An Actual Impact Investing Product

Tom Kostigen writes about an investment product that offers an expected return of 4% to 5% (presumably annualized) over a 7 -10 year hold, and where "more than half the downside is covered."  It is an impact investment in the area of health care, which is quite hot right now.  Mr. Kostigen tells how a top financial advisor at a prestigious Wall Street firm is having trouble raising interest in the program among institutions whose mission is health care.  The author relates that the advisor is planning to change his sales pitch to likening the program to investing in the next Viagra.


The broad outline of the this product is some confirmation of my contentions about impact investing in general: capital can accomplish economic returns, non-economic value, or some combination.  To the extent that non-economic value is accomplished, the economic returns will be reduced.  Moreover, to the extent that the value created is non-economic, the risks to the capital increase.  Thus, this (long-term, illiquid, private equity) product provides for a return of at least half of the invested capital, and still provides a maximum expected return of only 5%.


If I were to guess, one big factor in the product's low acceptance is the fact that it sits between the investment and philanthropic goals of the organizations.  Simply put, the product does not qualify for satisfying a foundation's distribution requirements.  In the other hand, the 5% maximum expected return is just enough to cover the required distribution without invading the corpus.  Not to mention the paltry return relative to the risks taken.


This program is a glaring example of a product manufactured to appeal to a trendy notion rather than having economic fundamentals to offer to prospective investors.  I don't doubt that social entrepreneurs are being funded and providing an economic return.  I am not convinced that these investments are sufficiently numerous and scalable for distribution through the advisor channel.  Better to invest to meet the client's investment goals, including any charitable giving to achieve the client's social objectives.