6-Jul-18

Impact investment as an important part of your client’s investment portfolio


Ian McLennan, Partner and Investment Lead at Triple Point, speaks to Intelligent Partnership about the place of impact investment in an investment portfolio.

Some investors might hold a conviction that impact and returns are not fully compatible and these sorts of investments are more altruistic than commercial. How would you address such concerns?

Our Impact EIS Service invests in for-profit growth companies, not social enterprises or charities. The investments that are targeted look to achieve growth returns by investing in companies that also make a significant positive contribution to society. The evidence is that there's no trade-off between financial returns and social impact – quite the opposite. A 2013 paper by Deutsche Bank, for example, suggests that 90% of 2,200 peer-reviewed studies show a positive or neutral correlation between social impact and financial performance.

Furthermore, we see that bigger businesses are moving in the direction of these types of investment. For example in January, Larry Fink the CEO of BlackRock, said in his annual letter to CEOs that “to prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.” We believe that both large and small companies will increasingly adopt this outlook, attracting greater investor interest.

It’s not only investors that are becoming more socially aware. Consumers and employees are increasingly attracted to companies that offer positive social impact. In 2014, Neilson conducted a Global Survey of Corporate Social Responsibility, which showed that the majority of respondents were willing to pay extra for products manufactured by a socially responsible company.

Impact might seem like a challenging concept to measure. How does Triple Point assess impact?

We have a rigorous process to identify companies with required levels of social impact.

Stage one is that, we look for businesses that operate within our impact areas; the environment, healthcare, children & young people and reducing inequality. Next we check that the problem the company addresses is of a significant scale. Thirdly we carry out in depth research to ensure that the company’s products or services really are effective. Fourth, we assess the level of need of the company’s customers. Finally, we consider whether Triple Point’s involvement brings additionality to the business. This is not just about providing funding, but also whether our sector expertise can help a company grow, such as our experience of working with the NHS, or with social housing providers.

Who should think about investing in impact?

Impact investment generally is suitable for all those who want an investment with both growth returns and positive social impact, given that there is no trade-off between the two.

Our service additionally offers EIS benefits, so investors would typically receive a 30% income tax rebate once their funds have been invested.

Where does impact investment sit in an investor’s portfolio?

Our Impact EIS should probably be considered within the context of the client’s existing investment portfolio and in the context of their own tax situation. Impact EIS will typically be part of the client's venture capital portfolio allocation, sitting alongside other growth VCT and EIS funds, and other non tax-advantaged private equity funds.

The returns on venture capital, including Impact EIS, should on average be higher than the returns on fixed income holdings and equities which should form the bulk of an investment portfolio. But Impact EIS will also constitute a higher risk investment. With respect to the returns from a normal balanced portfolio of equities and bonds, you might expect an after-tax return of 4% or 5% a year in the long run. In comparison the Impact EIS has an after-tax target return of 10% a year. It is also worth noting that Impact EIS investments are illiquid and funds are typically invested into growth companies for 4 to 7 years from the date of investment.

With an Impact EIS investment a portfolio approach is adopted to spread and average out risk. There is chance that over time a number of investments may fail altogether, while positive overall returns are delivered by a few very successful growth companies in the portfolio. But the risks are somewhat reduced by the available EIS tax reliefs. It is worth remembering that such EIS investments not only offer the 30% income-tax relief at deployment, but loss relief as well. If some of the investments are sold at a loss then the losses can be offset against the investor’s income tax bill.

What sort of percentage of portfolio exposure would be sensible?

This will depend on the investor's individual circumstances such as their age, health and level of wealth, meaning that investors should really speak to their own financial adviser who can take all such individual features into account. Having said that, Impact EIS should fall within an investor’s Alternative Investment or tax-planning allocation within a wider, balanced, portfolio. Alternative investments might include hedge funds as well as venture capital. Typically, traditional stocks, bonds and cash should make up the bulk of the portfolio and Alternatives should be a smaller part. I might suggest that Alternatives should generally make up perhaps 10% of a portfolio, or maybe 20% for a younger, more growth-orientated, risk tolerant, investor. Within that allocation it makes sense to build, over time, a diversified exposure to venture capital. Impact EIS can form a part of that, especially given that we will ensure that each investor’s portfolio is diversified across a spread of positive impact growth companies.

Our Impact EIS gives investors the opportunity to do well while doing good, by investing in one of the fastest-growing investment areas.

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