Impact Investors Move Closer to Getting Their Own Exchanges
Devoted to companies and projects with a social mission, the impact investment space remains fragmented. In response to demand from institutional and other investors, a handful of firms are seeking to create impact investing exchanges.
By Katie Gilbert
Matthew Patsky, CEO of Boston-based Trillium Asset Management, can't hide his frustration. Patsky's firm, which manages its roughly $1 billion in assets within a socially responsible framework, allocates about 2.5 percent to impact investing, an area devoted to companies and projects pursuing a social mission. But Trillium's clients, which include pension funds, foundations and endowments, often tell Patsky that they want closer to 5 percent of their capital in impact investments. Without any sort of impact investing stock exchange, he doesn't think this demand can find an outlet. "It's the same problem with almost every instrument in the impact investing space: There is no market," Patsky says. "There needs to be a clearinghouse for this space because we've got two big issues that need to be solved. No. 1 is liquidity. Taking care of that would solve No. 2, which is pricing."
In other words, can an investor like Patsky be confident of selling his impact investments when he's ready? And will he know what those investments are worth? Right now the market is so fragmented that he and others hesitate to answer yes to either question.
Impact investing could offer between $400 billion and $1 trillion worth of opportunities in housing, water, health, education and financial services through 2020, according to a 2010 report by J.P. Morgan and the New York–based Rockefeller Foundation. "There is a tremendous amount of interest in this space coming from institutional investors, family offices, high-net-worth individuals, private equity firms and pension funds," says Robert Rubinstein, founder and CEO of TBLI Group, an Amsterdam-based advisory firm best known for its events promoting triple-bottom-line investments—those with financial, environmental and social benefits. "But they simply don't have the infrastructure to find the investments."
A few shops have set out to build that infrastructure. In March 2011, Singapore-based Impact Investment Exchange Asia (Asia IIX), run by former Morgan Stanley colleagues Robert Kraybill and Durreen Shahnaz, launched a platform called Impact Partners. For an annual subscription fee, Impact Partners gives investors information about social enterprises throughout the Asia-Pacific region. Chosen for their financial viability and their social or environmental impact, the enterprises featured on the platform focus on everything from microfinance to fair trade to sustainable agriculture.
Kraybill stresses that Impact Partners is not a transaction platform; it's meant to help increase deal flow by making it easy to source impact investments. But Asia IIX and Singaporean regulators are discussing plans for Impact Exchange, a platform that would more closely resemble a traditional stock exchange.
New York–based Mission Markets, a sustainability-focused financial services firm, launched the current version of its Access platform in August. Dedicated to U.S. enterprises, Access differs from Impact Partners in two other crucial ways. First, it offers business advisory services to the companies it lists. Second, it lets clients invest directly through the platform, but only on primary capital-raising; that is, investors can't trade with one another, just with the social enterprises. Although Mission Markets' platform will eventually support secondary market trading, the current size of the impact investing sector doesn't warrant it, president and CEO Sam Salman says.
GATE Impact, due to launch publicly early in 2012, will feature secondary trading as well as capital-raising and investment listing. A step closer to a typical stock exchange, New York–based GATE is the only one of the three platforms registered as an alternative trading system that will allow for live orders and order matching.
President William Davis is focusing on investors—mostly big institutions—that can bring their impact investing portfolios onto the platform with them. At launch, Davis says, GATE Impact will list available impact investment deals of between $500 million and $1 billion. By comparison, the social enterprises on Asia IIX's Impact Partners platform have sought to raise a total of about $70 million.
Davis says GATE Impact's size and its ability to support a secondary trading market will be crucial to the success of the entire sector. "We hope we can help move the ball forward by providing a new level of transparency and efficiency," he explains. "Over time, as more transactions occur and more assets are being listed, you end up creating a more liquid marketplace."
Trillium's Patsky worries that a handful of groups developing exchangelike platforms for impact investing could further fragment an already disjointed market. But Davis and Mission Markets' Salman say their firms work together on deals that require shared expertise.
"It's a nascent asset class, and if one major player fails, it stigmatizes the whole industry," Salman notes. "Everyone wants this space to get to the point where it's deep enough and liquid enough to be a real asset class, and anyone's success reflects the industry's growth and maturity."
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