Ready To Seize The Impact Investing Opportunity?

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Impact investing is on the rise, as more and more private equity (PE) investors look to achieve solid financial returns while also helping to solve some of the biggest social and environmental challenges we face. As the impact investing opportunity continues to grow, Canadian PE firms should take steps to get ahead of the curve and ready themselves for investors’ inevitable questions. Those that move early stand to be leaders in the Canadian impact investing space.

Impact investing: An approach that’s gaining momentum

As an investment approach or lens, impact investing can be applied across asset classes, industries, geographies, and companies at every stage, from start-up to growth to mature, whether private or public. Impact investing encompasses different kinds of capital as well. Patient or concessionary capital is sometimes required, but PE firms in particular are finding an increasing number of opportunities for commercial investment and returns.

According to KPMG’s recent report, Enlightened capital: The role of trust in impact investing in private capital, the amount of capital invested in impact has grown sharply over the past five years, with little sign of abating. Impact investing activity is rising across the PE industry, with a number of PE firms launching impact investing funds and injecting billions in new capital in the process.

The market is already significant — and with massive growth potential. The Global Impact Investing Network estimates the impact investing market to be $502 billion, with more than 1,340 organizations managing impact investing assets worldwide. The International Finance Corporation estimates investor appetite and market potential for impact investment is upwards of $26 trillion, or 10 percent of financial assets held by institutions and households globally.

Several factors driving impact investment’s growth

Societal expectations of the role and responsibilities of business are shifting. In fact, senior PE executives interviewed for our report point to a growing need for solutions-focused capital, a drive to address unmet needs — and demands from investors themselves. In many cases, these executives felt impact investing was already well aligned with the culture and values of their existing portfolio of investee companies.

Investors are all searching for the next big opportunity, and they’re increasingly realizing companies tackling society’s biggest problems may be their next big ticket. The issues these companies are addressing seem to grow in size, scope, and pressure with each passing day, however, scaling solutions requires commercial capital. Several companies with strong leaders are committed to being a catalyst for change — using a commercial lens and leveraging best-in-class business practices. In fact, a number of PE general partners believe having an impact focus allows them to see — and seize — high-potential opportunities that others miss.

Trust will play a big role in impact investing’s growth

Our research shows that investor appetite for impact investing is high, and the impact market holds enormous potential. To realize that potential, PE firms will need to work to engage and earn the trust of both investors and the general public. Standards for reporting and transparency around impact are still in their early stages, and PE funds will need to show their intentions are pure, their approach credible, and their financial and impact performance on target.

Creating and embracing a detailed communications strategy is a core element of success for PE firms contemplating the introduction of an impact investment strategy. PE firms should be clear how impact investing will shape their investing approach overall, and how they will incorporate impact management and measurement into their overall decision making. Many PE firms are considering engaging third parties to provide independent assurance of their investments’ impact results as they do with financial results.

It’s time for Canadian investors to pursue impact

As our report illustrates, US PE firms have made significant inroads in impact investing. Canadian PE firms have been slower to get involved in the space — but we see no reason to wait. We encourage Canadian PE firms to learn from the impact investing experiences of their US counterparts and use this knowledge to be proactive and develop their own impact investing strategies. The faster Canadian firms move, the better they’ll be able to respond to their limited partners’ questions about impact investing — and pursue high-potential opportunities.

Impact investing is the future

Impact investing is no fad. At KPMG, we believe it’s the future of investing, especially within PE. Impact investing offers important and immediate opportunities for Canadian PE firms to take a leading role in this fast-growing space.

Tania Carnegie is Leader and Chief Catalyst of the Impact Ventures practice at KPMG LLP.