December 20, 2017
Dear Friends,
As 2017 draws to a close, we wanted to thank you for your partnership and share some reflections as seen through Tideline’s recent work with leading investors, asset managers, and market builders in impact investing.
We were thrilled this year to complete our 50th project since Tideline’s founding in 2014 and to see our early advisory engagements come to life through the launch of TPG’s RISE fund, NFF’s AIM Healthy, Impact Community Capital’s new growth strategy, and USAID’s INVEST project, for example. Tideline’s asset owner clients manage over $20 billion in impact capital. Our asset manager clients have raised, or are raising, $4 billion in capital for their new products and strategies.
Here are some of the themes that continue to shape Tideline’s work:
1. Education gaps in impact investing: While Tideline’s core work with clients is strategy development, it has become clear that asset owners, and the intermediaries that serve them, too often neglect the critical, pre-strategy work of market education and goal-setting. To be sure, an appetite for experimentation and learning by trial-and-error are helpful qualities in impact investing. However, leapfrogging the process of clarifying (and aligning internal stakeholders around) a set of impact preferences that can be practically matched with available investment opportunities leads to frustration or poor investment decision-making. We are encouraged that some wealth management shops are getting smarter about developing frameworks to guide their financial advisors, and in turn their clients, through an effective process of discovering client impact objectives – a safeguard against unmet expectations.
2. Making impact manageable: The importance of a more disciplined approach to integrating impact at all stages of the investment process – from sourcing to diligence, execution, monitoring, and reporting – came to the forefront this past year, in part due to the Impact Management Project. While there is more widespread agreement on the key components of “impact management”, the practice will look different for different stakeholders in the investment value chain: asset owners, investment managers, enterprises, and beneficiaries. Further clarification on why and how these roles and responsibilities differ will be essential moving forward. Enterprises know impact best and are most proximate to the effects of their services and operations on beneficiaries, and investment managers often take an active role in helping build and drive enterprise performance. For asset owners—who deploy significant capital through investment managers and can sometimes wield meaningful influence—simpler frameworks are needed for driving strong impact practices while also balancing manager autonomy.
3. Taking the first step in product design: As much as creating a new impact investment vehicle is about vision, passion, and mission, it’s also about process. Our recent work has reinforced the need for a disciplined set of activities for successful fundraising. And the first step is perhaps the most important: “concept development”, including identifying specific capital gaps and defining the compelling investment thesis that clarifies a vehicle’s role in addressing those unmet needs. Visionary managers of all types too often want to jump straight to structure and other implementation issues. However, it’s critical to step back, establish a strong foundation, and build from there. “Structure follows strategy” are words to live by in the vehicle design process.
4. Fulfilling the promise of catalytic capital: Much has been written about the power of philanthropic and public capital to catalyze innovation and provide the demonstration effect necessary to build the impact investing market. But as Tideline’s work with those funders has revealed, determining how best to use scarce subsidy to provide pathways and incentives for private investors is more art than science. While no single, “right” way to achieve the goal of catalyzing return-seeking investment exists, there are two puzzle pieces that are often missing: a disciplined assessment of the market in question, and an in-depth understanding of investor preferences and barriers. With a deeper understanding of investors in hand, catalytic capital providers will be well positioned to develop concepts that are most attractive to new sources of investment while still achieving the desired impact.
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In a dramatic year of stock market growth, volatile political events, and heart-wrenching natural disasters, impact investors and the enterprises they capitalize have forged an equitable, sustainable, and transformational path forward. We are proud and honored to have played a small role supporting that energetic response.
Happy Holidays, and our deepest gratitude,
The team at Tideline