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How to start investing for impact as a sophisticated investor

Sophisticated investors will have become aware of a growing trend known as impact investing, or socially responsible investing.

Impact investing is the better term because it’s not just a matter of avoiding harmful activities, such as the arms trade or the exploitation of labour in sweat shops, it’s also a question of backing businesses or projects engaged in doing positive social good.

These might be businesses that generate green energy, pioneer ways of providing clean water in the developing world, research drugs to fight a tropical disease, or provide new ways for young people in poorer countries to gain access to education.

To perfectly show the variety, an early example of impact investing can be seen with those investors who got behind Trevor Baylis’ clockwork radio, which he invented in 1991. These were aimed at Africa and other developing countries where mains electric power and access to batteries was limited. The product had a huge impact and was praised publicly by Nelson Mandela.

However, it’s also possible to have socially responsible investing in less obvious businesses, but where the long term social impact can still be enormous. This could be in a business that provides jobs and training, or which is disrupting an established sector for the benefit of society as a whole. So it might be a challenger bank or a business building much needed homes and addressing the UK’s housing crisis.

Read more: why are more business angels choosing to invest for impact?

This interest in investing for impact may be new to many, but it has already began establishing itself in the world of finance. The Global Impact Investing Network’s 2018 survey of its members, which include fund managers, banks and pension funds, found that they collectively manage more than US$228bn in impact investing assets – that's exactly double the previous year’s figure.

And, according to a report by the leading investment bank JP Morgan, impact investing is forecast to be worth US$1trn by the end of 2020.

They don’t do this on a whim. These are hardnosed professional investors and they aren’t making impact investments out of sentiment, but because they know that they can make a good financial return.

As Jordan mentioned last week, insurance giant Swiss Re announced it was moving its entire $130bn investment portfolio to new, ethically-based benchmark indices.

“This is not only about doing good, we have done it because it makes economic sense. Equities and fixed income products from companies and sectors with a high ESG [social and governance] ratings have better risk-return ratios.” - Guido Fuerer, Chief Investment Officer, Swiss Re

But, while many investors will be convinced that impact investments potentially have an important place in their portfolio, they’ll still be left with the question: how do I get a piece of the action?

It’s one thing to research a business by looking at all the traditional indicators and metrics - the financials, the business plan, the management team, the market and so on - but, with impact investing there’s a whole new range of factors to consider.

  • Is the business addressing a real social need and what is it?
  • Is it something that interests or motivates you?
  • Is this a need that can be usefully tackled commercially?
  • Is the business genuinely committed to having a positive impact or is it only paying lip service for the sake of its image?

This can be a challenge for many investors who feel at home looking at balance sheets, P&Ls and cash flow forecasts but who are maybe not so comfortable in researching other areas.

Of course, it’s always an option to buy shares on the open market in a company whose business will be well publicised and for which it’s probably fairly easy to answer the above questions. But these will be established businesses; their disruptive potential will probably be dissipated having established a new normal for their sector. They may tick all the boxes, but probably offer less in the way of growth opportunities.

Fortunately, thanks to the relentless march of the internet and digital technology, a new way of investing in young businesses with high growth potential has become available – equity crowdfunding - which has made investing for impact so much more accessible.

Read more: 3 key reasons impact investing is soaring in popularity

Crowdfunding platforms bring together high growth businesses looking for funding and investors seeking a decent return on their capital. The way it works is that a business applies to be listed on an online platform, which does an element of due diligence to run the rule over the business plan and, assuming a favourable verdict, the business is listed. Subscribers to the site can then look at the business proposal and opt to take an equity stake by buying shares through a simple online transaction, perhaps with an investment of as little as £100.

A refinement of crowdfunding is co-investing, where the public can buy shares in a company, on an online platform alongside any combination of angel investors, VCs, institutions and regional growth funds. This gives small investors the comfort of knowing they’re in partnership with experienced institutions and individuals who’ll subject the fundraising company to serious scrutiny.

Alone, this doesn’t demonstrate or prove any social impact that the business might have. But with our focus on impact-driven investment opportunities at GCV, our co-investment model makes it easier for a whole range of investors, from the private investor to the business angel, to identify and invest in high growth businesses that can have a positive social impact.

A route that's particularly beneficial for a variety of reasons, one of the most notable is confidence it can help instil - if the opportunity you're investing into already has institutional investors and numerous other sophisticated and retail investors involved, it can be a great indication of market confidence.

And with impact investing only continuing to increase in popularity, options such as online co-investment will only continue to help sophisticated investors take full advantage of the growing number of impact investment opportunities becoming available.

Driving Growth.
Creating Value.
Delivering Impact.

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.