Maximize Impact and Return Across Asset Classes

SmarterMoney+
Review
Spring 2015 / Volume 3
Presents
© Carr Clifton
Maximize Impact + Maximize Return
Across Asset Classes
Thought leadership for impact investors
Voted
Best
In Class
Impact
Reports
™

Overview. Leveraging one of the largest networks of Impact Investors globally, Big Path Capital
assists purpose-driven companies and funds ensuring mission preservation across financial
transactions, including acquisitions, mergers, and capital raises. Big Path has worked in over
100 engagements, more than any investment bank in the sector. As a global firm, Big Path
Capital is advancing a sustainable economy connecting mission-driven companies and fund
managers with mission-aligned investors. Big Path Capital’s clients include entrepreneurs,
companies, and fund managers advancing an expansive economy built on natural, social, and
financial capital.
Mission. Big Path Capital's principals are dedicated to fund managers and business owners
expanding the path for business interests seeking multiple bottom lines, taking the new
economy from the margins to the mainstream, and purusing business that generates good as it
generates return. Big Path champions the client's mission, scaling growth, perpetuating and
expanding impact. Big Path Capital is proud to be a founding B Corp member.
Key Focus Areas. Big Path represents the largest impact investing network in the sector and
focuses on:
• Companies. Big Path assists business owners with financial transactions including company
sales, acquisitions, and capital raises.
• Funds. Big Path assists fund managers in capital introductions.
• Events. Big Path curates events focused on institutional investors. Those include the
Impact Capitalism Summit (Chicago, Nantucket, and The Hague), the Five Fund Forum,
the Impact & Sustainble Trade Missions in collaboration with the U.S. Department of
Commerce, and the Impact Capitalism Train Stop Tour which will be providing half-day
educational sessions in 15 different cites.
• Education. Big Path has launched the Impact Academy to assist institutional investors how
to integrate impact investing into their investment strategies.
About the Organizer

About the Review
In less than a decade, “impact investing” – investment that intentionally seeks to generate
social and environmental benefits in addition to financial returns – has emerged into a recognized
force in the capital markets. With an estimated $60 billion in assets, according to the latest research
from the Global Impact Investing Network (GIIN) and J. P. Morgan, the impact investment market
remains a relatively small component of a much broader investment universe that incorporates social
and environmental considerations, but it is one of the fastest growing segments that has attracted
increasing attention from investors of all stripes, as well as investment consultants, policy makers,
and leading investment firms.
As impact investing mainstreams, Big Path Capital recognizes the importance of the
dissemination of research and thought-leadership to those new and experienced in the sector. Along
with the sponsors of SmarterMoney+TM Review, Big Path Capital is proud to offer this compendium
comprised of excerpts of recent research and resources about leading impact investing trends and
developments. Each article references a url link to the full article. These selections represent the
impressive breadth and depth of impact investing and we are grateful to our contributors for their
leadership.
Given the explosion of interest in the field, our aim is to be more curatorial than
comprehensive. Working with a Selection Committee which includes Luke Apicella of Prudential
Impact Investments, Noelle Laing of Cambridge Associates, Michael Lear of Athena Capital
Advisors, and Christine Looney of the Ford Foundation, the review will compile a selection of
some of the most influential articles, reports, and essays about this growing field, providing
readers with a wide-angled overview of this rapidly changing landscape.
In this inaugural issue, we spotlight ten papers that have recently helped to define,
conceptualize, and develop the impact investing space. They range from major trends reports
describing the scope and scale of the impact investing market to primers targeted at specific
audiences as well as analyses of specific impact investing themes and conceptual frameworks for
understanding how to pursue impact investing and expand the field further.
Although primarily associated with direct investments in private equity and debt, impact
investing is increasingly being pursued and conceptualized as an investment process applicable
across asset classes found in diversified investment portfolios. This is the basic insight of Total
Portfolio Activation: A Framework for Creating Social and Environmental Impact across Asset Classes, a key
conceptual intervention in the field co-authored by Joshua Humphreys, Christi Electris, and Ann
Solomon, and jointly sponsored by Tides, Tellus Institute and Trillium Asset Management. As J. P.
Morgan’s most recent impact investor survey conducted with the GIIN, Eyes on the Horizon,
documents, the vast majority of impact investing assets – nearly 75 percent – continue to be
allocated in private debt and equity. However, the relative share of other asset classes being deployed
for positive social and environmental impact, from listed equities and bonds to property and other
real assets, has grown in recent years, from less than 10 percent to more than 25 percent,
highlighting a gradual diversification of impact investment opportunities.
3

As Yvonne Bakkum from the Dutch emerging markets investment firm FMO Investment
Management stresses in her article “The New IRR: Impact, Risk and Return,” every investment
needs to be assessed not simply for its projected “internal rate of return” but rather for its impact,
risk and return. From this vantage point, she sees new opportunities for impact investing across the
risk continuum, from relatively low risk green bonds within liquid fixed income allocations to
emerging market debt and private equity funds-of-funds that provide greater diversification with a
bias toward growth equity over more traditional forms of venture capital or leveraged buyouts.
Widening the opportunity set along these lines would make impact investing far more appropriate
and compelling for pension funds and other institutional investors that have not yet participated
very actively in the field, initially dominated by philanthropic foundations, high-net-worth investors,
sustainable and responsible investment firms, and family offices.
The World Economic Forum’s report “Impact Investing: A Primer for Family Offices”
highlights the growing interest among wealthy families for resources to orient them. The much-
projected $40 trillion generational wealth transfer from baby boomers to millennials is anticipated to
drive growing demand for impact investing because younger wealthy people appear more socially
and environmentally conscious when it comes to business and investment than their parents and
grandparents. WEF’s impact investment team, led by Abigail Noble and Michael Drexler, usefully
stress opportunities across the full spectrum of asset classes and situate the emergence of impact
investing with broader approaches to sustainable and responsible investing. The report also provides
concrete steps for family offices to develop a vision for integrating impact into family investment
portfolios and to develop guidelines and execute an impact investment strategy, in close consultation
with advisers.
Along similar lines but more broadly targeted to mission-related investors, the investment
consulting firm Slocum’s paper “Governance: A Critical Aspect to Impact Investing Success”
highlights the need to clarify key questions about how decisions will be made before beginning an
impact investing program. Too often investors have dived into the impact investing space before
clarifying basic governance matters. Who should be making key decisions about which investments
are aligned with the investor’s mission and impact objectives? Are the kinds of trade-offs
occasionally encountered within the impact investing space acceptable? Answering these questions
early provides a more solid foundation for a successful experience with impact investing.
Within the private debt and equity spaces, new models of structuring impact investment
transactions are beginning to emerge to address the specific risks and returns impact investors have
begun to achieve, as Diana Propper de Callejon and Bruce Campbell detail in their paper
“Innovative Deal Structures for Impact Investments.” Private equity impact investors are exploring
the use of new kinds of terms in order to structure deals with predetermined liquidity payments,
from staged dividends to flexible redemption-based exits, altering the risk-return profile normally
associated with traditional venture capital investment that typically ignores social and environmental
impact. Private debt investors are extending their time horizons, developing more flexible repayment
structures, and abandoning pre-payment penalties and other conventional terms that place
unreasonable burdens on social and environmental enterprises.
Finally, the papers we present here raise several recurring thematic issues. The first is the key
role that government policy can potentially play in developing the impact investing field in
4

supportive ways. The Impact Investing Policy Collaborative, a joint initiative of InSight at Pacific
Community Ventures, the Harvard Initiative for Responsible Investment, and the Rockefeller
Foundation, has become a leading platform for identifying government policies that support impact
investing capital markets in order to generate positive social and environmental benefits. Allocating for
Impact, a “Subject Paper of the Asset Allocation Working Group” of the Social Impact Investment
Taskforce, established under the United Kingdom’s presidency of the Group of Eight (G8),
highlights the growing interest among policymakers in using impact investing as a complement to
public investment in order to address issues such as clean energy, affordable housing, education,
clean water, employment and social protection, infrastructure and agriculture, among other key
themes. And at a time of rampant wealth disparity – and in the US a veritable social and civil rights
crisis – it is particularly timely to have increasing focus within the impact investing community on
questions of economic mobility and income inequality, as the Aspen Institute’s The Bottom Line:
Investing for Impact on Economic Mobility in the U.S. and Cornerstone Capital Group’s flagship report
“Income Inequality: Market Mechanism or Market Failure?” each does in different ways.
We hope you enjoy this inaugural issue of SmarterMoney+
Review. We welcome your reactions
and recommendations for articles for our Selection Committee’s future consideration.
Joshua Humphreys Shawn Lesser Michael Whelchel
President Managing Partner Managing Partner
Croatan Institute Big Path Capital Big Path Capital
5

Focusing exclusively on sustainable
and responsible investing
We are the oldest investment advisor exclusively focused on
sustainable and responsible investing (SRI), managing equity
and fixed income portfolios for high net worth individuals,
foundations, endowments, and religious institutions since 1982.
A leader in shareholder advocacy and public policy work, our goal
is to deliver both impact and performance to our investors.
800-548-5684 • www.trilliuminvest.com

Table of Contents
Article Contributed by URL
The Bottom Line: Investing for Impact on
Economic Mobility in the U.S. (excerpt)
The Aspen Institute bit.ly/AspenBottomLine 11
Introducing the Impact Investing
Benchmark (executive summary)
Cambridge Associates &
Global Impact Investing
Network (GIIN)
bit.ly/CambridgeBenchmark 15
Income Inequality: Market Mechanism or
Market Failure? (excerpt)
Cornerstone Capital Group bit.ly/CornerstoneIncome 18
Innovative Deal Structures for Impact
Investments (executive summary)
Diana Propper de Callejon &
Bruce Campbell
bit.ly/InnovativeDeals 23
The New IRR: Impact, Risk and
Return (excerpt)
FMO bit.ly/FMONewIRR 26
Allocating for Impact (executive
summary)
G8 bit.ly/G8AssetAllocation 30
Eyes on Horizon (executive summary) GIIN & J.P. Morgan bit.ly/GIINJPEyeonHorizon 33
Governance: A Critical Aspect to Impact
Investing Success
SLOCUM bit.ly/SlocumGovernance 40
Total Portfolio Activation: A Framework
For Creating Social & Environmental
Impact Across Asset Classes (executive
summary)
Trillium Asset Management,
Tides, & Tellus Institute
bit.ly/TotalActivation 44
Impact Investing: A Primer for Family
Offices
World Economic Forum bit.ly/FamilyImpactInvest 47
Articles contained herein have been reprinted with permission
7

Consulting Editor
Selection Committee
Joshua Humphreys is the President and Senior Fellow at the Croatan Institute, an independent institute for advanced social and
environmental research and engagement. A leading authority on sustainable and responsible investing, Dr. Humphreys has taught at
Harvard, Princeton, and NYU. His insights on trends in sustainable finance and impact investing have been widely published in the
press, most recently in Barron’s, Bloomberg, BusinessWeek, the Financial Times, Forbes, Institutional Investor, Pensions and Investments, and
the Journal of Investing. He currently serves on advisory boards of the Dwight Hall SRI Fund at Yale University, the Responsible
Endowments Coalition, and the Coalition for Responsible Investment at Harvard. He also serves as an Associate Fellow at Tellus
Institute, the sustainability think tank in Boston.
Luke Apicella has eight years of impact investing experience.
As an associate with Prudential Impact Investments, he is
responsible for the origination and asset management activities
to grow the portfolio to $1 billion. He covers numerous
relationships, industries, private asset types, and impact
objectives. Apicella serves on the boards and/or committees
for several portfolio companies including a Real Estate
Investment Trust, a Community Development Finance
Institution, and a local start-up. His signature transactions
include a term loan for an innovative charter school in New
York City with performance pay for teachers, a co-investment
with a leading private equity fund in a high growth sustainable
consumer goods company, and a next vintage investment in the
top performing affordable housing fund. Apicella started his
career with Prudential and soon after became an analyst with
Impact Investments responsible for the portfolio management
activities including valuation, forecasting, and reporting.
Apicella has degrees in sustainability management from
Columbia University (MS), finance from New York University
(MBA), and entrepreneurship from Syracuse University (BS).
Joshua Humphreys
President and Senior Fellow
Croatan Institute
Luke Apicella
Associate
Prudential Impact Investments
Noelle is a Senior Investment Director in the Mission-Related
Investing (“MRI”) Group in Cambridge Associates’ Arlington
office. She identifies and researches MRI managers across asset
classes and serves as a resource to generalist investment
directors in the firm by monitoring managers in clients’ MRI
programs.
Prior to rejoining the firm in 2010, Noelle was a senior
investment advisor at the IAM National Pension Fund, where
she focused on alternative assets, including portable alpha,
hedge funds, natural resources, infrastructure, opportunistic
debt, and private equity. She also worked as a public markets
investment analyst for the American Red Cross, where she
conducted asset allocation analysis and manager due diligence
for the public market portfolios of the endowment, pension,
corporate accounts, and 401K program.
Noelle began her career at Cambridge Associates as a
consulting associate in 2003. During her time at the firm, she
was promoted to senior consulting associate and team leader
responsible for overseeing consulting associates and liaising
with firm wide management. In addition, Noelle was involved
in the firm’s consulting associate recruiting initiatives. Noelle is
a CFA Charter holder and received her BS in Mathematics with
Honors from St. Lawrence University.
Noelle Laing
Sr. Investment Director
Cambridge Associates
88

Selection Committee (continued)
Michael Lear is a Vice President on the Portfolio Management
Team. An experienced portfolio manager, Michael came to
Athena from MetLife Investment Strategies Group where he
worked as a portfolio advisor. Prior to that Michael worked as
a portfolio manager at Carruth Associates managing assets for
an investment division of the single family office. He also
spent eight years as a portfolio manager at State Street Global
Advisors. In his time at SSgA he worked on the Multi Asset
Class Solutions team focusing on exposure management and
portable alpha as well as in the Investor Solutions Group where
he focused on tax efficient solutions for high net worth clients.
Michael earned his B.S. in Marketing from Boston College and
holds an M.S. in Investment Management from Boston
University. Michael has received the Certified Investment
Management Analyst designation, the Chartered Alternative
Investment Analyst designation, is a member of the Investment
Management Consultants Association and the Boston Security
Analyst Society. Michael is a CFA charterholder and currently
holds the Series 6 license and Series 63 license.
Michael Lear
VP, Portfolio Management
Athena Capital Advisors
Christine Looney manages the Ford Foundation’s $280 million
Program-Related Investment Fund. In this role, she originates,
structures, and monitors Ford’s program-related investments
across the foundation and ensures alignment and
complementarity with program strategies and goals. Prior to
joining Ford, she was president of the Urban Business
Assistance Corporation, a nonprofit consulting firm serving
minority businesses in New York City. Previously, she was an
associate in Chase Manhattan Bank’s Structured Finance
Group. Christine has a MBA in finance and management from
New York University’s Stern School of Business and a
bachelor’s degree in economics from Holy Cross.
Christine Looney
Sr. Program Investment
Officer
Ford Foundation
9

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THE BOTTOM LINE: INVESTING FOR IMPACT ON ECONOMIC MOBILITY IN THE U.S. 1
THE BOTTOM LINE
INVESTING FOR IMPACT ON ECONOMIC MOBILITY IN THE U.S.
11

WWW.ASPENINSTITUTE.ORG
WHAT YOU WILL FIND IN THIS REPORT:
„„ Aspen Institute and Georgetown University
Survey – Findings and analysis of a survey
of active and emerging impact investors;
„„ Case studies – An opportunity to go
under the hood on deals with the Bank
of America, W.K. Kellogg Foundation,
Acelero Learning, and others;
„„ Point of view essays – Insights and lessons
from leaders in the field;
„„ Deals at a glance – Snapshots of impact
investors and what they have learned;
„„ In-depth chapters on investments in
education, economic assets, and health
and well-being – Investment areas with
the potential to advance economic and
social mobility for low-income families.
In each of these chapters you will find
key facts, investment examples, lessons
learned, and recommendations; and
„„ Appendices – Investor and sample
investment profiles from the Aspen Institute
survey and a glossary of key terms.
12

THE BOTTOM LINE: INVESTING FOR IMPACT ON ECONOMIC MOBILITY IN THE U.S.
EXECUTIVE SUMMARY
As a country, we have long believed in
the “American Dream” – through hard
work and opportunity, we can reach
our goals. But with millions struggling,
those dreams are being eroded. Social
and economic mobility has stagnated,
and inequality is rising. Not only are
families at risk but so is our nation’s
economic security.
Interest in the field of impact investing
has skyrocketed. Potential market size,
amount of available capital, and the
opportunity for financial and social
impact, particularly for our country’s
most pressing problems, are all
factors in that growth. This report and
accompanying survey were designed
to explore the landscape and lessons
learned of this growing field in the
United States, with a focus on deal flow
and returns. We paid special attention
to investments in education, economic
assets, and health and well-being,
investment areas with the potential to
advance economic and social mobility
for low-income families.
Adding rich depth and perspective
throughout the report are the following:
„„ Case studies – An opportunity to
go under the hood on deals with
the Bank of America, W.K. Kellogg
Foundation, Acelero Learning, and
others;
„„ Point of view essays – Insights and
lessons from leaders in the field; and
„„ Deals at a glance – Snapshots of
impact investors and what they
have learned.
Guiding research questions:
„„ What is the current level of
investment activity and interest
in the U.S. related to education,
economic security, and health and
well-being?
„„ What tools, strategies, and
models can be distilled from early
investments that could lead to better
results for children and families?
„„ How can strategies be effectively
shared with on-the-ground
innovators, foundations, policy
makers, and impact investors?
Aspen Institute and Georgetown
University Impact Investing Survey
In partnership with the Georgetown
University McDonough School of
Business, the Aspen Institute conducted
a survey of investors to assess activity
and interest in impact investing in the
U.S., with an emphasis on investments in
education, economic assets, and health
and well-being. Thirty-nine individuals
responded, representing 32 institutional
investors from across investor types.
Nearly 69 percent of respondents
invest in the study’s target impact
areas of education, economic assets,
and health and well-being.
„„ For these respondents, impact
investing is not a new practice.
Sixty-four percent indicated they
have been active impact investors
for more than 10 years.
„„ Their work is overwhelmingly
backed by an institutional
commitment to poverty (86
percent). Furthermore, 32 percent
reported employing a gender lens
in the investment decision process,
while 27 percent reported having a
racial equity lens.
Among all respondents, the average
investment transaction size varied from
less than $100,000 to more than $10
million. Of target impact area investors,
the majority of respondents indicated
an average transaction size between
$100,000 and $3 million.
13

WWW.ASPENINSTITUTE.ORG
The majority of investments are
delivered via funds or intermediaries.
An increasing number of foundations
are active impact investors. Private
sector players, such as Goldman
Sachs, Bank of America, and Morgan
Stanley, are developing business units
dedicated to impact investing.
As with venture capital, a majority of
impact investors find deal flow from
peers and other investors.
Forty-five percent of respondents
establish formal financial and social
benchmarks, and 80 percent of those
said their portfolios are meeting or
exceeding the established financial
metrics, and 90 percent are meeting
or exceeding the social metrics. This
provides evidence that good deals exist.
The Aspen Institute used the survey to
gauge how investors’ work supported
economic and social mobility.
We noted the following trends in
advancing mobility:
„„ A majority of respondents are
investing in target areas that
support low-income families and
those most in need.
„„ Significant dollars are supporting
strategies to build mobility.
„„ Investors are leveraging varied
organizational structures to
facilitate impact on parents,
children, and families.
„„ The pipeline for investments is
based on social capital (trusted
networks and relationships).
„„ Good deals exist to advance
economic mobility for U.S. families.
Looking at the field as a whole, the
top five trends among impact investors
include:
„„ Increased market players – moving
beyond private foundations;
„„ Foundations moving
from experimentation to
institutionalization;
„„ Focus on ‘place’;
„„ Leveraging CDFIs to increase
efficiency; and
„„ Emerging interest in metrics.
Focus on education, economic assets,
and health and well-being:
Outlined in the report are in-depth
sections on education, economic
assets, and health and well-being.
Opportunities in those investment areas
are highlighted below.
Education:
„„ Investing beyond school
infrastructure to educational
outcomes;
„„ Focusing on quality and efficiency;
and
„„ Leveraging intermediaries to
deploy large amounts of capital
effectively.
Economic assets:
„„ Using diverse forms of capital to
initiate and sustain economic
opportunity;
„„ Collaborating to invest in local
ecosystems; and
„„ Leveraging data to scale what
works and eliminate barriers.
Health:
„„ Reducing disparities in access and
quality of care;
„„ Managing the costs of care; and
„„ Investing in health systems.
Enabling policy environment:
Federal, state, and local governments
are increasingly finding alignment
with the goals of impact investors,
leveraging a variety of policy levers,
such as tax credits, co-investments,
and procurement policies to drive
improved outcomes for parents and
children in communities across the
country.
14

Introducing the Impact
Investing Benchmark
2015
15

Executive Summary
 Cambridge Associates and the Global
Impact Investing Network have collabo-
rated to launch the Impact Investing
Benchmark, the first comprehensive
analysis of the financial performance of
market rate private equity and venture
capital impact investing funds. While
the impact investing industry is in an
early stage of development, it is poised
for growth. One of the chief barriers to
industry advancement remains a paucity
of robust research on financial perfor-
mance. Credible data on risk and return
can help both existing and future impact
investors better identify strategies that
best suit their desired social, environ-
mental, and financial criteria.
 At launch, the Impact Investing
Benchmark comprises 51 private invest-
ment (PI) funds. Impact investments
are investments made into companies,
organizations, and funds with the inten-
tion to generate social and environmental
impact alongside a financial return. Funds
in the benchmark pursue a range of
social impact objectives, operate across
geographies and sectors, and were
launched in vintage years 1998 to 2010.
 Despite a perception among some inves-
tors that impact investing necessitates a
concessionary return, the Impact Investing
Benchmark has exhibited strong perfor-
mance in several of the vintage years
studied as of June 30, 2014. In aggregate,
impact investment funds launched between
1998 and 2004—those that are largely
realized—have outperformed funds in a
comparative universe of conventional PI
funds. Over the full period analyzed, the
benchmark has returned 6.9% to investors
versus 8.1% for the comparative universe,
but much of the performance in more
recent years remains unrealized.
 Impact investment funds that raised
under $100 million returned a net IRR of
9.5% to investors. These funds handily
outperformed similar-sized funds in
the comparative universe (4.5%), impact
investment funds over $100 million
(6.2%), and funds over $100 million in the
comparative universe (8.3%). Emerging
markets impact investment funds have
returned 9.1% to investors versus 4.8%
for developed markets impact investment
funds. Those focused on Africa have
performed particularly well, returning 9.7%.
 In all private investing, manager selection
and due diligence are critical steps in the
investment process and are important
factors in obtaining superior returns and in
risk management; impact investing funds
are no exception. There are funds within
the Impact Investing Benchmark that have
performed in line with top quartile funds
in the comparative universe, showing that
market rates of return for impact invest-
ments are possible and also reinforcing that
manager skill is paramount.
 Creating and analyzing benchmarks for
private investments, especially for a younger,
emerging portion of the market such as
impact investing, poses a number of chal-
lenges. Difficulty acquiring private fund
performance data and strict inclusion criteria
limited our ability to amass a large dataset,
which presented data analysis limitations
that are unavoidable at this stage. Cambridge
Associates will produce an ongoing quar-
terly Impact Investing Benchmark report to
track the industry over time.
16

This report was produced by Cambridge Associates, a global investment
firm and one of the world’s leading developers of financial performance
benchmarks, in partnership with the Global Impact Investing Network, an
organization dedicated to increasing the scale and effectiveness of impact
investing worldwide. It presents findings from the first comprehensive analysis of
financial performance in impact investing. To maintain a manageable scope, this report
specifically evaluates the performance of market rate private investment funds in the
impact investing space. This report also marks the launch of the first ever financial
performance benchmark of private impact investing funds, which Cambridge Associates
will maintain and update on a quarterly basis going forward.
The decision to focus this report on PI funds was motivated by several factors. Investing
via funds is a common strategy for impact investors of all types and sizes, including
development finance institutions, foundations, commercial banks, pension funds, insur-
ance companies, and family offices. Nearly 75% of investors that responded to the J.P.
Morgan and GIIN global impact investor survey, Eyes on the Horizon: The Impact Investor
Survey, published in May 2015, indicated that they invest via intermediaries (regardless
of whether they also invest directly in companies). Additionally, within fund invest-
ments, private equity and venture capital are particularly common vehicles. Out of 310
impact investing funds profiled in the ImpactBase Snapshot, published in April 2015, 153
are private equity or venture capital vehicles. Cambridge Associates’ Mission-Related
Investing (MRI) database is further evidence of private equity’s prevalence in impact
investing: of the 579 private MRI funds Cambridge Associates’ tracks, 392 are private
equity or venture capital funds (the remainder are private real assets funds).
Introducing the Impact
Investing Benchmark
For the sake of brevity, the phrases “private investments” and “Impact Investing Benchmark” are used throughout
this report. However, as explained in detail in the Methodology section, the benchmark only includes data from
private equity and venture capital funds that target risk-adjusted market rate returns and social impact objectives.
Accordingly, the benchmark does not include private debt funds, funds targeting environmental impact objectives,
or funds seeking below market returns, all of which are also prevalent strategies in the impact investing landscape.
Our use of these simplifying phrases, therefore, is not to imply that impact investing is restricted only to private
equity and venture capital; rather it is to enable simple narrative flow.
17

Global Thematic Research
Income Inequality: Market Mechanism or
Market Failure?
Tools to assess corporate performance and enhance
investment decisions
Executive summary
Income inequality is a normal feature of a free market economy. However, in recent
years, it has been on the rise in most developed countries and has reached relatively
high levels, especially in the US. Extreme income inequality affects economic growth
prospects and societal stability. It also impacts business models, corporate
profitability and value creation.
Our report provides insight into the investment implications of this socio-economic
phenomenon. It offers a comprehensive review of the facts, data and economic analysis
related to income inequality, and
establishes the relationship
between the macroeconomic
perspective and individual
investment decisions.
We have identified two simple
tools that can help investors
estimate the consequences of
their investments regarding
income inequality. The first is a
check-list of indicators and
questions to help assess
companies’ human capital
strategies in the perspective of
high inequality. The second,
related to the external socio-
economic impacts of business
activities, opens the debate regarding companies’ awareness of their influence on the
local economy.
Flagship Report November 13, 2014
Margarita Pirovska
Policy and
Sustainability
Analyst
+1 212 874 7400
Reprinted with permission from
Cornerstone Capital Group. Contents are
only current as of publication date.
18

I. Defining income inequality
Income distribution trends have become a mainstream discussion topic since the global financial crisis of
2008-2009. For the third year in a row, in 2014, 700 world leaders at The World Economic Forum in Davos,
Switzerland identified the increasing income gap as one of the biggest risks facing the world economy. This
same year, the International Monetary Fund, Standard & Poor’s and the Organization for Economic Co-
operation and Development (OECD) also issued warnings about this increasing disparity. But what exactly is
income inequality – and how does it affect investors and markets?
1. The broad concept: economic inequality
Economic inequality is the uneven distribution of financial and material assets and income among
individuals or households within a country, or between countries. Wealth inequality illustrates the variation
between the net worth of different groups of individuals or households, while income inequality refers to the
disparity in real disposable incomes. This report focuses primarily on the latter. We will attempt to describe
and analyze the socio-economic phenomenon of high and rising inequality of real disposable incomes within
the US population, and its impacts on financial markets and investment decisions.
Although related to the issue of poverty, and often referred to as the “difference of income between the rich
and the poor”, income inequality is a different topic, illustrating the dispersion of all incomes within a given
population. This does not imply that the lowest earners are actually living in poverty (which may be
understood in absolute or relative terms). However, in some situations, extreme inequality can lead to an
increase in poverty, and threaten future economic growth1.
Income inequality is closely related to wealth inequality. As incomes constitute one of the main sources of
wealth accumulation, persistent income inequality may fuel wealth inequality over time, and can be
exacerbated by inequality of opportunity and other social inequalities. Income inequality is therefore an
important short-term driver of wealth inequality.
Economic inequality has always been embedded in free market economies, and is not a problem per se. But
the return of pre-war levels of income inequality in the US, especially after the economic and financial
crisis, saw renewed interest in the subject. The biggest issue is that while the spread in income distribution is
increasing, economic growth is slow, and unemployment and underemployment of young graduates are
rising. In addition, over the long term, real growth of incomes at the lower end of the spectrum has been
stagnant.
2. The origins of inequality
The origins of the word “equal” stem from the Latin aequalis – meaning “uniform, identical, equal" but also
from aequus or "level, even, just". Equality can refer to what is the same, but also to what is fair and just.
Therefore, is inequality also unfair? Unjust? Or only “different”, and “not equal”?
1 These issues will be further developed in the second part of this report.
19

All developed, post-industrial societies share a commitment to principles of political equality2. However,
economic inequality, as a natural result of market forces, has withstood most attempts at reform. Some
political philosophers have argued that the mere existence of equality of opportunity justifies economic
inequalities3 . Inequality of income could therefore be a natural characteristic of the capitalist system.
However, as inequalities in developed countries have widened over the past three decades, it becomes useful
to ask whether these trends are socially or economically sustainable.
3. The income distribution gap in numbers
Over the past three decades, income inequality in the developed world increased along with sustained
economic and employment growth4. This contradicts widely accepted post-war economic analysis of income
inequality and economic growth, such as the one proposed in 1955 by Nobel laureate and Harvard professor
of economics, Simon Kuznets5. As an economy develops and undergoes industrialization, Kuznets argued,
income inequality grows at first and then starts to recede, as human capital develops and wages increase.
According to this analysis, in developed post-industrial markets, inequality should be low. This theory
was true in practice until the 1970s, when inequality began to rise again.
Income distribution within a given population can be assessed using data on real disposable household
income. Additional variables, such as consumption, or other monetary attributes can also be used as proxies.
However, data on real disposable income provides the most accurate and widely used source of information
to assess income inequality6.
The variance in income distribution can be expressed with different ratios and coefficients. Among the most
common measures are:
 The Gini coefficient, measuring the extent to which the distribution of income or consumption
expenditure among individuals or households within an economy deviates from a perfectly equal
distribution. A Gini index of 0 represents perfect equality, while an index of 1, with completely unequal
distribution, implies full inequality.
 The share of total income earned by the top 1% or the top 0.1% richest people in the population.
2 The Declaration of the Rights of Man and of the Citizen of 1789, the Declaration of Independence and the Declaration of Rights of 1776 were
inspired by the philosophers of the Enlightenment, such as Rousseau (Discourse on the Origin and Basis of Inequality Among Men, Jean-Jacques
Rousseau, 1754), who defined inequality as a social convention, an artificial construction stemmed from the social contract which guarantees
peace in exchange of limited individual freedoms. Based on the theories of a pre-existing natural, original equality among human beings, they
state that beyond the social contract and the organization of human societies, human beings are, in essence, equal. This political and legal
equality, implying equal dignity and respect for all human beings, has been adopted as a founding principle of Western societies.
3 Understanding and explaining why societies, composed of legally and morally equal individuals, are characterized by persisting material
inequalities has been a continuous endeavor of moral philosophers (see John Rawls, A theory of Justice, 1971). Overall, the past two centuries
have seen a progress towards equality not only in political and legal terms, but also socially and economically. Both the maturing welfare states
of Western societies, and the exponential globalization of nations, have contributed to expose, understand and address, fully or partially, many
social inequalities, such as racial, gender or social group based discriminations.
4 Divided We Stand: Why Inequality Keeps Rising, OECD (2011), http://www.oecd.org/social/soc/dividedwestandwhyinequalitykeepsrising.htm
5 Simon Kuznets, "Economic Growth and Income Inequality". American Economic Review 45 (March): 1–28. (1955)
http://www.aeaweb.org/aer/top20/45.1.1-28.pdf
6 See also the OECD Guidelines for Micro Statistics on Household Wealth (2013) http://www.oecd.org/statistics/OECD-Guidelines-for-Micro-
Statistics-on-Household-Wealth-Chapter7.pdf
20

 Percentile or dispersion ratios, such as the ratio between the income of the richest 10% of the
population and the bottom 10%.
The Gini coefficient for a set of developed countries shows that the gap in income distribution has
increased over the past thirty years. This measure illustrates the relative evolution of income distribution
over time, and to allow for a comparison between countries where data is available.
Figure 1: Gini coefficient of a set of developed countries, 1985 and 2010
Source: OECD
Globally, inequality has been growing at a steady rate. As Christine Lagarde, Managing Director of the IMF
said in early October, “There has been a staggering rise in inequality—7 out of 10 people in the world today
live in countries where inequality has increased over the last three decades. And yet, we know that excessive
inequality saps growth, inhibits inclusion, and undermines trust and social capital”7.
In the United States, the income gap is both increasing and higher than in other developed countries. To
better understand this tendency, we can look at the distribution of total income among the richest 1% in the
US economy. Data shows that current share of income going to the top 1% earners is similar to that
observed just before the Great Depression of 1929.
7 http://www.imf.org/external/np/speeches/2014/101014.htm
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
1985 2010
21

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Project
Leads:
Diana
Propper
de
Callejon
&
Bruce
Campbell,
with
Gabi
Blumberg

Project
Summary
Impact
Investors
often
rely
on
conventional
term
sheets
to
structure
investments.
This
can
create

challenges
and
even
potential
conflict
between
capital
providers
and
companies
given
that
not
all

investments
in
social
enterprises
conform
to
traditional
investment
terms.

To
address
these
challenges,

a
number
of
investors
have
begun
to
test
new
models
for
structuring
investments,
and
are
adding

entirely
new
terms
to
address
impact.
The
changes
and
innovations
that
have
been
tried
remain
largely

unknown
to
others
in
the
market.
Through
interviews
and
group
discussions
with
investors,

entrepreneurs
and
other
leaders
in
impact
investing,
this
project’s
goal
is
to
develop
an
easily
accessible

on-‐line
toolkit
of
innovative
terms
that
will
include
new
terms
that
are
being
piloted
as
well
as
new
ideas

that
are
at
the
conception
stage.

Diana
Propper
de
Callejon (www.linkedin.com/in/dianapropperdecallejon),
Managing
Director
at

Cranemere
Inc.,
has
20+
years
of
sustainability
investment
experience
and
developed
the
term
sheet

project
as
a
part
of
her
Aspen
Institute
and
Capital
Institute
Fellowships.

Bruce
Campbell,
(www.bluedotlaw.com/team/bruce-‐campbell/)
Chief
Happiness
Officer
at
Blue
Dot

Advocates,
has
worked
as
a
corporate
finance
lawyer
for
15+
years
and
has
an
extensive
track
record

structuring
impact
investments.

If
you
have
any
questions,
comments
or
contributions,
please
contact
gabi.blumberg@gmail.com

September

14

Innovative
Deal
Structures
for
Impact
Investments

Pi Investments

Background
Impact investors often rely on traditional term sheets to structure their investments. While familiar and well tested,
they are not always the most effective way to structure investments into companies that are explicitly oriented
towards social or environmental mission and profit.
First, conventional venture capital and private equity term sheets expect a financial return to come from an exit in the
form of a trade sale, IPO or sale of the business to an institutional investor. While some impact enterprises may have
the potential to attract a strategic acquirer or have access to the public finance markets, in other cases these paths to
exit are either unrealistic or undesirable. This can be for a number of reasons, including the following:
- Growth rates and scale of the enterprise: the company’s business model reaches its growth projections over
a period longer than 3-5 years and/or its ultimate size and scale may be limited by a smaller target market;
- Founder’s goals: the founder’s long-term goal may be to keep the company private to more easily preserve
the company’s social or environmental mission;
- Returns: some mission-led companies may deliver concessionary returns.
For companies that are less likely to complete a traditional exit for their investors, alternative exit strategies must be
utilized.
Secondly, conventional term sheets are silent on matters related to impact and thus fail to capture the full breadth of
interests and goals of the investors and companies. Term sheets constructed with a new approach can, on the other
hand, play a central role in aligning interests and behaviors related to the achievement and preservation of mission.
To address these challenges, a number of impact investors have begun to develop new models for achieving liquidity
and integrating impact directly into deals. Much of this knowledge, however, remains fragmented with no central
clearinghouse to gather and disseminate the new approaches and lessons learned.
Key Findings to Date
The team has interviewed almost 100 impact investors, enterprises, legal experts, and advisors from around the
world. Our key findings, focused primarily on privately held, early-stage businesses, are summarized below.
Equity investors are using innovative approaches to achieve liquidity, including staged
dividend payments and redemption based exits.
Equity based alternatives encompass the following approaches:
1. Dividend payments: Partial or complete liquidity is achieved through staged dividend payments to
investors. The company is required to make payments until they achieve a specified cash-on-cash return
target. These payments are variable – they are linked to a percentage of revenue or cash flow, and thus link
the timing of liquidity to the health of the enterprise. Typically, returns are capped or have certain limits on
them, but sometimes investors have a mechanism to participate in a higher return if the enterprise
successfully completes a traditional exit.
2. Redemptions: At the investor’s option, an exit is achieved through the mandatory redemption of an
investor’s equity stake in the business at a specified point in time. We have seen the redemption amount
paid to investors calculated in a variety of ways, including as a percentage of revenue, based on the fair
market value of the company at a given point in time and as a pre-determined multiple on investment.
Redemption provisions usually include some flexibility with respect to repayment in the event the company
does not have adequate cash on hand to satisfy the redemption request.
These alternatives offer a solution to exit challenges by shifting the investor’s risk adjusted return perspective. By
predetermining liquidity payments, investors trade the higher potential upside from a traditional exit, for more certain
repayment terms and less risk. For most of these investments, investors we interviewed are targeting IRRs in the
mid-teens (with a few even higher). These investments are better suited for investors looking to invest in companies
that are likely to generate sufficient profits from operations in the relative short term from which to provide staged
24

liquidity payment to investors rather than VC-style investors that are willing to accept a high degree of risk for
significantly higher return potential.
Debt investors are adapting traditional structures to increase flexibility and alignment
with enterprises.
Debt based alternatives offer the following new terms and adaptations to traditional debt:
1. More flexible repayment: Like some of the equity structures, some investors are linking debt repayments to
a percentage of revenues or cash flows. This makes the timing of the repayment contingent on the
company’s performance, rather than fixed payments.
2. Longer time horizons: Investors have been willing to lengthen the term of the debt repayment, extending
payments out as far as 10 years, or to offer longer repayment grace periods of 18-24 months and beyond.
3. Company friendly terms: Investors have included more company-friendly terms, including no pre-payment
penalties and, in some cases, pre-payment discounts.
These structures can be advantageous for companies with return profiles that are not suitable for equity investment,
but that also struggle to attain commercial loans due to unpredictable cash flows or a lack of security to offer as
collateral.
Revenue share agreements offer investors an alternative liquidity structure.
Revenue share agreements offer investors a simple way to participate in the growth of a company without purchasing
ownership, and therefore avoiding exit issues. These structures entitle the investor to an agreed upon percentage of a
company’s revenue stream over a certain period of time. Typically, the revenue payments are limited by time or a
capped multiple to the investor.
Innovative investment structures may present challenges and trigger potentially
disadvantageous tax issues.
These approaches have only begun to be tested recently (some have yet to be used) and none have been through a
full investment cycle. We have no data as yet to conclude that these terms will successfully lead to the targeted
financial outcomes or create better values alignment between investors and companies.
We have found that these innovative investment structures require careful tax analysis. If investors are not well
informed about the tax aspects of these investments, they may end up paying more taxes than they expected and
paying those taxes before the investment has realized a cash return. See the recent blog from Blue Dot Advocates for
more on the tax considerations for these types of investments: www.bluedotlaw.com/innovative-financial-structures/.
Impact investors are incorporating impact considerations into deals
Investors and companies are integrating impact considerations in a variety of ways:
1. Mission definition: Investors require the mission of the enterprise to be articulated as part of the term sheet,
By-Laws and Articles of Incorporation.
2. Use of funds to invest in impact: Some investors restrict the use of funds to business operations that drive
impact outcomes.
3. Impact governance: Impact governance is integrated at the Board level, including the appointment of at
least one board member who has oversight of impact.
4. Linking returns to impact outcomes: Investors link their financial returns to the impact that the enterprise
achieves. In some cases, they are inversely related, such that the investor accepts a lower return if the
company achieves certain target outcomes. In other cases, they are positively related, such that the higher
the impact, the higher the return to investors (e.g. Pay for Success model).
5. Mission preservation at the exit: Different approaches include providing founders with veto power to block
an exit if they believe it to be in conflict with the enterprise’s mission. Alternatively, the fiduciary duty of
the Board can be redefined through an alternative entity such as the Benefit Corporation or through the
operating agreement of a limited liability company to allow it to give equal consideration to impact
preservation when evaluating an exit for investors.
25

The new IRR: Impact,
Risk and Return
YVONNE BAKKUM
Managing Director,
FMO Investment Management
A NEW 3-D WAY OF LOOKING AT INVESTMENTS
There is no such thing as a free lunch. Or, when talking about
long term investing, no return without risk. In the Netherlands,
a debate is going on about the risk appetite of pension funds.
To what extent does regulatory pressure limit their ability to
generate sufficient returns? The CIO of one of the largest
pension fund openly questioned the Dutch Central Bank’s policy
to freeze the risk profiles of some pension funds whose asset
value had sunk below the required coverage ratio. He argued –
rightfully so - that this would be counter effective. In the current
low interest rate environment, a conservative investment policy
emphasizing traditional fixed income instruments will yield
low returns hence will not help to improve coverage ratios.
Investment decisions tend to be based on the internal rate of
return (IRR) of an investment opportunity. IRR is the annual rate
of return on an investment considering its original cash outflow
and its ultimate outcomes in terms of cash inflow over time.
IRR analysis is a commonly used method to compare investment
opportunities and support (or even lead) investment decision
making. Much has been written about the limitations of this
method, and I will happily stay away from too much detail here.
But this wouldn’t be an article about a new IRR if I wouldn’t
address at least one of the limitations of the old one: the
uncertainty or volatility of return. If the future cash inflows
cannot easily or reliably be quantified, IRR analysis will not work
and an investment may not even be considered. As a result,
many investments are never made nor considered. Uncertainty
becomes a disqualifier – while in fact all financial outcomes are
uncertain! And as mentioned before, no return without risk.
And then there is another issue in my view: the definition of
return. Cash inflows and the assumed cash associated with a
residual value are included in IRR calculations. But what about
non-financial or indirect forms of return?
THAT’S WHY I ADVOCATE FOR A NEW IRR:
LOOKING AT EVERY INVESTMENT TAKING INTO ACCOUNT
ITS IMPACT, RISK AND RETURN.
All investments have an impact. At FMO, the Dutch development
bank, the impact we are looking for is the positive impact that
successful private enterprise can have on emerging market
26

economies, on people and on the environment they live in. In
2014 alone, our new investments were expected to create and
support at least 500,000 jobs, touching the lives of millions of
people. By focusing our new investments on renewable energy
projects and other ‘green’ initiatives, greenhouse gas emissions
avoided amount to the equivalent of a million tickets from
Amsterdam to Nairobi.
All investments carry some degree of risk. And as a reward
for taking that risk, investors want to realize a commensurate
financial return.
SO HOW DO IMPACT, RISK AND RETURN COME TOGETHER?
In my view, they are interlinked concepts and should be seen in
relation to each other. Many investors associate impact investing
withhighriskproductssuchasventurecapitalorprivateequity.In
the Netherlands, where regulatory pressure is highest in relation
to illiquid investment categories, mainstream institutional
investors are hesitant to pursue impact investing. In other
cases investors struggle with apparently conflicting mandates:
“please build an impact investing portfolio, and please stay away
from illiquid investments...”. However, as impact investing
offers opportunities across asset classes, different products
exist to meet risk-return requirements of different investors.
If you are wondering what types of impact investing options
are available, let me just mention a few:
A LOW RISK OPTION:
Green bonds offer impact investment opportunities with
substantial liquidity. The market for green bonds is developing
very quickly. Critical investors have driven increased transparency
and consistency in the use of proceeds by the issuers, leading to
improved realization and reporting of impact. FMO and others
offer green or sustainability bonds on a regular basis.
A MODEST IRR OPTION:
Emerging markets loans are another interesting impact
investment theme. Especially through pooled vehicles, the risk
profile is relatively modest while return potential is much more
attractive than traditional EMD products. By selecting the right
vehicle the impact can be very positive: creating jobs for many,
improving labour conditions and promoting ‘green’ businesses.
A HIGHER IRR OPTION:
Private equity funds-of-funds in general offer a highly diversified
form of private equity investment. In emerging markets,
private equity funds tend to focus on growth equity which has
tremendous impact as it allows entrepreneurs to grow their
business. This focus on growth equity also lowers the risk, as
you are not exposed to the typical leverage risk associated with
private equity in the US and Europe. So when looking at higher
risk products, dig deeper to understand the true risk profile
which may not always be as high as you think!
Clearly, investing for impact is not a privilege available to
high risk seekers only, nor is it only suitable for the more
philanthropically oriented investor. Every investor should be
able to find impact investing opportunities that fit their specific
risk appetite. I sincerely hope that the notion of this new IRR
will help people realize there is more to investing than return
optimization only. It’s a new 3-dimensional way of looking at
investments.
Anna van Saksenlaan 71
2593 HW The Hague
The Netherlands
+31 (0)70 314 96 96
fmo-im@fmo.nl
www.fmo-im.nl
FMO Investment Management offers professional investors access to FMO’s expertise in
responsible emerging market investing. We match investors’ appetite with FMO’s experience
in selected sectors, products and regions. The resulting fund propositions each aim for a
diversified portfolio, where each investment we make should generate an attractive financial
return and meaningful development impact. Our offering builds on more than 45 years’
experience resulting in a portfolio of EUR 8 billion portfolio spanning over 85 countries. FMO
Investment Management is part of FMO, one of the larger bilateral private sector development
banks globally.
27

Outcomes
Repayment
Expansion
Capital
Non-profit
intervention
provider
Private
funders/impact
investors
Government
payor
We design public-private nonprofit
partnerships, structure social
financing solutions and manage
performance to ensure shared goals
are met.
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www.socialfinanceUS.org
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Mobilizing Capital To Drive Social Progress
ADDRESSING A RANGE OF COMPLEX SOCIAL ISSUES
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As a firm that cares about environmental and social issues, Mintz Levin commends you for thinking about
the impact your investments make.Your thoughtful investments are safeguarding
our future goal of sustainable economic development.
Contact Mintz Levin for cutting-edge advice and guidance.
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SOCIAL IMPACT
INVESTMENT TASKFORCE
Established under the UK’s
presidency of the G8 September 2014
ALLOCATING
FOR IMPACT
Subject Paper of the Asset
Allocation Working Group
30

EXECUTIVE SUMMARY
Despite increases in aggregate
global wealth, levels of
inequality and environmental
degradation in many countries
continue to rise. To help tackle
this, impact investment1
aligns
the positive power of private
capital with the social and
environmental needs of society
at large. This makes impact
investment a critical tool for
the policymaker, bringing
cost-effective solutions and
incremental capital to some
of our most intractable societal
challenges, from life-saving
vaccines to affordable housing.
It also provides investors with a compelling
opportunity: to align their investment strategy
with their societal values, to spot areas of rapid
growth (supported by a favourable policy
environment) and even to identify potentially
less correlated investment propositions.
To solve problems on a global scale, we need
global capital pools to respond. This means that,
alongside the pioneering investors already
allocating for impact, we need impact investment
to find its formal place within institutional
portfolios.
This will happen when Chief Investment Officers
and Investment Managers recognise that
a diversified and thoughtful allocation to
impact investments can fit with their fiduciary
responsibilities, and when governments use
well-designed policies to encourage and support
such allocations.
This paper presents a series of frameworks to help
both investors and policymakers do just that.
In Chapter 1, we describe the various features
that make impact investment an attractive
proposition, for both governments and investors.
In Chapter 2, we clarify the various terms used in
the market and position the investment choices
available. This chapter aims to help investors
identify the opportunity set that can best meet
their societal and financial goals. It also provides
policymakers with a view of the impact investment
universe, which they can influence and incentivise
to meet their development agendas.
In Chapter 3, we propose a framework for
including impact investments across a balanced
investment portfolio, without compromising the
financial goals and fiduciary responsibilities of
Chief Investment Officers and investment
managers. This chapter is clearly relevant for
investors but it is also aimed at policymakers,
since it lays the groundwork for later policy
recommendations.
In Chapter 4, we assess the key barriers to
making impact investments for a wide range of
investors and intermediaries. These barriers fall
into three main categories, relating to conflict of
duty, to the nascent stage of the industry and to
increased risk factors.
EXECUTIVE SUMMARY
Impact investment aligns the positive
power of private capital with the social and
environmental needs of society at-large.
It is for this reason that this report has
two key audiences: both investors and
policymakers.
1 Throughout this report, the terms ‘impact’ and ‘societal’ encompass both social and environmental impact 31

EXECUTIVE SUMMARY
Finally, in Chapter 5, we present a series of
actionable policy recommendations that can
address these barriers, illustrated through
examples of equivalent policies already at work
around the world. These recommendations call
for governments to act in three key ways:
1. MARKET STEWARD
• Clarification of fiduciary duty
Use of fiscal incentives
• Requirement for regulated financial institutions
and foundation endowments to articulate their
contribution to impact investment
• Requirement that impact investment be included
as an optional percentage of pension fund
offerings
• Requirement that banking institutions lend to
priority sectors
2. MARKET PARTICIPANT
• Issuance of Requests for Proposals to encourage
development of impact investment products
• Stimulation of the intermediary market to
produce more bundled/ multi-asset products
at-scale
• Provision of catalytic capital, such as matching
investment, first loss protection or guarantees
3. MARKET BUILDER
• Support for placement and distribution platforms
• Support for an impact investment rating system
Taken together, we hope that the various
frameworks and policy recommendations
presented in this report have the potential to
unlock the financial power of global portfolio
investors, bringing widespread solutions to some
of our most pressing societal challenges.
About the authors
This report is the product of a series of discussions
by the Asset Allocation Working Group of
the Social Investment Taskforce, established
established under the UK’s presidency of the G8
(see Acknowledgements for details).
The Working Group is chaired by Harvey McGrath
of Big Society Capital.
The report’s lead authors are Clara Barby of
Bridges IMPACT+ and Mads Pedersen of UBS.
Please direct any feedback or further enquiries
about this report to:
clara@bridgesventures.com and
mads.pedersen@ubs.com
32

www.jpmorganmarkets.com
Global Social Finance
04 May 2015
Eyes on the Horizon
The Impact Investor Survey
Social Finance
Yasemin Saltuk
(44-20) 7742-6426
yasemin.x.saltuk@jpmorgan.com
Ali El Idrissi
(44-20) 7134-6938
ali.el.idrissi@jpmorgan.com
J.P. Morgan Securities plc
Global Impact Investing Network
Amit Bouri
(1-646) 837-7203
abouri@thegiin.org
Abhilash Mudaliar
(1-646) 837-7168
amudaliar@thegiin.org
Hannah Schiff
(1-646) 837-7152
hschiff@thegiin.org
33

Eyes on the Horizon
04 May 2015
Yasemin Saltuk
(44-20) 7742-6426
Executive Summary
This report presents the findings of the fifth annual impact investor survey conducted
by The Global Impact Investing Network (GIIN) and J.P. Morgan. We have
maintained core questions on investor activity and perspectives, and also included
additional specific topics such as loss protection, technical assistance, impact
management and measurement, and exits. Throughout the report, we complement the
survey questions with some of our own desk research presented in “Zooming In”
sections. Below, we present a summary of the survey’s key findings.
Sample characteristics
 The sample size this year is 146, a 17% increase from last year.
 Seventy-eight percent of respondents have their headquarters (HQs) in Northern
America and WNS Europe. However, 48% of current assets under management
are in emerging markets, even though 90% of capital is managed by DM-HQ
investors.
 The sample is about half fund managers (57%). The rest of the sample is asset
owners, with foundations making up 18%, diversified financial institutions/banks
7%, and development finance institutions (DFIs) 5%.
 Just over half of the sample (55%) principally targets “competitive, market rate
returns”, with the remainder of the sample split between “below market rate
returns: closer to market rate” (27%) and “below market rate returns: closer to
capital preservation” (18%).
Investment activity and allocations
 As Table 3 shows, the group reports having committed USD 10.6bn in 2014 and
intends to invest 16% more – USD 12.2bn – in 2015.
Table 3: Number and size of investments made and targeted
In 2014 2015 target
Number
(n=146)
USD, mm
(n=146)
Number
(n=145)
USD, mm
(n=144)
Mean 37 72 44 85
Median 7 10 8 14
Sum 5,404 10,553 6,332 12,241
Source: GIIN, J.P. Morgan.
 The 82 organizations that responded both last year and this year reported a 7%
growth in capital committed between 2013 and 2014 and a 13% growth in
number of deals.
 Collectively, our respondents are managing a total of USD 60bn in impact
investments today, 35% of which is proprietary capital and 65% managed on
behalf of clients.4
 Fund managers manage 63% of this total AUM while DFIs – who make up just
5% of our sample – manage 18% of total assets (Figure 1).
4
Total impact investment assets under management represents 145 respondents and not the
total 146 due to one respondent not providing this data.
34

Eyes on the Horizon
04 May 2015
Yasemin Saltuk
(44-20) 7742-6426
Figure 1: Total AUM by organization type
n = 145; AUM-weighted average; Total AUM = USD 60bn
 Investments directly into companies represent a much larger proportion of assets
under management (74%) than do indirect investments (20%).5
 Capital is diversified across regions, with about half invested in emerging
markets and half in developed markets (Figure 2).
 Housing accounts for 27% of respondents' assets under management, as do
Microfinance and Financial Services (excluding microfinance) combined. A
further 10% is allocated to Energy, while Healthcare and Food & Agriculture
account for 5% each (Figure 3).
Figure 2: Total AUM by geography
Source: GIIN, J.P. Morgan. See Table 2 for region codes used in the text.
Figure 3: Total AUM by sector
Source: GIIN, J.P. Morgan. NB: Some of the “other” categories reported include forestry, land
conservation, sustainable agriculture, arts & culture, and manufacturing
5
A small group of respondents chose "other" to denote investments in structures that are
neither companies nor funds (these respondents specified, for example, real assets and NGOs).
63%
18%
9%
6%
2%
2%
0.01%
Fund manager
Development finance institution
Diversified financial institution / Bank
Foundation
Other
Pension fund or Insurance company
Family office
40%
14%
11%
10%
8%
6%
6%
3% 2%
0.2%
Northern America
SSA
LAC
EEC
WNS Europe
ESE Asia
South Asia
Other
MENA
Oceania
27%
17%
16%
11%
10%
5%
5%
2%
2%
2%
1%
1%
1%
0%
Housing
Other
Microfinance
Financial services (excluding microfinance)
Energy
Healthcare
Food & agriculture
Education
Information and communication technologies
Manufacturing
Infrastructure
Habitat conservation
Water & sanitation
Arts & culture
35

Eyes on the Horizon
04 May 2015
Yasemin Saltuk
(44-20) 7742-6426
 Private Debt and Private Equity are the most prominent instruments, accounting
for 40% and 33% of assets under management, respectively. Eight percent is
allocated to Equity-like Debt while less than 1% is allocated to Pay-for-
performance instruments (Figure 4).
 Most capital managed today – 91% – is invested in companies post-venture stage,
with 28% allocated towards companies at the Growth Stage, 52% in Mature,
Private and 11% in Mature, Publicly-traded companies. Nine percent is
committed to Seed/Start-up companies or Venture Stage businesses (Figure 5).
Figure 4: Total AUM by instrument
Figure 5: Total AUM by stage of business
Planned asset allocations going forward
 The region to which the highest number of respondents plan to increase their
allocations is SSA (29 respondents), followed by ESE Asia (28 respondents) and
LAC (27 respondents). A relatively low number of respondents plan to increase
allocations to MENA, WNS Europe, EEC and Oceania (Figure 6).
 The sectors to which the highest number of respondents plan to increase their
exposure are Energy and Food & Agriculture (38 respondents each), followed by
Healthcare (37 respondents) and Education (33, Figure 7).
Figure 6: Change of allocation planned for 2015, by geography
Ranking by number of respondents who chose "increase”
Figure 7: Change of allocation planned for 2015, by sector
Ranking by number of respondents who chose "increase”
40%
33%
8%
6%
5%
3% 3%2% 0.2%
Private debt
Private equity
Equity-like debt
Public debt
Public equity
Real assets
Other
Deposits & cash equivalents
Pay-for-performance instruments (e.g., social
impact bonds)
3%
6%
28%
52%
11%
Seed/Start-up stage
Venture stage
Growth stage
Mature, private
Mature, publicly-traded
(10)
(5)
(1)
(4)
(7)
(1)
4
6
6
4
2
6
4
1
8
10
16
19
30
21
23
21
23
29
3
4
9
12
14
22
27
28
29
(10) 0 10 20 30 40 50 60 70
Oceania
Eastern Europe, Russia, & Central Asia
Middle East & North Africa
U.S. & Canada
Western, Northern, & Southern Europe
South Asia
Latin America & Caribbean (including Mexico)
East & Southeast Asia
Sub Saharan Africa
Decrease Begin to assess Maintain Increase
(2)
(1)
(1)
(9)
(4)
(1)
(1)
(3)
(2)
4
6
3
3
6
18
1
8
3
6
9
6
4
9
14
12
11
14
18
20
20
31
25
23
28
19
5
9
12
13
15
16
20
21
23
33
37
38
38
(10) 0 10 20 30 40 50 60 70
Arts & culture
Habitat conservation
Manufacturing
Infrastructure
Information and communication technologies
Water & sanitation
Microfinance
Housing
Financial services (excluding microfinance)
Education
Healthcare
Food & agriculture
Energy
Decrease Begin to assess Maintain Increase
36

Eyes on the Horizon
04 May 2015
Yasemin Saltuk
(44-20) 7742-6426
Market development and pipeline
 Respondents indicated progress across the board on several key indicators of
market growth, including: collaboration among investors, availability of
investment opportunities, usage of impact measurement standards, and number of
intermediaries with significant track record. Compared to 2013, respondents
seemed to see more progress in 2014 on the availability of investment
opportunities at the company level.
 However, certain challenges remained consistent in investors’ views. “Lack of
appropriate capital across the risk/return spectrum” ranked first among a set of
challenges this year, and “shortage of high quality investment opportunities with
track record” ranked second (Table 4).
Table 4: Challenges to the growth of the impact investing industry today
n = 146; Respondents ranked top three
Rank Score Available answer choices
1 193 Lack of appropriate capital across the risk/return spectrum
2 174 Shortage of high quality investment opportunities with track record
3 115 Difficulty exiting investments
4 97 Lack of common way to talk about impact investing
5 87 Lack of innovative deal/fund structures to accommodate investors’ or portfolio companies’ needs
6 76 Lack of research and data on products and performance
7 67 Inadequate impact measurement practice
8 57 Lack of investment professionals with relevant skill sets
Source: GIIN, J.P. Morgan. See scoring methodology in the Methodological and Analytical Notes section on page 3.
 When evaluating potential government policies, respondents indicated that the
most useful policies would be those that improve the risk/return profiles of
investments, either through credit enhancement or tax credits or subsidies.
 About two-thirds of respondents perceived the market for impact investments to
be at least somewhat competitive, with most citing a limited number of investable
ventures or scalable business models as the chief source of competition.
 At the same time, nearly 9 out of 10 respondents indicated that co-investors are
either important or critical to their investment decisions.
 Indeed, referrals from co-investors or portfolio companies were identified as the
most effective sources of identifying potential deals.
Performance and exits
 Survey participants reported that their portfolios are performing mostly in line
with both their impact expectations and financial return expectations (Figure 8).
 Twenty-seven percent of respondents reported outperformance against their
impact expectations and 14% reported outperformance against their financial
return expectations. Conversely, only 2% reported underperformance on impact,
while 9% reported financial underperformance relative to expectations.
Figure 8: Performance relative to
expectations
Number of respondents is shown under
each category; some respondents chose
“not sure” and their responses are not
considered here.
27%
14%
71%
78%
2% 9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Impact expectations Financial expectations
Outperforming In line Underperforming
n=139 n=139
37

Eyes on the Horizon
04 May 2015
Yasemin Saltuk
(44-20) 7742-6426
 Private equity impact investors reported on their most recent exits, totaling 77
exits in our sample, 61 of which happened since 2012. Seventeen exits were in
Microfinance, and nine each in Financial services (excluding microfinance),
Healthcare and Food & Agriculture (Figure 9).
 Twenty-one of these exits were in South Asia, while 11 each were in SSA and
WNS Europe.
 The majority of these exits took place by selling either to a strategic or financial
buyer, and most exits took place more than five years after investment.
 In order to mitigate exit risk, over 50% of private equity investors include “tag
along” and “drag along” clauses in their investment terms.
Risk and loss protection
 "Business model execution & management risk" once again emerged as the
largest contributor of risk to respondent portfolios, as shown in Table 5.
Table 5: Contributors of risk to impact investment portfolios
n=146
Rank Score
1 288 Business model execution & management risk
2 132 Liquidity & exit risk
3 115 Country & currency risk
4 106 Market demand & competition risk
5 98 Financing risk
6 91 Macroeconomic risk
7 34 Perception & reputational risk
 In order to manage downside risk, 34% of respondents participated in a
transaction with a loss protection feature, such as a first-loss reserve or a
guarantee, over the last year.
 However, the majority of respondents see loss protection as something that’s
either a “nice to have” or necessary only in certain cases, but not critical to
making impact investments.
 The risk of mission drift at exit is important to impact investors, with 61% taking
measures to mitigate this risk, either by selecting an investee in whose mission
impact is embedded and/or by selecting an acquirer that will protect the mission.
Impact performance management
 Ninety-nine percent of respondents measure the social/environmental
performance of their investments, through a range of standardized and proprietary
metrics and frameworks, with the majority aligning with IRIS.
 Most respondents seek to achieve impact by investing in organizations that either
sell products or services that benefit a target population or provide employment to
target populations.
 Respondents generally put high importance on measuring outputs and outcomes,
while they are less focused on putting a dollar figure on impact.
 While the vast majority of respondents track impact performance because it is
part of their mission, nearly two-thirds also believe the business value of such
information to be of high importance.
Figure 9: Sample private equity
exits by sector
n = 76 exits
FS= Financial services excluding microfinance
ICT= Information and communication technologies
1
2
2
2
4
8
9
9
9
13
17
0 5 10 15 20
Manufacturing
Education
Energy
Habitat
conservation
Housing
ICT
FS
Food&
agriculture
Healthcare
Other
Microfinance
38

Eyes on the Horizon
04 May 2015
Yasemin Saltuk
(44-20) 7742-6426
 Only 20% of respondents have a standalone team for impact measurement; two-
thirds rely on their investment teams for this.
 About one-third of respondents explicitly target gender equality as an impact
theme, while just over half target environmental conservation as an impact theme.
Technical assistance
 Seventy-three percent of respondents provide technical assistance to investees,
either in-house and/or through third parties.
 The most common use of technical assistance is general management support,
followed by assistance with accounting and financial systems, industry-specific
skills enhancement and impact measurement.
 While most respondents who provide technical assistance do so during the
investment period, a notable proportion does so pre-investment as well.
The intermediary market
 The fund managers that participated in our survey reported having raised USD
4.7bn in 2014 and target raising USD 7.1bn in 2015 (Table 6).
 Fund managers reported current impact investment assets under management of
USD 38bn, 32% of which comes from Diversified financial institutions/Banks,
19% from Pension funds or Insurance companies and 18% from Development
finance institutions.
Table 6: Capital raised for 2014 and targeted for 2015
Raised in 2014 (n=52) Target raise for 2015 (n=65)
Mean 90 109
Median 22 50
Sum 4,702 7,082
Source: GIIN, J.P. Morgan. Note: excluding funds that did not answer or reported “0” for the
calculation of mean and median
Figure 10: Primary investors in terms of percentage of total capital
32%
19%18%
13%
8% 6%
2%
1% 1%
Diversified financial institution/Bank
Pension fund or Insurance company
Development finance institution
Family office/HNWI
Retail investor
Foundation
Fund of funds manager
Endowment (excluding foundations)
Other
39

EPICExcellence. Passion. Integrity. Caring.
Lincoln, MA | New York, NY
www.athenacapital.com
InvestmentAdvisory&Management |Estate&WealthPlanning
Administration&Reporting | ExternalChiefInvestmentOfficer
Athena Capital Advisors is intensely focused on offering exceptional service
and customization to meet our clients’ particular needs. As an established
wealth manager, our core strength lies in the depth of our due diligence, risk
management and portfolio management processes, into which we seam-
lessly integrate impact goals for interested clients. For almost a decade, we
have been helping individuals, families, and endowments incorporate their
values into their investment portfolios.
These are our values. What are yours?

Governance: A Critical Aspect to Impact Investing Success
At Slocum, in our work as a generalist investment consultant, we are helping many of
our clients explore impact investing for the first time. We are also working closely with
clients with longstanding SRI or ESG programs who are looking to expand or deepen the
alignment between their investments and their mission. This organizational movement
can be spurred from various directions. In some cases it is due to a forward thinking
President or Executive Director. In others, it is led by interested staff or board members.
Sometimes, influential donors or student groups provide an external initial push into this
area. Regardless of how impact investing is introduced, it challenges existing decision-
making processes and governance structures.
Conventionally, investments and programmatic work are neatly separated. They have
different staffs and are governed by different board committees. In many institutions,
there is little to no overlap between the activities of these two functions. Impact
investing requires a different paradigm – the goal is to enhance both the investments
and the mission of the organization by building alignment between them. This
objective clearly has its merits, and we see the interest in it growing. In many cases,
however, the push into impact investments is frustrated by governance questions – or it
moves ahead without addressing them, which can cause problems later.
Governance can be a complex and tricky concept, and good governance is often
defined by ‘you know it when you see it.’ Fundamentally, good governance means
that decisions are being made by the right people, at the right time, with the right
information. In the case of impact investing, we believe there are three key decisions:
Should we
make mission-
related
investments?
•To align our investment process with
our mission?
•To convene capital and extend our
influence?
•To enhance our brand?
Which
investments are
aligned with
our mission?
•Are we trying to impact a
particular region or issue
area?
•How do we think about
trade-offs between different
impacts?
What tradeoffs
should we be
willing to
make?
•Financially?
•In manager
tenure/AUM?
•In staff time?
41

Should We Make Mission-Related Investments?
There are several different ‘reasons’ that an organization can have for embarking on a
mission-related investment program – and many times, more than one are at play. For
some institutions, there is a driving belief that the mission of the institution should be
expressed in all of the choices that the institution makes, not simply in the grantmaking
portfolio. Other institutions believe that there is philanthropic benefit to applying a
profit-driven model to social or environmental problems; it can convene capital and
catalyze sustainable solutions. And for some groups, moving into impact investing can
be a critical component of their brand positioning.
In all cases, the decision to move into mission-related investments should have the
support of the board.
Why Are We Moving into Mission-Related Investments?
Which Investments are Aligned with Our Mission?
Except for different tax considerations, financial returns are universal. An investment
that returns 8%, returns 8% for everyone. Impact investments, on the other hand, are far
from one size fits all. On more controversial issues, investors may even have opposite
perspectives on what constitutes positive impact. Before making mission-related
investments, organizations must have a cohesive, shared vision of how their mission
objectives can be achieved through investments. This requires a clear definition of the
mission from the board, as well as a broad sense of the investment opportunity set,
based on input from investment committees, staff and consultants. Organizations
should define their impact investment activities by issue area and by geographic focus.
Economic development investments are very different if the mission is focused on
Detroit or in Africa.
To align our investment
process with our mission
•Program staff and
committees should be
involved, alongside
investment staff and
committees, in defining
which opportunities best
fit the institution
•As much of the
investable funds as
practicable, without
subjecting the institution
to undue financial risk,
should be invested in
aligment with the mission
To convene capital and
extend our influence
•Investment opportunities
should be clearly
directed to specific issue
areas and problems -
and in many cases,
investment opportunities
may flow out of existing
grantmaking work
•Partnerships with for-
profit entitites and a
strong communication
plan can enhance
impact
To enhance our brand
•Strong communication is
critical
•Determining which areas
to invest in should be a
board driven process, so
as to align investments
with the strategic goals
of the institution. Specific
investments should then
be vetted by investment
committees and staff
42

In many cases, specific investment opportunities can create tradeoffs between
different areas of impact. Increased employment can come at the expense of the
environment. Environmental improvements can come at the expense of economic
development. These tradeoffs are not always present, and investors can often help
managers think of creative ways to address them. But organizations should have a
view on how they want to address these tradeoffs, based on the goals and resources of
the organization.
What Tradeoffs Should We Be Willing to Make?
Impact investments have long been tagged as a tradeoff – more social return, less
financial return. Many investors are now finding that mission-related investing can be
win-win; they are finding opportunities to have significant impact and strong financial
returns. This isn’t always the case, and many investors have a desire to pursue impact
even if it does create a financial tradeoff.
Even where investment returns are equivalent, impact investments can pose additional
risks. Many business models in social entrepreneurship are new, creating opportunity,
but also increased uncertainty. Funds and firms in impact investing are often newer
and smaller than conventional asset managers. And impact investing – including
impact evaluation – can create additional administrative work.
Addressing these tradeoffs requires the participation of boards, investment committees,
and staff. Impact investing often means investing in something new – investment
committees are unlikely to take such a risk unless they feel they have the backing of the
board.
Addressing Governance Issues First
The promise of impact investments has many institutions jumping in feet first without
second thought – and has left others scratching their heads, wondering how and
whether to proceed. We strongly advise early consideration of governance issues,
including key questions such as: what decisions need to be made, who should make
them, and what information is needed? Different organizations will find different
governance structures that work for them, but regardless of what structure is ultimately
chosen, impact investing requires a new approach.
Slocum has seasoned experience working through these issues with a variety of
institutional investors since our founding in 1986. We have learned from this firsthand
experience what works well and what does not. Please email SRISG@jslocum.com with
any questions.
43

TOTAL
PORTFOLIO
ACTIVATION

A
FRAMEWORK
FOR
CREATING
SOCIAL

AND
ENVIRONMENTAL
IMPACT
ACROSS
ASSET
CLASSES

A
paper
published
by
Tides,
Trillium
Asset
Management,

and
Tellus
Institute
has
developed
a
novel
framework

for
pursuing
social
and
environmental
impact

opportunities
across
asset
classes.

The
study
“Total
Portfolio
Activation,”
by
Joshua

Humphreys,
Ann
Solomon
and
Christi
Electris,
provides

concrete
steps
to
help
institutional
investors
begin

working
toward
a
fuller
activation
of
their
portfolio
to

advance
their
mission.

The
basic
insight
that
drives
Total
Portfolio
Activation
is

that
every
investment
across
every
asset
class
has
social

and
environmental
impacts—positive
and
negative.
The

paper
provides
both
a
framework
and
a
set
of
analytical

tools
to
help
mission-‐driven
investors
understand
the

specific
impact
opportunity
set
that
can
be
pursued.

In
addition
to
wide-‐ranging
research
on
the
burgeoning

field
of
sustainable,
responsible,
and
impact
investing,

the
authors
relied
on
the
advice
and
examples
of

numerous
investors,
investment
officers,
and
fund

managers
who
agreed
to
speak
about
their
efforts
to

pursue
investment
impact,
whether
across
their

portfolios
or
within
asset
classes.
With
case
studies
of

The
Oneida
Trust,
Equity
Foundation
and
Dominican

Sisters
of
Hope
among
others,
the
report
provides

specific
examples
of
investors
who
have
begun
to

activate
increasing
allocations
of
their
portfolios
for

deeper
social
and
environmental
impact.

Total
Portfolio
Activation
outlines
four
related
areas
of

activity
where
opportunities
for
impact
can
be
readily

seized
within
each
asset
class
and
ten
key
steps
that

investors
can
take
in
order
to
implement
the
Total

Portfolio
Activation
framework.

Download
the
full
report,
Total
Portfolio

Activation:
A
Framework
for
Creating
Social

and
Environmental
Impact
across
Asset
Classes

http://croataninstitute.org/publications/publicat
ion/total-‐portfolio-‐activation-‐2012

The
following
is
an
excerpt
from
the
paper:

nterest
in
investment
that
pursues
social
and

environmental
impact
has
exploded
in
recent

years.

Although
opportunities
for
impact
investing

have
emerged
across
asset
classes,
most
impact-‐
investment
activity
has
remained
largely
confined
to
a

I

44

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Maximize Impact and Return Across Asset Classes

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