4. Case studies
Currently, family offices show the most interest in making impact investments in three markets: education 2) agriculture and food 3) environmental conservation. Though interest does not directly equate to completed transactions. On the other side of the coin, the markets with the least interest are services for the base of the pyramid (BoP), water, agriculture and food. FOs view their gaps in knowledge and the lack of investable solutions as creating this disconnect.
The case studies below begin to illustrate the range of knowledge, internal resources and capacity, collaborations, and types of impact investments being made. Deploying capital to drive sustainable innovation binds their differences.
Direct Investments: One approach to impact investing is through the traditional investing activities of HNWIs and FOs. One active investing family in Denmark insists, from experience, that it is crucial to not ‘go it alone’; one needs to bring the right people to the table with the funds and the skills to share learning. This can take the shape of advisors or by creating an impact investing syndicate. The FOs external partners include their extensive network within the local startup scene, among the global impact investing community, other investors, and topical, financial, and legal advisors. Often, the organisational vehicle, from FO to private equity fund or VC fund, is less important than the startup ecosystem. This investor recognized the opportunity that impact investments could have through their participation in the private investing sphere. More and more of the pitches before them are focused upon impact. They see their role in impact investing as being able to keep their expectations on financial return on par with their traditional investments, but they can extend the timeline to take the role of patient capital. This investor made early investments (pre-seed or seed) in Labster, an educational service provider with virtual labs and science simulations, and Seaborg, the creators of an innovative, barge-based nuclear power generating system. The first has clear impacts on broadening student learning and the second promises to safely reduce carbon emissions.
Facilitating Intermediaries: Kimpa Impact Family Office offers full-spectrum services that begin with discussions with FOs to clarify their expectations, support to define impact strategies, investment solutions to effectively deploy capital, and, finally, to measure impact. Kimpa is a leader in bringing impact investing resources under one roof to work with entrepreneurial families through their entire impact journey. Betteries is one innovative startup that KIMPA facilitated a direct investment from a FO. Their business upcycles electric vehicle batteries into a range of affordable and adaptable power systems. The new batteries are modular and can be joined to create alternative power sources to replace petrol-powered generators, power small vehicles, and store solar power in mini-grids. Betteries is an example of a climate solution creating significant social and economic impacts.
Fund-Based Investments: Maj Invest is a Danish asset manager that offers family offices the opportunity to invest in sustainable financial services in emerging markets alongside large institutional investors in private equity funds. This can increase confidence in FOs as they can benefit from the due diligence expertise of the institutions. One example of this investment structure is Maj Invest’s Financial Inclusion Fund II investing Belstar, a financial inclusion institution in India, in 2018. Belstar is led by Hand In Hand India, an international non-profit social program with initiatives in community economic development. In collaboration, Belstar has been contributing to local economic development in the community, empowering women, promoting gender equality, and reducing poverty in India. Belstar targets raising capital to support its growth and expansion, in order to offer more loans via Self-Help group and Joint-Liability group models, to reach the underserved rural regions in India. The company was introduced to Maj Invest by an experienced investment banker as a proprietary deal.
Stewardship: Another approach to FO impact investing can be seen in the cooperation between an investment firm and a family. As large funds are increasing their impact investing allocations and their investments mature, they will need to find suitable partners to provide stewardship of their projects as they exit to redeploy their capital elsewhere. One example of this approach is a transaction between a family and Beartooth Capital. Beartooth Capital acquired a large parcel of land in a degraded environmental condition in Montana, USA. Their goal was to rehabilitate the water systems on the land to increase its value. A clear example of the kind of win-win scenarios generated through impact investing. After the work was completed they found a buyer that shared their interest in preserving the land, a search that took longer than expected, providing another example of patient capital facilitating impact goals.
“Co-creation with problem solvers”: Not all investments are neatly packaged in the impact investing space and sometimes investors and companies work together to create innovative solutions and financial mechanisms. One example of this dynamic is a recent partnership between PensionDenmark and Ørsted, a Danish energy firm, on a renewable energy project. Ørsted was beginning to transform itself from fossil fuels to renewables. PensionDenmark shared their sustainability interests, while they also wanted to diversify their assets away from equity and bond markets after the 2008 crisis. The two entities created a joint venture that allowed PensionDenmark to mitigate their risk through price support, profit sharing, and by only converting their initial construction loan to equity after the project became fully operational. Active investors with capital have the freedom and flexibility to work closely with innovative partners from ideation to execution. Although this example involves a large fund, many family offices are ideally positioned to leverage their capital and knowledge to form active impact investment partnerships.
Reallocating to impact investing through intermediaries: Large multi-family offices around the world are expanding their strategies into impact investing in cooperation with their families. Waterfield is a globally recognized and connected MFO in India that views their impact investing as an extension of their long-held view of purpose driven-wealth. They see two entry points into impact investing for their wealth owners: a journey from philanthropy to social venture capitalism and a journey from commercial venture capitalism to social venture capitalism. In most cases, expectations of returns and their priority (i.e., impact first or returns first) are dependent on the point of entry. However, most of our families clearly view impact investing as an investment strategy and consequently expect their investments to give them risk-adjusted, market-rate returns. An example impact investment began when they were approached by a veteran philanthropist that wanted to increase her impact by leveraging investment capital to create a sustainably invested pool that would generate returns, which would be ploughed back into impact investing and philanthropy. Waterfield assisted in easing her entry into the private equity and venture capital space, including by the head of their alternative investments team working with her and her team on risk-return expectations and allocation. They formulated a structure that divided the allocation into three separate investment branches – impact funds, direct investments into impact enterprises within sectors of interest, and investments into hybrid social finance models. With an allocation in place, we worked with veteran impact fund managers to help narrow the focus down to specific sectors. The team also sourced and evaluated direct deals and hybrid social finance models. They continue their support by scanning the ecosystem to proactively identify and evaluate deals to ensure that she has access to a constant stream of experts and content to allow for continued opportunities.
Philanthropy-led Impact Investing: North-East’s interest in impact investing came as an outgrowth from their families’ philanthropic activities. In conversation with their family members, they started asking questions about how they could create investment opportunities in direct support of philanthropic objectives. North-East concentrates on both the intentionality and the additionality of their impact investments. The majority of the impact investments of their families are carried out through philanthropic structures to support their philanthropic objectives. They focus on topics where a market dynamic can generate scalable solutions to an issue, e.g., in the area of environmental sustainability or social enterprises. The investments are usually early-stage, higher-risk and require more internal resources in relation to the funds allocated as compared to other investments. This family office approaches impact investments similar to their grants-based partnerships, with the impact as the main objective, but with a clear assessment of the investment potential as well. North-East benchmarks the investment potential through its opportunity cost: what return could it generate from allocating the funds to other investments with a similar risk profile? What impact could be generated by allocating the funds as a grant? They then utilise both their philanthropic and investment competencies throughout due diligence, the structuring process, and the investment’s lifespan. They conduct the impact investments in close collaboration with their families.