The private equity industry has never had the best reputation. Even with the most staunch of defenders, private equity is often viewed as greedy and willing to do anything for the sake of making a quick buck. However, with the growing interest in impact investing – the term coined to describe investments that are made into companies, organizations and funds with the intention to generate social and environmental impact – we may be seeing this negative private equity reputation changing.
In the general sense, private equity is meant to inject working capital into a promising business and refine products, while keeping shareholders suitably compensated for their risk taking. While this typically means investing in a company that will provide the firm with great returns, these returns – technically – could also be social returns. And that’s where impact investing comes in.
Impact investing can generate social and environmental returns, as well as positive financial returns. Sometimes, even more importantly, it can change the popular attitudes towards a specific business.
Take a look at the global oil firm BP. After the accident with the Deepwater Horizon offshore rig in the Gulf of Mexico in 2010, its stock values took a severe hit. Under pressure from concerned investors, BP was quick to implement energetic and comprehensive programs to compensate the affected populations and reverse the environmental damage.
Private equity firms are now looking to include impact investing in the scheme of their portfolios, and today interest in social impact returns among private equity investors is at a level where it is possible to talk of social investment as an alternative asset class. Some private equity firms are already consciously approaching investments while thinking, “how can we place money for positive impacts?”.
However, not all private equity firms have fully embraced impact investing just yet. Many are not yet ready to look beyond income statements and balance sheets to see if the company’s goals, values and missions address health, social and environmental challenges. But this could soon change.
In recent years, there has been greater attention given to impact reporting – the auditing of non-financial results – which has made sustainable business, social enterprises and charities ventures so much more attractive to private equity firms. Having access to these types of audits can help private equity firms become more involved with social impact investing, as they can show both the social return as well as return on investment.
Additionally, there has been a growing awareness in opportunities to make a positive social impact. As this awareness grows, individual investors, family offices, endowment funds and other sources of private capital are “encouraging” their managers to seek out promising impact investment opportunities.
All these facts are likely to accelerate the move towards more private equity firms becoming involved in impact investment opportunities. As they do, these private equity firms can help fill in the remaining gaps to some of today’s biggest social challenges – bringing new products and services to markets that deliver both financial and social returns.
So, while many private equity firms are increasingly keen to change the record, heartened by the attention given to responsible investing, encouraged by the governments, clear financial returns and improved reporting – overall, it may take a little longer for past negative associations to fade from popular imagination. Still, there are some who are demonstrating that there maybe a case for them after all.