Investment Notes

Collaborative Impact

March 2, 2020
Alex Debney By Alex Debney

A key pillar of successful impact investment into real assets is partnering with the best operators.

While our focus is not direct investment into businesses, the stable infrastructure-like investments we do focus on require careful management. For example, the successful delivery and administration of affordable housing to people in need requires a highly skilled operator with experience.

At The Impact Fund our investment process can be fundamentally refined into three key steps:

1. Define areas of deep social and environmental need best suited to impact investing, i.e. our “impact themes”

2. Find attractive opportunities with the right investment characteristics which address each theme

3. Partner with the best, most intentional and aligned asset operators/managers for each investment. These partners help us source specific investment opportunities, manage our portfolio of real assets, and fundamentally drive the impact in our investments.

Without these exceptional operating partners for our assets The Impact Fund would not be able to create real and lasting positive impact for its investors.

We highlighted in our first thought piece, Understanding Impact Investment, that here at The Impact Fund we try to very deeply investigate every aspect of an investment, including ongoing management of the assets.

How we rigorously investigate and approach collaboration and partnering with the best operators is a key pillar of our investment assessment.

There are typically three areas we focus on in this evaluation — track record, shared values, and future outlook.

Track Record

Impact investment, as we’ve highlighted before, is a relatively nascent investment sector in Australia. Things like how we truly measure impact, working through unexpected consequences of an investment, and where to invest within each sector are evolving at breakneck speed.

That presents real risks and challenges (and great opportunities). Partnering with an experienced operator with a successful track record is one way in which we mitigate these risks.

We dive deeply into the culture of the business, the people and management, the commercial outcomes, and how they enact positive change.

We also care very deeply about their past commercial outcomes — both positive and negative. Often negative outcomes and mistakes give us the best learnings. How an operator successfully navigated these situations innately speaks to their ability to deal with future challenges.

If we are evaluating a new operating partner without a demonstrated track record then the focus switches to personal track record of the management team. We love fantastic entrepreneurial minds, and do not want to discount great opportunities that may exist with growing operators.

Shared Values

A platform of shared values is also something we look for.

It’s important in any business relationship — but is even more essential in impact investing. Perverse incentives and outcomes can arise from any investment, but they’re exactly what we’re trying to avoid with impact investment. So, it is highly important an operator and impact investor share the same values to avoid unintended negative outcomes.

An example we’ve seen repeatedly is where profit-seeking strategies don’t align with targeted impact outcomes.

The first value we look for is authenticity. This starts with answering questions like “does the management team operate with integrity”, and “do we trust their perspectives as the expert, or best-in-class operator?” When the answer is yes it becomes much easier to navigate tough situations, or ensuring the investment and impact strategy is executed on.

From there our team really look to understand other values that are important to us, like ownership over outcomes, reliability, and commitment. We are patient capital and our relationships need to last.

Reference checks are therefore a very important part of the process for our team, alongside our own direct diligence.

Future Outlook

Strong track record and shared values are not enough by themselves. Alignment towards a common future goal is important. We meet many great operators with a similar value set — but who may not share our growth ambitions and desire to create change and positive impact at scale.

To enact real change in a new and evolving investment sector we need to think big. Operators who share this vision will help us be a driving force behind real capital inflows to the impact sector.

A good example from our recent investments is specialist disability accommodation.

It is a new sector that requires a large amount of investment over the next 3–5 years, with great impact outcomes and projected returns. Yet it is complex to navigate.

Our team worked hard for over two years to understand various operators throughout the sector, before partnering with two fantastic specialist disability accommodation providers. They share our future outlook and have a commitment to real impact at scale.

Read the full article here