February 2012 www.euromoney.com74

Private banking

75www.euromoney.com February 2012

When JPMorgan recruit-

ed for a position in its

social-sector finance

group last year more

than 1,000 employ-

ees applied for the job. At Harvard Business

School, social entrepreneurship and impact

investing is now the most popular course.

Impact investing might be the saviour of a

finance industry tarnished in the crisis, step-

ping in to help solve the social problems that

many governments are now ill equipped to

handle alone. It is where capital markets meet

benevolence. What started as a discussion

around philanthropy now has the potential to

become an industry in its own right.

Impact investing is, at its most basic,

providing finance to non-profit or for-profit

organizations and companies that will have a

social impact. That might be a loan to a local

housing organization or an investment in a

company that is developing technologies to

combat climate change.

It’s not new by any means. The wealthy

have been donating and investing in com-

panies that aim to create positive social

change for more than a century. The private

equity and venture capital industries, for

example, emerged as a result of investments

by wealthy European families after the

Industrial Revolution. In the late 19th and

early 20th centuries, the wealthiest names in

the US, such as JPMorgan, the Vanderbilts,

Rockefellers, Warburgs and Whitneys, made

private equity mainstream, building railways

and cultural landmarks.

That spurred the emergence of the venture

capital industry after the Second World War

when companies were set up by wealthy indi-

viduals to gather funding to finance start-up

businesses for returning soldiers.

Impact investing looks set to follow a simi-

lar trajectory in becoming an asset class. “A

change in mindset is becoming evident,” says

Richard Brass, director at Berenberg Bank.

“Investors are actively seeking out those

companies that pursue a clear sustainability

agenda alongside a traditional financial re-

turn. At the same time private-wealth philan-

thropy is paying much closer attention to the

social return from their charitable giving.”

Several factors are coinciding to propel

impact investing. Easier access to informa-

tion has increased awareness of social issues,

particularly among the younger wealthy

generations. At the same time, demograph-

ics have shifted so that a large portion of the

world’s wealthiest individuals are of an age at

which there is an increasing sense of urgency

in leaving a legacy.

Brand is also a factor. There has been a co-

inciding shift in perspective about the virtues

of leaving behind the legacy of making money

compared with a legacy of solving global

issues. “Some of this new interest for sure is

from individuals thinking about how they

want their family name to be remembered,”

says Charles Lowenhaupt, chief executive of

family office service provider Lowenhaupt

Global Advisors. Bill Gates, for example, has

inspired many wealthy individuals with the

Bill and Melinda Gates Foundation, the larg-

est in the world. Gates is more likely to be

remembered for his philanthropic endeavours

than for supposedly anti-competitive business

tactics at Microsoft. Michael Milken is now

commended for the efforts and success of

his Milken Institute, rather than vilified for

violating US securities laws.

The tipping point of impact

investing, however, is the eco-

nomic crisis. This has boosted

awareness of the global gap

between the rich and the poor

and has highlighted the inability of govern-

ments to fund solutions. “For all the talent

and money in the public sector, there is much

more talent and money in the private sector,”

says Antony Bugg-Levine, the chief executive

of Nonprofit Finance Fund in New York,

which has been helping non-profit organiza-

tions to deal with their financial issues for

more than 30 years.

Furthermore, the downturn made philan-

thropists more aware of the sustainability

of charities they were donating to, says Bill

Woodson, head of family wealth manage-

ment at Credit Suisse. “Philanthropists want

to ensure that the charities they are funding

have other means for raising money.”

The result is that wealthy individuals and

families have been re-examining how their

philanthropic dollars are put to work. Typi-

cally a wealthy individual or foundation will

give 5% of its portfolio away in grants and

donations to selected charities, and the re-

maining money will be invested in assets that

seek to make returns to reinvest. Now they

are asking how to ensure that the remaining

95% makes an impact, and they are being

met with an increasing amount of products

and advice to help them.

The idea of products such as pooled

financing deals or investment funds in the

context of philanthropy has not been easy

for the financial services industry to grasp.

“There is this bifurcation of ‘I make money

by investing and I make social change by giv-

ing money away’,” says Bugg-Levine. As the

number and diversity of companies providing

solutions to problems such as climate change,

disease, food scarcity and poverty increases,

however, the mindset is changing and the list

of profit-generating firms driven by social

entrepreneurship is growing. The Gym, for

example, started as a low-cost fitness centre

in an inner-city London neighbourhood

and grew to become a franchise. Another

example is a woman who developed a new

utility switch that regulates utility functions

in affordable housing units, saving buildings

hundreds of thousands of dollars. Or food

company Gain, which aims to make cheap

food more nutritious.

The most dramatic change in mindset,

however, is the concept of making returns

from the public sector. “It’s not just about

investing in companies that will have a social

impact, there are ways to fund basic social

services,” says Bugg-Levine. “We’ve been

lending to non-profits for 30 years, and there

are many ways of putting capital to work

that are helpful and that provide a return.

With public spending being cut, wealthy individuals are putting more of their philanthropic dollars to work through social-impact investing. Companies are being set up to provide advice and products, and the private banks need to get on boardBy: Helen Avery Illustration: Peter Crowther

February 2012 www.euromoney.com76

Private banking

You can help solve homelessness not

just by giving to shelters but by invest-

ing in sustainable programmes that save

money.”

UK and US � rm Social Finance is hop-

ing to prove that returns can be made by

funding such sustainable programmes. It

is developing instruments that align the

interests of private investors seeking both

social and � nancial returns with those of

non-pro� ts and governments. “Solving

homelessness can produce returns,” says

its US chief executive, Tracy Palandjian.

Her � rm is in talks with state govern-

ments and is approaching the capital

markets with what are known as Social

Impact Bonds. The instruments would be

issued by Social Finance and the capital

used for programmes to reduce the

public cost of chronic homelessness or

other social problems. “US states pay $6

billion to $87 billion a year for services

such as shelter, emergency room visits,

and psychiatric care with regards to the

chronically homeless,” says Palandjian. “A

Social Impact Bond could be issued to pay

intervention programmes, such as perma-

nent supportive housing, which includes

targeted case management and access to

preventative healthcare and other ben-

e� cial services. If over the length of the

instrument, the government’s cost to serve

the chronically homeless is reduced by a

predetermined amount, then the investors

would receive their principal and a return.”

She also points to Social Impact Bonds as

a means of reducing the cost of incarcera-

tion to the government. Over $50 billion is

spent by states on correction facilities each

year “but nearly one in two offenders ends

up back behind bars,” she says. Social Impact

Bonds could be used to pay for rehabilitation

programmes to reduce re-offending, such as

housing and employment assistance, rehab,

and mentoring and behavioural support.

If we invested in prevention programmes

around re-entry, taxpayer savings could be

signi� cant.”

The new model of thinking about where

returns can meet social gain is at present not

a part of the regular private banking model,

and it means a big overhaul by the industry is

called for. “The industry has employed people

to help you invest money, and people who

help you give money away. There is no mid-

dle ground,” says Bugg-Levine.

It is a surprising but accurate judgement.

Most private banks contacted for this article

said that their philanthropy advisers were

unable to speak about impact investing as it

was not an area they looked at other than

on a client-by-client basis. Nor did the advis-

ers work with the micro-� nance teams in

the groups’ investment banks. Some banks

said they were introducing networking

Donor-advised fundsKathy Merchant is president and chief

executive of the Greater Cincinnati

Foundation, one of some 700 com-

munity foundations in the US. Like most

community foundations it offers a donor-

advised fund product – pools in which

local individuals and families invest

as part of their federal tax-deductible

charitable-giving allowance. The funds

are invested in balanced portfolios, and

the donors can ask the community

foundation to make grants to non-profi t

organizations when they wish.

Four years ago, Merchant started

looking at social-impact investing as

part of the foundation’s overall commu-

nity investment strategy. “The idea was

that you can make a grant, and then

the money is gone, but we have a lot

of creative and entrepreneurial people

in Cincinnati, so we thought it would

be attractive to look for opportunities

where they could perhaps make a loan

or invest in a local enterprise.”

After making several loans and

equity investments using its endow-

ment funds, in August last year the

foundation began to offer social-impact

investing to donor-advised funds.

Merchant says that current and pipeline

investments total $10 million of the

$425 million in assets held by the foun-

dation. Now donor-advised funds are

starting to co-invest with the founda-

tion, making even more low-cost capital

available to support local non-profi t

organizations.

Merchant says there are big oppor-

tunities to put money to work: “The lag

effects of the recession are starting to

show up in communities and local non-

profi ts, and there are a lot of organiza-

tions desperate for capital. What we

found surprising was the different and

unique opportunities out there. Loans to

local low-income housing developments

are the norm but we’ve discovered in-

vestment opportunities in things like the

commercialization of genome research

in universities and hospitals, or energy

retrofi t loans, or loans in technology

for education linked to state education

standards.”

The combined assets of all donor-

advised funds in the US is some $30

billion among 162,000 funds. Financial

institutions such as Fidelity and Morgan

Stanley Smith Barney also offer donor-

advised funds. The Fidelity Charitable

Gift Fund, for example, has about $2.5

billion in assets.

Their interest in impact investing

is only just beginning. However, as

Merchant points out: “What if all of the

donor-advised funds dedicated 10% of

their portfolios to local impact investing?

That would make a huge difference to

society.”

Solving homelessness can produce

returns

Tracy Palandjian, Social Finance

77 www.euromoney.com February 2012

events on the topic but had nothing formally

established.

This means demand is at present being

met by independent organizations such as

Nonpro� t Finance Fund or Veris Wealth

Partners, which is a wealth manager entirely

dedicated to investing money in socially

responsible � rms, or � nancing or investing in

organizations that have a social impact. “Very

few � rms have the experience in impact

investing,” says Patrica Farrar-Rivas, chief

executive of Veris. “Consultants, asset manag-

ers and now private banks may offer a few

select products, but they don’t have a view of

the entire landscape.”

Bugg-Levine says it was not until last

year that private banks started to consider

an offering to their clients in social-impact

investing.

“It’s a real challenge for the private banks,

which are not organized to suitably address

impact investing,” says Bugg-Levine. “You

tend to have this barbell where the CEOs and

chairmen understand the importance as it

shows the bank is doing good and it is good

for recruiting – and the 27-year-old Harvard

graduates at the banks are really keen to be

involved. But then there are the bankers in

the middle who are just not set up to have

the resources to � nd opportunities and build

products, or work out how to � t it in with

their clients.” That is changing, he adds.

One leading wealth manager has already

launched an impact investment fund as a

private placement. JPMorgan Private Bank is

also launching a private placement deal with

its social-sector � nance group – a group that

formed three years ago to conduct research

and seek investments with social impact on

behalf of the bank itself.

Adjusting the mindset to

making returns from social

gain, and reorganizing the

business to address impact

investing, are not the sole

challenges for private banks. Developing

products or locating third-party products in

a new asset class comes with risks attached.

In impact investing, there is the risk, as with

any investment, that returns will not be made

or that loans will not be repaid. The skills for

effective due diligence in this new sector will

have to be developed.

Perhaps the biggest risk, however, is that

the social gains towards which the money

was allocated might prove disappointing.

Measuring social impact is not as precise a

science as measuring returns. The metrics are

beginning to be set up, says Farrar-Rivas. “It’s

a new set of measures and clients want their

own. How are they tracking performance? Is

it by the number of jobs created? The energy

saved? The number of properties restored?

These kinds of measures will be as important

as � nancial returns.”

And Bugg-Levine says that, at the same

time, � nancial returns need to be met.

Returns typically range from 1% on a loan

to 10% on a private equity investment in a

company. “It’s not a case of saying: ‘Oh well,

it didn’t make money but it did bene� t soci-

ety’,” he says. “The social mission should not

result in lower standards in creditworthiness

or it misses the point.”

At these early stages of development,

� nancial institutions are looking to work

with foundations and organizations that

have experience in impact investing not

only to increase their knowledge but also to

develop collaborative initiatives. Some are

placing investment bankers in secondment

positions with foundations, for example, for

mutual education on how capital markets

and funding social change can interact.

“There will need to be a recognition that

none of us alone will get the job done, and

investments are not enough. Nor are loans,”

says Bugg-Levine. “Grants will always be

needed, as will government support. The ex-

citing thing about impact investing is that it

could encourage a complete capital solution.

So how can we put the grant money together

with the investment money and work out

whether a credit enhancement or a loan-loss

guarantee might work or whether to hire a

new CFO and bring in intellectual capital?

That’s when the breakthrough will really

happen in how � nancial markets address

social change.”

Private banks will play a vital role in creat-

ing the impact-investment industry. Beren-

berg’s Brass says it is an area that suits the

private banks perfectly. “The core of private

wealth management is tailoring investment

mandates and showcasing investment op-

portunities. It is also about helping clients

that wish to do so to use their wealth to the

long-term and sustainable bene� t of others.”

Woodson at Credit Suisse says it is impera-

tive that private banks move into impact

investing. “It’s likely that the � rst steps some

private banks take will be to partner with

external impact-investing managers, and be

a distribution channel for those,” he says.

“We are well down the road in evaluating

such managers. It’s a return on investments to

make that sort of commitment to philanthro-

py. Firstly it creates goodwill with the client

It’s not a case of saying: ‘Oh well, it didn’t make money but it did

bene� t society’

Antony Bugg-Levine, Nonpro� t Finance Fund

February 2012 www.euromoney.com78

Private banking

and translates into referrals or longer and

deeper relationships. And secondly, to execute

on these strategies, clients will create charita-

ble organizations themselves that will require

an adviser. We would want to be that adviser.”

As private banks begin to create products,

Farrar-Rivas says she hopes that they will

realize that this is a long-term project. “If

their initial products fail to produce the social

or investment returns forecast, I hope they

understand that there are thousands of ways

to structure products and don’t just give up on

impact investing based on one initial attempt,”

she says.

Making impact investing scaleable will be

crucial for the private banks. Jacqueline Elias,

co-head of the philanthropy centre at JPMor-

gan Private Bank, says it is one of the main

challenges. “The deals to fund are somewhat

limited and sometimes quite small compared

with a lot of the fundraising we do,” she says.

“An organization may be trying to raise just

$15 million for example.” She says the will is

there but it will be a case of working out how

to bundle or structure the products.

Like private equity and venture capital,

however, impact investing has the opportu-

nity to be rolled out to institutional investors,

retail investors and to have greater capital

markets involvement. The Rockefeller Foun-

dation, for example, is supporting the Calvert

Foundation to develop additional products

for retail impact investors. Margot Branden-

burg is associate director at the Rockefeller

Foundation and has been working with

peers to assess what it would take for impact

investing to become an industry in its own

right.

“There is no doubt about the challenge,”

she says. “It requires an industry infrastruc-

ture, impact rating systems, reporting stand-

ards and online clearing houses, social ex-

changes, basic research and policy frameworks

and new products and intermediaries. But it is

coming. ImpactBase, an online clearing house

of impact-investing funds, contains 130 funds

at the moment, many of which have become

more sophisticated, and now we are � nally

seeing movement from the private banks, for

which product needs to exist at scale. This is

good, because the scale of problems is beyond

the government and private foundations to

address alone. If an industry is developed, it

could bring in the capital markets and, with it,

tens of trillions of dollars.”

UBS matches business practice with philanthropic goalsSpeak to people involved in philanthropy

about impact investing and lots of contra-

dictory phrases are trotted out. “It’s not

new, but at the same time it’s very new,” is

one. “It’s a great opportunity, but there are

lots of challenges,” is another.

For Mario Marconi, managing director

and head of family services at UBS, the

concept is simpler. “The idea of impact

investing is to promote social and environ-

mental good while at the same time apply-

ing an investment logic,” he says.

Marconi’s role incorporates responsi-

bility for philanthropy and values-based

investment. He concedes that the sector

is in its infancy: there’s lots of talk but

little action, with plenty of people writing

reports but little else.

Back in 2004, Marconi was part of

UBS’s push to build a philanthropy offering

for ultra-high-net-worth individuals. It’s an

area UBS dominates today: UBS ranks

top of the global category for philanthropy

services in Euromoney’s annual survey,

with a clear lead over second-placed

Credit Suisse, by 11.9% of total votes

to 8.2%. (For access to the full set of

bank scores, visit euromoney.com and

subscribe to Euromoney’s Global Private

Banking Review.)

Marconi says UBS started to look at

impact investing two years ago. “We saw

interest among clients in making invest-

ment decisions based on impact and

sustainability, not as a replacement to

charitable donations but to go alongside

it. And as a business we felt that achiev-

ing a social impact through an investment

approach would be a long-term economic

trend,” he says.

UBS is looking into areas of fi nancing

small and mid-sized enterprises through

private-equity-style vehicles, aimed at

the wealthiest clients, which will invest in

companies in frontier countries where the

average GDP is less than $10,000 per

capita. Most are involved in sectors such

as education, healthcare or infrastructure,

and they have to adhere to strict environ-

mental and social practices.

“The engine of growth in these countries

is the SME sector, but they have very little

access to long-term capital,” says Mar-

coni. “Government aid and philanthropy

cannot cover the money needed to gener-

ate this growth, but private sector capital

can. Once you give capital protection, the

pool of investable money becomes far

bigger.”

Although some of the biggest and most

infl uential family foundations are said to be

looking at impact investing, Marconi says

the emerging markets such as Asia and

Africa will have a vital role to play. “A lot

of the issues that need addressing are in

these developing regions. There are many

successful entrepreneurs that are looking

to establish an approach to philanthropy,

and they like the business proposition

involved in impact investing.”

But he says the mindset of philan-

thropy everywhere is evolving. “There is a

fundamental transformation taking place.

Now our clients’ biggest concern is ‘Am I

making an impact?’”

We saw interest among

clients in making

investment decisions

based on impact and

sustainability, not as a

replacement to charitable

donations but to go

alongside it

Mario Marconi, UBS

looking at impact investing, Marconi says