APPA Real Estate is leading the charge and looking for companies who are eager to invest in businesses that produce positive social returns with many social, economic, and environmental problems facing society. One such investment avenue is called “impact investing,” which means funneling capital to business enterprises that produce social or environmental benefits even if they don’t produce the most profit possible.
Examples of social impact investing may include developing affordable housing units, cultivating sustainable timberland, and building eye-care clinics. These enterprises bring positive benefits to the surrounding communities but often aren’t the first choice of traditional investors.
Some investors may think that investing in projects with social benefits means the enterprise will generate weak returns or that it will take too long to recoup the investment. Although social impact enterprises may demonstrate clear advantages in addressing market needs and keeping customers and employees satisfied, conventional investors sometimes worry that social impact investments can’t increase scale to achieve attractive returns. Many investors also think that social impact investments carry a higher level of risk and are less liquid and therefore harder to sell-off.
Due to this fear of unfamiliar terrain, many mainstream investors overlook strong social impact investment opportunities, thinking they should be left to adventurous venture capitalists and nongovernmental organizations. However, the data paints a different picture of the returns of impact investments. For instance, a study looking at 48 impact investor exits in India over five years showed a median rate of return of approximately 10 percent. Analyzing just the top third of those deals showed a yield of 34 percent, a clear signal that investing in social enterprises can result in profitable exits.
In addition, the average period between impact investment and exit was about five years in this case study, which is the same general length of the investment holding period for conventional private equity and venture capital firms. Thus, the data shows that social enterprises with strong business models can generate value for shareholders without a long holding period.
Impact investors play a critical role in seeding social enterprises, helping them stabilize, and ultimately making them more attractive for conventional investors. For instance, impact investors with expertise in developing and establishing viable business models and basic operations are essential to getting an enterprise off the ground in stage one. In stage two, the enterprise needs investors who are experienced at balancing economic returns and social impact. Finally, in stage three, social enterprises need investors who are experts at scaling up, refining processes, developing talent, and expanding systematically.
Social enterprises with core impact investors throughout these three stages have a good shot at drawing additional conventional investment down the line. As the enterprise matures with the help of impact investors, it is better able to pull in funding from mainstream funds like private equity and venture capital.
Despite hesitancy on the part of some investors, the field of impact investment is already generating hundreds of billions of dollars annually and is poised for significant continued growth. Initial industry findings indicate that social impact investing will become more mainstream as investment firms and companies become more familiar with the benefits and the potential for business and social priorities to align. If you would like more information about Real Estate Impact Investing, reach out to Aaron Marzwell at firstname.lastname@example.org.