Impact Alpha, 13 Feb 2018: https://goo.gl/RcgSW1
“Enterprise readiness” is commonly recognised as a precondition for an effective impact investment. It turns out investors as well could benefit from some support before they jump straight into executing impact investments with their advisors.
That was one key takeaway from an investor panel at last year’s SOCAP conference, and investor networks such as Toniic have begun to explore the topic. Our previous ImpactAlpha post discussed the challenges facing advisors in an increasingly dynamic, complex and competitive market. It is time to turn the spotlight on asset owners.
Investor needs vary, of course, depending on type. For family offices, greater investment flexibility can be both a blessing and a curse. For them “investor readiness” can include the need to educate and align the interests of dozens of family members, sometimes cutting across generations, with family office staff.
Family offices don’t always recognise the value of such education and strategy-setting services — and may not be accustomed to paying for them. They may expect their advisors and managers to provide that type of support for free, or to wrap them into the fees charged during the investment execution phase. That can lead to ill-informed or conflicted decision making.
Private foundations tend to be more cognisant of the need for a deeper level of preparation, given their natural interest in designing impact investment approaches that are tightly aligned to their mission and philanthropic areas of interest. However, they too need patience in working with their advisors to develop the tools and processes required to prepare and execute impact investment strategies. In some cases, foundations are called on to play a unique role building the capacity of the very advisors they and their peers require.
Finally, the advisory needs of institutional investors are quite distinct. They tend to draw on internal research and strategy functions to answer the early education, alignment and strategy-setting questions, and turn outwards primarily for investment sourcing and other execution services. Their concern is the lack of investment products of institutional scale and sell-side investment banking and structuring services dedicated to impact investing.
Investors take the wheel
In our earlier post, we described the impact investing landscape as a highway populated with cars and trucks (intermediaries) moving different types of passengers and cargo (investors) from point A to B. Extending that metaphor, an investor that neglects readiness is like a passenger jumping into a race car when it might be more prudent to take a taxi or shuttle bus.
Tideline’s spectrum shows the types of preparation — education, clarification of objectives and requirements, and research and strategy development –- that investors could benefit from before moving to execution in impact investing.
But, as our SOCAP panelists pointed out, far from being the passive recipients of these services, investors can help to design the intermediary ecosystem they need and prefer.
A well-functioning impact investing market requires that investors of all types make use of the following levers:
Investors should seek clarity and transparency on what they don’t know. Being upfront about the learning and alignment needed to become ‘investor ready’ would allow for better matching of intermediary services with investor requirements.
Investors should demand transparency from their advisors regarding their capabilities across the various stages of investment, any conflicts that may arise and how fee structures achieve or impede alignment of interests.
Investors can share learnings, tools and frameworks to advance peers’ understanding of what works and what doesn’t in working with advisors. Peer networks and affinity groups are particularly helpful for this purpose.
Investors can help build the intermediary market by engaging directly with advisors, including by: writing Requests for Proposals (RFPs), which can be a useful exercise for clarifying requirements and comparing intermediary services; encouraging collaboration between advisors with different capabilities; and embracing the messiness’ of the market and working creatively with advisors to jointly tackle remaining gaps and explore new solutions.
Investors play a critical role helping traffic flow smoothly and efficiently on the impact investing highway. By approaching the market with more clarity, confidence, and creativity at the outset, investors will be better prepared to achieve their impact investing objectives.