How asset management firms can venture into the impact investing landscape

Impact investment can be regarded as an intentional capital allocation into businesses or funds that are aimed at improving the society or environment and still making financial returns for the investor.

Globally, there is a burgeoning interest in the impact investment sector by asset management companies for two major reasons: the provision of substantial capital to build a sustainable global economy and increasing the diversification of not just asset classes but also as a strategic investment into other countries, especially developing economies.

For Nigerian asset management companies trying to venture into the impact investment sector, it is crucial for them to understand the sector itself. Players in the impact investment landscape can be-classified into two distinct categories, “financial first investors” and “impact first investors” according to the report conducted by Bridges Ventures, Parthenon Group and Global Impact Investing Network (GIIN).

The aim of the financial first investors is to optimise financial returns by examining investment vehicles that offer returns at market rate while making a social good. On the other hand, the aim of impact first investors is to generate a social good while accepting a range of returns either from the principal investment to market rate. The major difference between the two groups is that the latter is willing to accept lower returns than the market rate in order to ensure the attainment of the social good.

However, asset management companies displaying either kind of impact investor characteristics can collaborate in what is termed “layered structures”. These layered structures provide a platform through which both types of impact investors can pull capital together, in which the financial first investors can enjoy a market-based rate of return and impact first investors can attain a more significant social impact than relying on just their own capital.

The space for Nigerian asset management companies

Asset management companies, especially those in the pension industry are typically bounded by regulatory requirements which will constrain them from being an impact first investor. This means that Nigerian asset management companies willing to venture into impact investing, majority of them will have to play as financial first investors.

With this view in mind that Nigerian asset management companies can operate as financial first investors, the next question is how can they actually venture into the landscape of impact investing? There are a number of strategies that can be employed such as:

a)The creation of a fund where investments can be made by several asset management companies regularly towards achieving a common social good.

b)Pension companies can establish an impact investment diversified portfolio.

c)A form of test-run strategy in which a particular amount of money is set aside deliberately for “testing the waters” purpose. This strategy involves exploring different investment vehicles under different conditions (communities, funds, venture capital etc.) and trying to ascertain the best strategy for a wider scale investment. However, this strategy is not cost-effective for small companies that do not have the luxury of funds compared to internationally owned asset management companies.