An industry veteran, who helped the founders of JustGiving realise their vision, believes impact investing could soon establish itself as less risky than traditional markets.
Rodney Schwartz is chief executive of ClearlySo, an impact investment bank based in London, UK, which has raised more than CA$400 million for companies. Speaking to WP at the Toronto Global Forum, he rubbished the notion that impact investing, made with the intention of generating a beneficial social or environmental impact, means sacrificing on returns.
He pointed to ClearlySo’s book, which includes 95 early-stage investments, of which only six have gone under, a low number for a growth portfolio. Highlights include JustGiving, for which Schwartz previously served as chairman and which has delivered 20x on the initial investment, and Bulb, a renewable energy company, which has returned 8x.
And while he conceded there isn’t enough evidence to categorially claim that impact investing is good for returns, he believes there is no doubt the risk is lower than traditional investing.
He said: “People who are doing this for social reasons, they don't walk away as easily as people who are used to making money. There’s an element of ownership. There are homeless people, for example, and we need to make this work, so people try and try and try again in a way that they wouldn't if it was conventional [investing].”
The other factor Schwartz believes will benefit the market is that impact produces solid rather than headline-grabbing winners. He added: “My guess is over time, and we don't know this yet and will have to wait a few cycles, we will find that returns are lower but that risk is lower.”
Schwartz initially “fell” into founding a venture capital company after a career spent in what he jokingly called the dark side – PaineWebber, PARIBAS and, in particular, Lehman Brothers.
The VC was a success, with Schwartz stepping in to helm the firm after a colleague injured his spine cycling. He was good at raising money but admitted his heart wasn’t in driving what was, essentially, someone else’s dream.
Nevertheless, he helped Catalyst Fund Management & Research grow and even tried to start an impact fund at the firm. It was, however, too ahead of the curve at the time to garner significant interest and Schwartz instead started exploring other ways to deploy his skills. He chaired Shelter, the UK’s largest homeless charity, but quickly become disillusioned at the “poorly run and poorly governed” organisation.
It was after helping JustGiving and seeing what a great business they had built that the idea came to him to start a company with the purpose of helping other impactful businesses. Schwartz told WP that, increasingly, companies that are addressing real burning social problems are becoming great investments.
He said: “We have 53 angel investors and one guy is an independent financial advisor who invested between $10-30,000 in a company. He said to me, ‘look, I just want to let you know, this impact stuff, I don't care about it at all - I'm investing in this company because I think it's going to be successful’.
“I thought that was really interesting and I was pretty pleased because, to me, if you can start to measure up commercially, you are really on your way.”
Ultimately, people want returns with their impact. Advisors, though, have to focus on delivering these SRI funds to the clients that want them, as well as making that emotional connection with investors.
He said: “It's what advisors tell us works with clients. If they can't connect with their clients about their emotional needs, about their legacy desires, they will lose these clients.
“It makes sense to figure out how to begin to offer this sort of product to your clients. You can start with SRI funds but if they don't start to do some of the sexier, more impactful private equity type deals or private debt deals, I think they will lose clients.”
So what makes a good impact investing opportunity? Schwartz's answer is straight to the point - the same as any other VC proposition. This includes the usual "smell check" to make sure nobody's blowing smoke and their intentions are good, and then it's a case of normal due diligence - route to market, board, can they execute etc.
Schwartz said: "We come to a pretty quick sense of whether or not it's really impact oriented, and then it's just about regular analysis."
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