Rod Scwartz, CEO of Clearly So, predicts rapid growth for the impact investment sector in 2016.
As a financial intermediary between high-impact organisations looking to raise capital and socially and environmentally oriented investors, ClearlySo’s deal flow and capital raising activity is a good barometer for growth in the UK impact investing market.
In Q4 of 2015, we completed £21m+ in capital raises, our most successful quarter to date, with some significant momentum being carried into the new-year.
The impact investment market is growing at a rapid pace, with some growth estimates for the UK market ranging from 30-40% per annum. Based on the report, The First Billion, the impact investment market in the UK was predicted to grow from £286m at the end of 2012 to £750m in 2015, and is expected to increase to £1bn+ by the end of next year.
Whilst this is just a drop in the ocean of global financial markets, we are starting to see an influx of high quality organisations and impact entrepreneurs emerging and looking for larger and more sophisticated capital raises.
Raising money for these high-impact organisations is also becoming easier with more and more investors, both individual and institutional, becoming interested and actively engaged in impact investing.
Many question the sustainable growth of this market, in reference to its heavy reliance on subsidies and dismissing impact investing as just a ‘fad’.
The question we are all trying to answer is can it continue to grow? Unsurprisingly, our answer is an unequivocal… Yes! Despite being American, blind optimism has never been a trait of mine, so I will explain the reasons why I think this market will go from strength to strength:
1. Impact investing is entering the corporate and institutional mainstream. We have observed a growing number of private organisations, from commercial and private banks to the big four professional services firms, take the lead in a number of ground-breaking transactions. Most recently too, ClearlySo has seen increased pressure being put on private equity fund managers to incorporate impact within their investment focus.
2. Cultural changes for the millennial generation. The fundamental underpinning of this movement is the desire on the part of individuals, as employees, investors and customers, to consider impact in their employment, investment and consumption decision-making processes. This fundamental factor is gradually reshaping global financial markets and society as a whole.
3. Growing interest from the young in entrepreneurship. A number of impact-oriented businesses have had a profound impact on society as well as having been very successful commercially, such as The Body Shop, Ben & Jerry’s, Innocent Smoothies, and Tom’s Shoes. The success of such companies has inspired others, particularly the values-oriented young people, to understand that businesses have a wider social impact on society. As a result, a company’s purpose is the main reason why they choose to work there.
4. The receding state is creating a void into which impact enterprises are moving. UK charities and social enterprises have been and will continue to be under considerable pressure as government grants dwindle. As a result, many are exploring entrepreneurial models as a way to deliver public services to beneficiary groups without dependence on grant income. These new businesses are in need of values-aligned investment to fund operations, innovation and expansion.
5. Governmental support and advocacy towards the growth of impact investment. Successive governments have played a major role in implementing helpful legal changes and dealing with regulatory issues. Tax credits in the form of Community Investment Tax Relief (CITR) and the more recently implemented Social Investment Tax Relief (SITR) have also been established to encourage impact investment.
All of these driving factors above have helped the impact investing market grow and develop to date. Whilst we can argue about the sustainability and methods of government support and corporate interest, there are a series of macro socio-economic factors that cannot be ignored.
With major global issues such as climate change, rising inequality and overpopulation, there is growing pressure on every facet of business and lifestyle to act responsibly and create a sustainable economy.
What is even more encouraging is that impact investing is not just growing in developed countries. Entrepreneurial solutions are also becoming common-place in the area of economic development in the emerging markets and there has been significant impact investment into less-developed countries.
In fact, based on a recent GIIN report, emerging market impact investment funds have returned 9.1% to investors versus 4.8% for developed market impact investment funds. Those focused on Africa have performed particularly well, returning 9.7%.
So if we continue to map these trends in corporate behaviours, cultural changes, government support and entrepreneurial zeal, what will the impact investment market look like in the future?
1. Much, much bigger and increasingly connected to the mainstream. Impact investment is not an asset class, it is a factor in every investment and corporate decision. Impact is an additional dimension alongside financial risk and return.
Applying this concept, as we do at ClearlySo, makes the impact investing universe boundless. Take for example the “Internet Sector” in the late 1990’s, which was viewed by many as a niche sector disconnected from traditional industries. This technology has become utterly integral to every corner of every sector, fast-tracked human development and changed the way we communicate, live, problem solve and conduct business. Impact is similarly becoming an integral consideration to every facet of our personal and professional lives.
2. International / Cross-border investment and co-operation. As highlighted above, many of the biggest issues of our time will require cross-border collaboration and investment. We have already seen a number of mainstream European institutions adopt a global approach to impact investing (e.g. Triodos, OikoCredit, AXA IM, Lombard Odier, Bertelsmann Foundation).
3. Very diverse (like the mainstream). Entrepreneurial solutions will continue to challenge the way we conduct business and live our lives, trying to find more efficient and effective ways of solving problems and improving quality of life. We already work with impact organisations operating across most sectors, and this will continue to increase the diversity of the impact investment market.
Although these predictions might seem conceptual and idealistic, we have the fortunate position of seeing these trends unfold before us on a day to day basis. It is hard not to be optimistic for the future when we are exposed to such innovation, which affords us the privilege of peering, just a little, into a better future.
Rod Schwartz is the CEO of impact investment firm Clearly So.