February 2012 www.euromoney.

com 74
Private banking
75 www.euromoney.com February 2012
W
hen JPMorgan recruit-
ed for a position in its
social-sector fnance
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
fnance 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 fnance to non-proft or for-proft
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.
Its 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 fnance 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 fnancial 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
worlds 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 offce 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 vilifed for
violating US securities laws.
T
he 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 Nonproft Finance Fund in New York,
which has been helping non-proft organiza-
tions to deal with their fnancial 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
fnancing deals or investment funds in the
context of philanthropy has not been easy
for the fnancial 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 proft-generating frms driven by social
entrepreneurship is growing. The Gym, for
example, started as a low-cost ftness 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. Its not just about
investing in companies that will have a social
impact, there are ways to fund basic social
services, says Bugg-Levine. Weve been
lending to non-profts 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 board
By: Helen Avery Illustration: Peter Crowther
February 2012 www.euromoney.com 76
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 frm 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 fnancial returns with those of
non-profts and governments. Solving
homelessness can produce returns, says
its US chief executive, Tracy Palandjian.
Her frm 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-
efcial services. If over the length of the
instrument, the governments 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
signifcant.
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-fnance teams in
the groups investment banks. Some banks
said they were introducing networking
Donor-advised funds
Kathy 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-prot
organizations when they wish.
Four years ago, Merchant started
looking at social-impact investing as
part of the foundations 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-prot
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-
prots, 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 weve discovered in-
vestment opportunities in things like the
commercialization of genome research
in universities and hospitals, or energy
retrot 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
Nonproft Finance Fund or Veris Wealth
Partners, which is a wealth manager entirely
dedicated to investing money in socially
responsible frms, or fnancing or investing in
organizations that have a social impact. Very
few frms 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 dont 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.
Its 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 fnd opportunities and build
products, or work out how to ft 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 fnance group a group that
formed three years ago to conduct research
and seek investments with social impact on
behalf of the bank itself.
A
djusting 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. Its
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 fnancial returns.
And Bugg-Levine says that, at the same
time, fnancial returns need to be met.
Returns typically range from 1% on a loan
to 10% on a private equity investment in a
company. Its not a case of saying: Oh well,
it didnt make money but it did beneft 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,
fnancial 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?
Thats when the breakthrough will really
happen in how fnancial markets address
social change.
Private banks will play a vital role in creat-
ing the impact-investment industry. Beren-
bergs Brass says it is an area that suits the
private banks perfectly. The core of private
wealth management istailoring 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 beneft of others.
Woodson at Credit Suisse says it is impera-
tive that private banks move into impact
investing. Its likely that the frst 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. Its a return on investments to
make that sort of commitment to philanthro-
py. Firstly it creates goodwill with the client
Its not a case of saying: Oh well, it didnt make money but it did
beneft society
Antony Bugg-Levine, Nonproft Finance Fund
February 2012 www.euromoney.com 78
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 dont 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 fnally
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 goals
Speak to people involved in philanthropy
about impact investing and lots of contra-
dictory phrases are trotted out. Its not
new, but at the same time its very new, is
one. Its 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.
Marconis role incorporates responsi-
bility for philanthropy and values-based
investment. He concedes that the sector
is in its infancy: theres lots of talk but
little action, with plenty of people writing
reports but little else.
Back in 2004, Marconi was part of
UBSs push to build a philanthropy offering
for ultra-high-net-worth individuals. Its an
area UBS dominates today: UBS ranks
top of the global category for philanthropy
services in Euromoneys 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 Euromoneys 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 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
inuential 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