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.
d)Another strategy is for the asset management companies to offer their clients the option of investing in an exclusive portfolio consisting of companies driving impact investing.
e)Nigerian asset management companies can leverage on the use of the layered structure to drive impact investing.
Case studies of asset management companies in impact investing
We have identified that Nigerian asset management companies can venture into the impact investing landscape as financial first investors and outlined some strategies that can be employed. Here are some case studies around the world of asset management companies venturing into impact investing. The source is from the report conducted by Bridges Ventures, Parthenon Group and Global Impact Investing Network (GIIN).
The Shorebank Deposit Program
Investors in the Shorebank deposit program comprises of several financial institutions and foundations under the Teachers Insurance and Annuity Association – College Retirement Equities Fund’s (TIAA-CREFF) community bank deposit (CBD).
TIAA-CREFF invested $22 million in Shorebank in 2007. The aim of Shorebankis to create economic prosperity and a healthy environment. In terms of social impact, the group had lent over $916 million to 60 developing countries. For financial impact, the return is -2.5 percent to TIAA-CREF’s CBD Program. The people that invested in this scheme were only after social impact not returns on their investment.
Triodos Investment Management
The Triodos investment management targets providing renewable energy solutions to member countries of the European Union (EU). The Triodos Renewables Europe Fund was funded by retail investors and institutional investors in 2006 with an estimated capital of £30 million.
The Fund makes social impact by investing in small to medium sized renewable energy projects and has a minimum investment size of £1 million. The maximum amount per investment is dependent on the size of the fund and is limited to a maximum 15 percent of the fund’s committed capital.
Root Capital is an asset management company that has investments from several industry players and foundations. Root Capital targets investment in African companies that make use of local raw materials to produce agricultural products. The company targets the “missing middle”, a gap existing between microfinance and corporate banking.
Root Capital provided funds worth $1 million to an agricultural firm in Tanzania, Kilicafe, which supports over 100 farmer groups. The funds helped in the acquisition of raw materials needed to process coffee beans and the construction of a warehouse.
Since then, the membership in Kilicafe has grown by approximately 28 percent from 2006 to 2008. In relation to its financial impact, the loan was expended at an interest rate of 9 percent (in line with local market rates).