How Family Businesses Can Become Impact Investors
24 August 2016 at 11:20 am
Impact investment has evolved from a nascent field to an area where family businesses are actively engaged. A social finance executive explains the new opportunities in the market.
An EY report released this month found almost half of family businesses globally are actively engaged in social impact investing as part of their philanthropic portfolio.
In June a Global Impact Investing Network said the key takeaway from its report was impact investing is no longer a nascent market. It’s set to rise by 16 per cent in 2016 topping $24 billion.
But it’s not always clear where the opportunities are or how family businesses can access them.
EY social finance, impact investment and philanthropy partner Christopher Thorn spoke to Pro Bono Australia News about how family businesses can become impact investors, the barriers that exist and how the market will open up in the future.
What opportunities are there for family businesses in Australia to become impact investors?
Obviously we’re at the very early stage of this market developing, but we’re seeing increasing opportunities emerge. Interestingly, I think, the family businesses or the philanthropic investors are creating as many opportunities as are being presented to them, so it’s partly around how they’re engaging with the space. And what I mean by that is impact investing means a lot of different things to different people, it’s used in many broad ways, so it can be anything from investing in a very small, specific instrument or impact investment, or it can also refer to the way people think about even a philanthropic grant in terms of measuring an impact that it’s making.
How can family businesses go about finding an impact investment opportunity?
I think there are an increasing number of intermediaries that are emerging in the market, and peak bodies. But also I think the Not for Profits themselves, and increasingly government too, are starting to sound out the market to philanthropic or impact investors with ideas of engaging.
Are there particular areas where these opportunities are emerging?
There have been a number in the social space, which have been government led, both New South Wales and Queensland, and we’re starting to see that emerge in Victoria. I think in terms of other specific examples, as I said, they tend to be emerging from Not for Profits who understand that there are ways of tapping into finance broader than just pure philanthropy, and so they’re starting to put opportunities before investors.
In some ways this is not new. If you go back some time when we had program-related investments or opportunities for philanthropists to compliment a philanthropic grant with a loan or a revolving loan or access to property at a discounted rate of rent – they’re all different ways that a traditional philanthropic grant could be enhanced by some sort of impact investment, which might be the contribution of some other form of asset with the intent of making a social or environmental impact.
Is impact investment only open or accessible to businesses of a certain size?
No, and I think this is part of the dilemma and challenge of the term. I think the term can mean different things to different people. In terms of a very specific opportunity from an investment perspective it may be, for regulatory and other reasons, that an opportunity is, from a scale perspective, more suitable for a larger investor like a family office.
We haven’t seen a lot of retail impact investments in Australia as yet, and that’s partly because obviously there’s a regulatory issue in terms of the scale of offering investments that might be hard to define the risk or return into a retail environment. But it’s not to say it won’t happen, I think it’s probably more a stage of where we are in the market.
What other barriers are there preventing family businesses from entering the space?
I think more than anything it’s just getting clarity around what we’re actually talking about and what the opportunities are. The biggest impediment is around people and organisations, whether it be philanthropists, Not for Profits, even investors, being aligned in what they’re trying to achieve and what sort of capital they’re making available, what sort of return expectations they have, what the times for those returns or capital to be repaid are.
I suppose my point is we’re not necessarily talking about a specific thing like investing in a share or a particular loan… it’s a spectrum of opportunities rather than one thing. So therefore it does depend upon the specific opportunity.
EY’s report said, depending on the family business, impact investing could be an additional financial allocation or might actually replace philanthropy – which should be the motivating factor for investment in terms of risk and sustainability?
I think what the report really draws out is that increasingly families are taking a portfolio approach across their various entities. So the report talked about the number of families that had a foundation and the number of families who were also giving through a corporate foundation or through some other form of impact investment, through the family office for example.
And so I think what we’re seeing is a slightly more strategic approach to the way the family business is engaging with the community. And so that might be the combination of a grant or a loan from the family office, or a broader staff engagement or fundraising activity through the corporate foundation where other stakeholders might be engaged.
What we’re seeing is an alignment of activity across all the activities of the family, so it’s not just happening in the foundation, and then trying to find ways of leveraging or supporting that activity. So for example, that family foundation might make a grant, and then there may be a loan out of the family business, or there might be a fundraising activity run by employees through the family foundation, which all work together to support the overall impact that the family’s trying to make.
Can you provide examples of some current family business impact investments?
We don’t actually mention particular company names or individual names, I think though it’s fair to say there are a number of families in Australia that are very engaged at, and having a very clear intent around, how they maximise their impact through combining philanthropy with an impact investment. It’s hard for me to go into specifics, but it’s certainly beginning to happen.
When do you expect impact investing will be open to personal investment? Or is it only available to high-net-worth individuals?
This is one of the interesting things. Although it’s getting a lot of currency now, impact investment in its broader sense is not necessarily a new thing. I know when I started back in the 1980s as a financial advisor I was aware of families who were supporting community or charitable interests through contribution of resources beyond making a philanthropic grant – whether it be a loan or… there are examples of people, of famers for example, who might have donated an acre of land or crop from an acre of land to a community organisation or the proceeds to a particular charitable cause. That’s not necessarily new. So in that sense individuals have been able to do this for a long time.
I think what’s changing is there’s a greater awareness that there are more ways to support a charity or community organisation or an issue beyond just providing cash. People are starting to think through what their options are and how they can do that. So it’s not that people can’t do it at the retail level, there may not be, at this stage, high-profile retail social investment products per se. But I think they’ll come as the organisations that might issue those products become aware that there’s demand and they’ll go and try to tap that market.
I don’t think we’re that far away from that. What I’m saying is there aren’t structural impediments to stop it happening. It’s more that, potentially, the people who are trying to raise funds from that market in an organised fashion have not yet got themselves organised or focused on what they might do. But I don’t think we’re that far away from that.
How do you see the market opening up in the future, and on what timeline?
I think it’ll open up more and more as participants understand what the opportunity or the skill scope is. To me, one of the great characteristics or features of social finance or impact investment is that it enables an alignment of interests and, if you like, there’s a blurring of the boundaries between Not for Profit and business or philanthropy and business or social enterprise and business. And so what that’s doing is enabling opportunities for people to think through how they might come up with a solution that crosses those boundaries, and I think it’s almost opening up that way of approaching the task or approaching the challenge, which is enabling people to be creative.
The more people start thinking like this the more we’ll see opportunities that are made available, or people will look for support from a broader range of supporters. In many ways crowdfunding, if you like, in the purest sense, it may or may not be going to a charity, but that’s a way everyday donors have been able to participate in a mechanism by using an IT platform to facilitate giving. You could argue that’s a form of impact investing, which is available to the retail market.