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10 Key Alpha Drivers in Impact Investing: Study

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Yes, impact investing does boost financial returns, but does more, according to the latest study confirming this finding, which also zeroed in on 10 “unique drivers” that “can enhance or add financial value” for investors. The new research study, The Alpha in Impact, comes from Tideline, an impact investing consulting firm, and Impact Capital Managers, a network of private funds that manage more than $8 billion focusing on impact investing.

“As many studies have demonstrated, impact investments can perform in line with — and sometimes better than — relevant benchmarks. But those studies are often silent on the role of impact in contributing to those returns,” write Dave Kirkpatrick, managing director of SJF Ventures, and Brian Trelstad, partner of Bridges Fund Management, two of the ICM firms that  worked with Tideline to generate the study using their own investment experience examples.

A key purpose of the study, the authors write, is to jump start the conversation beyond whether impact investing adds alpha to a fund, as the study shows it does. The10 drivers that enhance investment value are dived into  three areas:

I) Accessing unique and high quality investment opportunities

  1. Source deals through mission aligned networks
  2. Uncover opportunities through deep market experience
  3. Build values alignment with investors

II) Creating value across the portfolio

  1. Leverage impact expertise to develop more effective businesses
  2. Enhance investee branding and story telling
  3. Attract and maintain investee talent
  4. Unlock public and philanthropic capital

III) Strengthening outcomes through operational rigor and risk management

  1. Promote efficiency and discipline in operations through impact accountability
  2. Establish credibility with impact-driven stakeholders
  3. Optimize social, environmental and reputational risk management

The study provides a series of case studies from several of the ICM fund managers. One such example showed how an investment of $2.25 million in Mayvenn, an e-commerce platform for independent hairstylists, primarily those of color who are microbusiness owners, saw revenues grow five-fold over three years. Today, the company has a network of 50,000 stylists who have earned $20 million in commissions.

Mayvenn was started out of the trunk of a car, but seized on the “trusted expertise” of the hairstylists in their communities to grow the company as well as the small businesses.

“Early on, we worked with Mayvenn to better understand the stylists on the platform and think through how to scale the business to have a lasting impact for communities of color,” said Kesha Cash, founder and general partner of IAF, one of ICM’s fund managers, in a statement. IAF was an early investor of Mayvenn. “Mayvenn stylists [now] are economically empowered and use their skills to generate more income in a way they hadn’t before.”

Going forward, the study authors hope this study inspires more research “to a) test, validate, and update the drivers of impact alpha, based on an analysis of portfolio-level data across impact and non-impact funds; b) quantify the additional financial and impact value achieved through each driver; and c) provide further resources and tools for impact venture capital and private equity fund managers to further accelerate impact and returns. “

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