional investors that have all sorts of restrictions around investing in first time funds, emerging managers and so on, these investors set their own guardrails and can say yes when a private equity firm or investment bank might have to say no.
The difference in perspectives is proving to be a massive boon to impact investing. It might take 20 years for a VC or PE firm to get to their third fund (a typical investment threshold for institutional investors). But so many impact strategies are focused on solving real-world problems now – whether it’s climate change and ocean plastic and innovating new solutions. An alignment of purpose and the sense of urgency is propelling these partnerships forward.
But perhaps the biggest driver is the passion that these investors bring about a topic. Of all of the potential anchor investors for a fund or a specific investment, families and individual investors are usually passionate about a particular impact area and seek to align their investment dollars with their passion. What’s more, they are typically seeking out specialized asset managers who bring skills and an expertise about investing in a particular area that these investors don’t have themselves.
One family we’ve worked with, for example, has been a pioneer in impact investing and their interest in solving the ocean plastic crisis grew out of a passion for scuba diving. Part of what drew them to us is our focus on scaling solutions through the supply chains of multinational corporations – something that these investors can’t do themselves. And I’m seeing this scenario replicate itself across the impact marketplace. It’s proving hugely powerful.
I often speak about the “missing middle” of investment capital that we need to bridge the gap between philanthropic or seed funding and the enormous sums of institutional capital sitting on the sidelines waiting for more proven solutions to come along that meet their investment criteria. Families and individuals are providing a critical form of capital that is helping innovators around the world prove new solutions that will change how we live. It’s important for family offices and individual impact investors to understand the enormous power that their private capital holds to address our greatest environmental and social challenges – and to engage in being part of the solutions today.