Coming of Age: Why Consolidation in the Impact Investing Industry is a Great Thing
For many in the world of social enterprise and impact investing, 2017 was a year of intense reflection. Radically shifting government policies and ongoing social unrest forced us to revisit our strategies. Times were tough; and yet, all that turmoil had a silver lining because it underscored the importance of our efforts. Committed, we all seem to be staying the course.
That helps explain, in part, why the field has seen such steady growth. According to the Global Impact Investing Network (GIIN), more than US$114 billion was deployed into impact investments in 2017 (the total U.S. market is well above US$8 trillion according to US SIF). Many of these assets came from large investment banks, advisors, private equity firms and asset managers that have become active and significant players in the impact investing space. We’re talking big names like Blackrock, Bain Capital, TPG Rise, Morgan Stanley and U.S. Trust.
These recent developments – asset growth and large institutional entrants – reveal a new outlook among investors and their advisors – a mindset in which ESG (environmental, social and governance) factors guide decisions. It is a sign that impact investing is going mainstream. And when that happens, industry consolidation is not far behind.
In fact, we are now witnessing an uptick in mergers and acquisitions. However, these deals raise important questions about the future of the sector and its commitment to poverty alleviation, economic development, gender equity and diversity, and fighting climate change. What happens when you combine expert capability with expansive capacity? Can fewer firms truly enable greater impact?
M&A Examples in Impact Investing
All of the aforementioned considerations hit close to home. Threshold Group, the firm I joined in 2016 after being the CEO of Toniic, was acquired by Tiedemann Wealth Management this past December. The merger represents an incredible opportunity to scale our impact investing platform within a much larger framework, reaching more families and foundations looking to develop their own impact and ESG investing strategies. It also provides a way for more traditional investment professionals to study and appreciate the non-financial outcomes of investing.
That said, we have our work cut out for us. As my friend Matthew Weatherly-White put it in ImpactAlpha, “It remains to be seen whether Tiedemann can integrate that impact culture without diluting it or corroding it.” He is absolutely right. When a non-impact firm acquires an impact practice, the greatest risk is mission-drift. It takes a concerted effort to preserve the commitment to social and environmental impact as well as impact reporting.
Tiedemann is bringing impact expertise to every part of the firm, rather than simply “attaching” it as a new division. Integration teams are helping every advisor and investment team member learn how to develop impact strategies in close partnership with their clients.
The risk of mission drift is less prevalent when two firms from similar backgrounds come together. Case in point: two old-timers in the impact space, SVN and Investors’ Circle, recently joined forces. Historically, these two networks have served slightly different constituencies; but as of Jan. 1, 2018, they are a single community of impact investors and social entrepreneurs.
The merger stems from the need to build economies of scale when funding for impact networks is scarce and declining. Both parties are clear about that intent. In their own words, “We see an opportunity to set a new norm of inclusiveness and collaboration among investors, entrepreneurs, donors, policymakers, and thought leaders – moving forward together as a single organization meets the needs of the field by capitalizing on this opportunity, and it positions us to boldly guide the industry going forward.”
Indeed, both organizations had struggled to grow exponentially, and the segmentation of our sector was never a good thing for creating a larger scale movement and offering research and best practices. It is very hard to manage the cash flow of a nonprofit when the demands from investors and network members increase every day. That’s doubly challenging when the public service component (research and publication) and the necessary organizational overhead costs are unfunded.
At the time this blog went live, Jim Davidson, board chairman of Investor’s Circle, and his team were still looking for a new CEO who will have a hand in crafting the new (still unnamed) entity. Whoever fills that role will influence many impact investors, leaders and social entrepreneurs for years to come.
On the commercial banking side, similar deals are taking place. In January 2018, Amalgamated Bank (with about $4 billion in total assets) and New Resource Bank (with about $353 million in total assets) merged to form the largest values-based bank in the U.S. The new entity is called “New Resource.”
According to NRB, “Through our merger, Amalgamated will gain the expertise of our sustainability lending and leadership, and we will gain the scale of a bank already supporting nationwide consumer and commercial products and lending services.”
These three examples of consolidation are the Ricardian law of comparative advantage in action. In each pairing, the actors should specialize in what they do best so that both parties will be better off. At the same time, these marriages will require self-examination to succeed. Both sides must be honest with themselves and each other about the strengths, weaknesses and needs of the new entity.
At Tiedemann, we are working hard on our own merger, integrating teams and cultures, and asking ourselves hard questions. Our impact investing service offering needs to remain tailored and authentic. So does our proprietary impact reporting. Yet both must be scalable, financially viable and applicable to our full client base. To that end, we believe we are building a world-class impact investing advisory committee that will provide expert guidance as well as insights on the marketplace.
For us, as well as our industry peers, I know we will scale not only our comparative expertise to new geographies and services, but also forge a more robust and more meaningful suite of offerings for a larger constituency of investors. The time for transformative change is now. Our sector is no longer nascent. We have moved beyond simple momentum. We are uniting and maturing. Our collective future is bright. As the saying goes: Watch this space.