Funding For Startups

A GUIDE ON IMPACT INVESTORS AND FUND MANAGERS

Impact investing is an investment strategy that aims to generate specific beneficial social or environmental effects in addition to financial gains.

By teammarquee . January 9, 2023

investor relations

Impact investing is becoming increasingly well-known, but what exactly is an impact investment? According to Global Impact Investing Network (GIIN), “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” The most typical tool utilized in impact investing is an investment fund.

Impact investment funds are becoming a more prevalent component of a sound overall strategy. The Global Impact Investing Network (GIIN) sees a future in which social and environmental factors are woven into the fabric of investment decisions by default. According to GIIN estimates, the size of the global impact investing market is approximately USD 1.164 trillion. 

Impact investment companies offer a compelling value proposition, and the speed of change has created pressure on businesses to be more open about their ESG (environmental, social, and governance) and impact reporting. Alternative asset managers, corporate organizations, and individual investors increasingly emphasize establishing a solid foundation of information and a uniform reporting system.

Forget all this hype! For ordinary laymen’s language, what does impact investment funds mean? Let’s understand some terms before proceeding to the crux of the topic.

WHAT IS IMPACT INVESTMENT?

Impact investments are made to produce both a positive financial return and a verifiable social and environmental impact. Depending on the strategic objectives of the investor, impact investment firms can be made in both emerging and mature economies and aim for a range of returns from below market to market rate.

NEED FOR IMPACT INVESTMENT

 Impact investing contradicts long-held beliefs that market investments should only be focused on generating financial returns and that social and environmental issues can only be addressed through charitable donations.

Through investments that also provide financial returns, impact investing companies offer a variety of realistic alternatives for investors to advance social and environmental solutions. The market for impact investing firms is expanding, and it is attracting a variety of investors.

Financial advisors, wealth managers, pension funds, and other institutions can offer client investment opportunities to people and organizations interested in a broad range of social or environmental concerns. Institutional and family foundations can leverage significant assets to accomplish their primary social and environmental goals while also accomplishing their business objectives. 

HOW TO CRAFT A WELL-THOUGHT IMPACT FUND?

Creating a cohesive impact fund narrative can be challenging. A comprehensive and thorough investment plan that is also supported by data and other evidence and incorporates all the elements of a complex investment plan is known as an investment and impact thesis. It requires the fund managers to be willing to share their understanding of the intended impact of their fund within the framework of their investment strategy with external parties from the outset.

The fund managers must demonstrate how a fund fits into the competitive market. They might ponder whether the fund would stand out in the industry. How is it unique? What would entice impact investors to the fund? How does the fund’s impact strategy stack up against its competitors? The responses to these questions affect important fund management decisions, such as which Limited Partnerships to be targeted or which investee companies to approach based on their capital needs. 

HOW TO MEASURE THE IMPACT OF FUNDING MANAGEMENT

Impact fund managers should also consider who will monitor and manage their investments’ social and environmental effects. Early pipeline development can be challenging because a fund manager cannot commit funds to a company until its investors are confirmed. To prevent missing out on possible opportunities, fund managers must strike a balance between the timing of impact investment fundraising from their limited partners and the financing requirements of their potential investees. LPs need to see a viable pipeline in which the fund manager may invest. All these aspects need to be properly managed.

When fund managers approach the investors, the following information is included in the investment pipeline

  • How the company’s size, industry, and stage of development align with the investment thesis;
  • Investment requirements, impact theory, and impact potential for the company; and
  • The quantity or anticipated quantity of communication between the fund manager and the company. 

HOW TO MARKET YOUR INVESTMENT FUND? 

Now, it is time to market a fund, draw investors, and start investing after carefully and thoroughly planning and structuring it. There are four stages by which managers can deal with their investment fund, namely:

First launch Phase

Go to market

First Close and

Second Close

Fund managers shouldn’t rely just on one particular sales pitch or marketing strategy. A fund manager needs to be knowledgeable about not only the broad spectrum of potential investors but also the particular interests of various investor types and how to promote these interests to raise money. Knowing which investors are more likely to say “yes” and how they think and behave is essential for making the best initial impression when targeting investors while trying to raise money. Matching the fund’s thesis to its potential investors requires strategic and tactical thinking as they help managers plan for fundraising events.

Only a highly skilled team can successfully implement a fund’s plan, give investors monetary returns, and impact fundraising events. Three key positions in a typical partner fund management team: senior transaction team leader, associate, and analyst. The scope of these jobs can be increased or decreased as necessary; for instance, a fund may employ several analysts or associates, depending on its size and requirements. Besides more considerable funds, advisers and specialists are typically not regarded as members of the leading partner fund management team; however, depending on their areas of expertise, they are frequently involved in specific deals. The fund manager’s duties include keeping a list of specialists on hand for consultation.

CONCLUSION

After investing, fund managers have significant influence over how their portfolio companies are run. In many cases, managing portfolio firms after an investment is when the actual job starts. The secret to successfully managing these relationships is to build reliable reporting systems and establish reasonable expectations during the fund design and transaction sourcing stages.

No company plan is ever carried out as precisely as intended. Fund managers must be prepared to lead their teams and the firms in their portfolios through any development difficulties. They generally collaborate with entrepreneurs to establish a close and trustworthy connection to navigate these changes successfully. Strong relationships may guarantee that reporting and information collection are accurate and timely, allowing both parties to foresee possible problems and identify opportunities for improvement. A mutually beneficial reporting process can be cultivated by establishing both official and informal reporting methods (both in writing and verbally).

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FAQs


Impact investing can be seen as the process of putting your money to work in such a way that it creates an impact in the society. This may include activities like providing access to free education, cheap energy, water or healthcare; affordable housing; renewable energy; micro-finance, etc.

Here are the four core characteristics of Impact Investing: Intentionality, i.e. an intentional desire to contribute to some social or environmental benefit, use of evidence and impact data in Investment Design, managing the impact performance, and contributing to the growth of the industry.

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