Susan H. Mac Cormac is a Partner and Michael P. Santos is an Associate at Morrison Foerster LLP, and Divya Walia is a Research Fellow at Impact Capital Managers. This post is based on a Morrison Foerster and Impact Capital Managers memorandum by Ms. Mac Cormac, Mr. Santos, Ms. Walia, Harry M. Stanwick, Daniel J. Irvin, and Marieka Spence. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Max M. Schanzenbach and Robert H. Sitkoff.
Introduction
Executive Summary
Impact Capital Managers represents over $60 billion of impact-focused capital and connects a network of 100+ of the leading private capital investment funds seeking competitive, market rate returns. As market-rate investors, the challenge for ICM member organizations is to prove that impact can and does drive financial return. Inconsistency in impact measurement and reporting makes it difficult to establish a quantitative correlation between impact and financial performance. However, ICM member examples demonstrate that, when done right, effective investment stewardship from an impact perspective is the same as effective stewardship from a financial perspective. Nowhere is this clearer than at the exit stage, where impact and financial value creation during the life of the investment are realized. This report is interested in showing the impact-specific drivers that most influenced exit outcomes for ICM portfolio companies. While this report centers on ICM members’ firms, we hope the findings can be useful for the private capital impact investing landscape more broadly.
ICM member organizations represent just one pillar of the effort to mobilize capital towards crucial social and environmental issues. As market-rate investors, ICM funds should be assessed independently from other investors on the impact capital spectrum, including concessionary rate investment funds, philanthropy, and public organizations. ICM members also differ from other areas of the sustainable investing landscape in that they represent mainly private capital. On one hand, this gives investors freedom from short term shareholder pressure and allows for a focus on long-term impact creation. However, this also creates opacity around their impact and its relationship to realized financial value.
This report attempts to reduce some of that opacity by including transaction-level information that show both impact and financial return. This report is also focused on specific considerations that impact investors face at exit. Unlike traditional investors, realized financial value is not the only outcome that matters. As mission-driven capital allocators, most ICM firms are interested in impact created and future impact potential as metrics of exit success. Impact investors are also concerned with how to protect that impact at exit. Many general partners have committed to their limited partners in their governing documents that they will seek to create impact with their investments. Protecting impact at exit and fulfilling their commitments to their limited partners is thus of particular importance. In addition to exit-level analysis, the report includes a discussion of impact tools used by investors to create and maintain impact at exit.
