Wednesday, March 25, 2015

Allman, Impact Investment

Impact investors believe in the power of private capital to solve intractable social problems and, at the same time, deliver a financial return. Impact investing is a burgeoning field. “As of 2014, over USD12.7 billion has been committed to impact investing, representing a growth of 19 percent from the prior year. Numerous investors are active ranging from lone high net worth individuals to a multitude of private equity funds. Even larger-scale financial institutions and investment services have dedicated funds and resources to impact investing.” (p. 1)

Keith A. Allman and Ximena Escobar de Nogales have written a how-to manual for the would-be investor. Impact Investment: A Practical Guide to Investment Process and Social Impact Analysis (Wiley, 2015) takes the reader through the steps that an investor would normally follow: sourcing and screening, investment analysis and valuation, due diligence and investment structuring, term sheet and documentation, and building value to exit.

The process is arduous and more constrained than traditional private equity investing. Private equity funds have a single mission—to make money. Impact funds have a dual mission—to deliver both financial and social/environmental returns. This means that impact investors will have a smaller pool of potential investments from which to choose. It entails a more complicated set of metrics throughout the process. It also means that the compensation of the fund manager has to be pegged to both financial and social goals—a tricky calculation at best.

Impact Investment is an excellent guide for investors who want to venture into the field of idealistic capitalism. As this book amply demonstrates, they will need all the help they can get.

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