The Major Hurdles to Impact Investing | Chief Investment Officer

(March 7, 2014) — Impact investing won’t be adopted by the majority of institutional investors until several significant challenges have been overcome, according to Nicole Wubbena senior consultant at Hewitt EnnisKnupp.

The approach, which takes social, responsible investing a step further and allocates capital to distinct projects designed to improve society as a whole, has gained traction in recent months, with family offices and high net worth individuals leading the charge.

Sir Ronald Cohen, the founder of private equity giant APAX and godfather of venture capital, is one of the UK’s biggest advocates for impact investing.

In the US, Goldman Sachs launched a $250 million “social impact” fund whose returns are linked to the success of projects such as affordable housing, pre-school education, and how many young criminals commit new offences after leaving New York’s notorious Rikers Island prison.

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And the Dutch pension giant PGGM has also written extensively on how it thinks asset owners should tackle impact investing.

However, despite all of the positive noise surrounding the strategy, there are simply too many problems for asset owners to embrace it fully, according to Wubbena.

“What challenges the endorsement of these products by institutional investors is the inability of such offerings to meet various ‘check the box’ standards. These include length of track record, minimum asset levels, fees, liquidity, and risk/reward ratios,” she wrote.

“Given that the field is still considered in the ‘early stages’, few products have track records exceeding three years and remain relatively expensive to traditional products.”

Another barrier is there are fewer liquid equity-like options than debt, private equity, and venture capital-like investments, Wubbena continued.

In addition, the implementation of these purpose-driven investments, particularly for plans that are guided by stringent expectations around investment performance, can prove challenging.

“In these cases, financial performance as measured against traditional non- social responsible investment (SRI) benchmarks is paramount, and payment for the costs of plan administration and the provision of participant retirement benefits are exclusive, non-negotiable investment objectives,” she said.

The lack of education about the strategies also needs to be overcome, Wubbena said. For some institutional investors, impact investing was still only synonymous with traditional SRI mandates, leading to SRI products being recommended in lieu of strategies that could align better with investors’ goals. The limited amount of data available is also hampering performance measurement, she said.

Despite all of these reservations, Wubbena remained confident that more data and anecdotal observations would be gathered over time, and that a robust universe of investments would be built, providing a stronger perspective from which to consider impact investments in institutional portfolios. She also predicted the development of more specific benchmarks to aid with performance measurement.

“Growth and innovation in the field of impact investing justifies continued interest and participation. While challenges to the field merit caution, or perhaps even temporary avoidance of the space by some, the ultimate decision to invest in the field is one that must be evaluated in the context of many factors specific to a client’s mission and fiduciary parameters,” she said.

“Even if this investment approach does not appeal to some investors now, it may in the near future. Small and gradual allocations by investors today will provide these same investors with valuable insight into the risk and reward of such investments.

“Furthermore, it will provoke thoughts on innovation and best practices as they relate to the use of these funds in complex line-ups. The long runway for growth provides investors currently in these strategies the opportunity to participate in the advancement of existing products and initiatives and to contribute to their evolution.”

(March 7, 2014) — Private real estate firms raising their first or second funds are struggling to secure investor capital, research has revealed.

Data monitor Preqin found an aggregate $14 billion was raised by the 63 emerging private real estate funds that reached a final close in 2013. This was the lowest number to close in any year since 2003 when 52 such funds reached a final close.

The percentage of capital in this market that was allocated to emerging real estate managers fell to just 18% of the amount raised globally by funds closed in 2013. This was lower than the 21% it made in 2012 and 34% in 2011.

“Fundraising is always a particularly challenging prospect for newly established firms,” said Andrew Moylan, head of real assets products at Preqin, “and in a very crowded market with investors increasingly focusing on managers with a long track record, it is only becoming more difficult.”

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Moylan said the majority of funds abandoned or placed on hold in 2013 were being marketed by emerging managers and these firms were increasingly losing out to their more established rivals.

The failure to secure capital is not due to a lack of effort, however. Preqin found emerging managers spent as much time on the road marketing their products as their larger peers, but were less successful.

Just 38% of superannuation schemes and 37% of insurance companies are open to investing with emerging managers, Preqin found.

For those willing to think outside the usual suspects, however, there may be rewards.

“First-time funds are more likely to be above average performers and many sophisticated investors are keen to gain exposure to the most promising of new firms, which have the potential to be the next generation of leading private equity real estate managers,” said Moylan.