The global investment industry has between US$200-300 trillion in assets. Impact investment has about US$1.5 trillion in assets, some 0.75% of total market. This is consistent with estimates of philanthropic capital of some US$ 1-2 trillion. Family offices have about 1-3% of the global market and about 4% of the impact market.
Most of our problems stem from a failure of economics. One of the most insidious effects is where the benefits of an action accrue to the few, or the one, while its costs accrue to the many. A fair and just distribution of wealth and income, a sustainable environment, these are all public goods that we know a market economy will undersupply. Absent regulation and policy, the private sector will never adequately supply them.
Asking a subset of the investment world to fund investments in public goods may work at a local scale but is bound to be inadequate at a global scale. Impact investing is unlikely to work unless public policy is also brough to bear. Blended finance can help but consider the dynamics of a CLO with a 0.75% equity tranche. The focused benefits distributed costs phenomenon is responsible for most of our failures, in providing a habitable and flourishing environment, and in creating an equitable economy. Asking impact capital to fund these public goods is asking them to fail at the aggregate level. There may be profitable opportunities at the micro level but if an impact investor were to diversify over all opportunities, they must almost surely fail.
What is required of us is a systemic change. This can come from policy and from cultural change. The two are often correlated. The 60:40 equity bond portfolio is a case in point. It has little theoretical basis, yet it is widely accepted and practiced. Why? Because it tends to work albeit inefficiently, but it is simple and intuitive and is backed by a narrative of plausibility and expert opinion.
Impact investment needs such a totem. We need to identify a theme that is practical, simple, that works, and that expert opinion and public policy can get behind. Blended finance is a strong candidate. The mechanics of it are fairly workable, it can generate higher returns for the equity and mezz investors but relies on equity investors being less demanding. What it needs is to be seen to work in practice for academia, experts, and public policy to support.
Family offices are tiny in the scheme of things. Yet they can be helpful in animating investment themes, such as private markets, and we hope, impact investing. However, from the numbers above, the task is daunting. We need to demonstrate success. We need to obtain impact and generate reasonable returns even if they are not optimal returns. Our example will be something others can build on who do not have the luxury of flexibility and the spirit of adventure. But it means we must be very selective. Recall that total diversification leads almost surely to bad outcomes when you are funding public goods.
We need public policy and academia behind us to develop our brand and concept. I would like to see more grants in this direction, to universities and to think tanks.
I give us a 1 in 5 chance of success in the next 10 years. We cannot let futility get in the way of our efforts. Without us, the chances are zero.