Impact or “profit with purpose” investment is a rapidly growing niche in private equity that derives returns from investing in companies that deliver a social benefit to needy communities. A recent report from JPMorgan estimates its value may expand from about $9 billion today to $1 trillion by 2020.
Impact investing is becoming especially popular among the Gen Y generation of finance workers. Born between 1978 and 1995, these '‘millennials’" as they are also known, want more out of a career in banking and finance than just making money. This ‘hero generation’, says Deloitte Consulting in Who are the Millennials , is defined by wanting to make a difference, and wanting to produce something worthwhile.
Although still nascent, impact investing is already segmenting, and now comprises a broad spectrum of players. Some practice strategic philanthropy, which delivers social upliftment but sub-par investment returns, while on the opposite end are profit-with-purpose investment funds that are structured along private equity lines and seek outsize financial returns.
An increasing number of skilled people are keen to pursue impact investing careers, says Andrew Kuper, president and founder of LeapFrog Investments, whose firm has hired from Blackstone, McKinsey, and Goldman Sachs.
No IB salaries
The reality of working in this industry is that the salaries are not going to shoot the lights out – yet. In relative terms, it is still a very small segment of the global investment market, but the flood of people wanting to work in impact investing relative to current opportunities means that it is a buyers' market when it comes to remuneration for profit-with-purpose companies.
Salaries in the sector are lower than the market average in financial services, says Simon Chadwick, outgoing CEO of the Asian Venture Philanthropy Network (AVPN). While impact investment firms that adopt a "two and twenty" private equity compensation structure – a flat 2% fee of committed capital total and an additional 20% of any profits – offer candidates the potential for high earnings, Chadwick says many funds don't yet have sufficient assets under management.
Impact funds in the ultra-niche “venture philanthropy” category are typically even smaller and may not even provide a profit share. This makes it hard for them to hire full-time senior staff, Chadwick says. “The industry therefore tends to attract much younger people who are prepared to take lower salaries, but then the hiring company needs the capacity to train them."
Kuper from LeapFrog says finance professionals should not focus on immediate financial gain if they want to work in impact investing. “This is like joining Google when it was still being run out of someone’s garage. You are getting in on the ground but there is huge upside.”
Neither Trump nor Teresa
The best candidates are both investment savvy and socially aware. "You don’t have to make a choice between being Donald Trump or Mother Teresa,” Kuper says. “We look for people who are motivated by wanting to do good by being good at business, who possess strong investment and analytics skills, and who have a developed emotional intelligence. EQ is something we test for.”
Kuper's tips for pursuing a career in impact investing :
- Focus on quantitative and analytical modelling, but not exclusively
- Get exposure to non-financial fields, such as philosophy or literature
- Work in a developing part of the world, such as Africa or Asia, to understand the challenges people face
- Think like a pioneer and entrepreneur
Chadwick says that budding impact investors should start their careers in a large financial institution that does social performance measurements. “This would help them develop a broad spectrum of skills.”