How impact investing leans on venture capital funding

Impact investors are increasingly working in tandem with venture capital private equity investors to locate projects producing both a financial return and positive social impact

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Blurred and indistinct lines have long existed between impact investing and venture capital investments. But of late impact investors and venture capitalists have been leaning on each other’s capabilities as interest in environmental, social and governance (ESG) investment moves to the mainstream.

Ultimately, impact investing and venture capital private equity desire the same objective: to find companies that are bankable from an investment perspective.

The difference between the two concepts is that impact investors are prepared to accept businesses with lower yields in return for greater ESG impact. Although it is worth bearing in mind impact investments do not necessarily come with lower yields than those gleaned from venture capital projects. Venture capital private equity investors, on the other hand, seek maximum yields and ESG is not normally a primary consideration.

Most venture capital private equity investors are only going to invest in a venture if they think it can generate a certain minimum return on the equity. While return on equity is also an important consideration for sustainability investors, they don’t need to generate 20%-plus IRRs as long as the venture has a good social impact.

Take the LGT Group, where its sustainability unit, known as LGT Impact, leverages its venture capital private equity unit, LGT Capital Partners, to identify social impact projects and businesses.

In Asia, these investments target markets such as the Philippines and Indonesia, which generally receive less investment flows than bigger markets like China, for example.

As part of its sustainability focus, LGT Impact has invested in a venture through LGT Capital Partners in a company that produces coconut water in the Philippines and exports the product to the US market. The reason LGT Impact invested in the venture is because they have the capability to work directly with the coconut farmers who are participating in the venture, an undertaking that LGT Capital Partners is not equipped to do. This synergy multiplies the social impact of the project.

Another venture that appeals to LGT Impact concerns a micro-finance lender in Indonesia, a project in which LGT Capital Partners has ploughed capital in the form of a co-investment. The micro-finance lender provides loans averaging US$200 for two million rural women in Indonesia. Though LGT Impact has yet to invest in the venture, interest levels are high and the unit will closely consider making a commitment.

Impact investors are generally interested in finding the right business model for social impact projects, and usually focus on healthcare, education, clean technology, and enterprises related to the Sustainable Development Goals laid out by the United Nations.

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Date

1 Apr 2019

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