Impact investment faces tricky path to standardization

The Global Impact Investing Network (GIIN) estimates that there are $502 billion in impact investing assets under management, one-quarter of them held by 31 development finance institutions (DFIs). The International Finance Corporation (IFC) puts the sum controlled by private impact funds at around $71 billion, while noting that the lack of clear boundaries between what is and is not impact complicates any calculations.

Andy Kuper, the founder and CEO of LeapFrog Investments, told IFC's global private equity conference that these estimates drastically underestimate the size of the impact universe. "There has always been a misconception about the number of opportunities out there," he said, noting that many investments could be categorized as impact but are not.

"GIIN is one of the best databases out there but there is no database covering all the opportunities that are available. It's a real shortcoming," added Afsaneh Beschloss, founder and CEO of RockCreek, a global sustainable investment firm.

The need for shared forms of reference is apparent in all aspects of impact investment, from the definition of investment strategies – whether they align with the UN's sustainable development goals (SDGs) or other criteria – to the measurement and independent verification of the impact achieved. This has become even more important as new funds are launched to tap growing investor interest in the space.

To this end, IFC recently released a set of operating principles for impact management that are intended to properly define the impact investment process and help investors come up with their own assessment protocols. Industry participants welcome the initiative, but caution that it will take time for the market to stabilize.

"Everyone has a different framework, but we are starting to coalesce around a certain set of frameworks. Those who cannot build them can get them off the shelf," said Jennifer Pryce, president and CEO of Calvert Impact Capital, a non-profit investor. "Measurement is not such a bouquet effort, there is more standardization behind it." 

Kuper believes standardization will help separate the wheat from the chaff over the next few years as "those doing it as a marketing strategy are weeded out and those doing it for stronger returns are lifted up."

However, at the same time, the impact space is becoming larger and more complex, with global PE firms joining smaller incumbents in launching impact strategies. TPG Capital is targeting $3.5 billion for its second Rise Fund, while LeapFrog has so far raised $700 million for its third fund, up from the $400 million for Fund II. India-based Aavishkaar is also looking to scale up, but its total assets under management are around $200 million.

These firms approach investment in different ways, appeal to different kinds of LPs, and measure their success in different ways. They also face very different practical challenges.

"It is very difficult to follow your passion of creating a company that can create impact, generate a 20% return in five years and find a consultant that understands and verifies the impact," said Vineet Rai, CEO and managing director of India-based Aavishkaar. "You have to be a trapeze artist to have all those balls in the air."

He noted that smaller players struggle to pay for the consultant, while passing the cost on to the fund may cut into returns unless the investments are of a meaningful size. Retaining talent is also a challenge for these firms because they cannot compete with larger mainstream GPs.

Nevertheless, Rai is encouraged by the progress impact investors are making. He recalled a meeting with a US endowment in 2013 at which the investment professional tried and failed to find a category for Aavishkaar. The instinct was to classify it as venture, but there wasn't any dedicated technology exposure. Even though the investment professional recognized that Aavishkaar had returned capital to LPs, the endowment passed on the fund.

"Now when I say I am in impact investing, they know," Rai said. "They might say you are not large enough, credible enough, or you don't look right – this remains constant. But at least you can have the conversation."

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• Topics
• GPs
• Expansion
• Asia
• Growth capital
• Impact investment
• IFC
• Emerging Markets Private Equity Association (EMPEA)
• LeapFrog Investments