Report from the Impact Capitalism Summit, Chicago: can the two co-exist?

Throughout the day-and-a-half Impact Capitalism Summit in Chicago last week, a recurring question emerged during the panel discussions: How can the impact side of that central concept stay protected from the capitalism side? The frequently posed quandary seemed to indicate that the 300 representatives of family offices, foundations, investment firms, and government who had gathered at the Union Club of Chicago for the second annual Summit (hosted by Asheville, North Carolina- and Atlanta-based sustainability advisor Big Path Capital) are part of an industry that’s growing up and moving beyond introductory conversations about how to get started in impact investing, and whether it’s worth it.
“We’re capitalists; we all care about financial performance,” said Matthew Weatherley-White, managing director at The CAPROCK Group, a multi-family office in California, Washington, Utah and Idaho, as he introduced a panel on the financial performance of private equity impact investments. He said this as though he knew his audience didn’t suspect otherwise, and there was no need to linger on the question of whether or not impact investing can fetch market-rate returns. But he had to establish the point to get to the more interesting and nuanced question at hand for the panel—one more focused on the impact side: Does the stated mission of a social enterprise survive as the company expands or after it’s acquired? And is it possible that private equity managers in the impact space reap greater returns when they ensure that a portfolio company’s mission stays intact as it grows?
Researchers at the University of Pennsylvania’s Wharton School have been looking into these questions, andDr. David Musto, chair of the school’s finance department, was on the panel to present their early conclusions (which haven’t yet been published). Based on interviews with 38 private equity firms, Musto said that most impact-focused private equity investors trust that portfolio companies’ missions persist after an exit, though the investors have generally not contractually ensured that these companies won’t change course. The researchers also found that when private equity investors do take steps during an exit to legally require that a company maintains its original social mission (creating what Musto calls an “aligned exit”), performance doesn’t suffer. “We’re not seeing a lower rate of return when you have an aligned exit,” Musto said. “There’s no sacrifice being made.” Impact investors in the private equity space are seeing low double-digit returns, he added—in line with the rest of the industry. “We should feel confident that there’s no performance tradeoff,” Weatherley-White summarized. “Persistence [of impact] is our next great challenge as a community.”
The recent news that private equity giant Bain Capital will develop an impact investment business to be headed by former Massachusetts governor Deval Patrick sparked a discussion in another panel about whether impact investing can persist in its current form more generally as it begins to scale up. “Impact purists have expressed concern over the influx of institutional capital,” said Jennifer Leonard, vice president of impact investing at The CAPROCK Group. She asked the other panelists on the private equity panel: are they concerned about the possibilities of mission drift or greenwashing as Bain moves into the space?
Javier Saade, associate administrator at the U.S. Small

Business Association, said he’s optimistic: “If Bain Capital announces they’re launching a fund, it’s because there’s already demand,” he said. “The question is, will that change the game? My sense is it’s going to augment the game. I think it’s a positive thing that more capital is trying to search for a double bottom line. If money is being invested, it doesn’t matter where it comes from.”
In his keynote on the second day of the conference, Deval Patrick himself addressed the concern around Bain’s appearance on the impact scene. “Bain brings mainstream credibility,” he said. “Some of you may be worried, but I’m excited. I see this as an opportunity to make a strong statement about impact investing.” He added that as Bain embarks on its new strategy, he and his colleagues are keeping their options open: “Private equity to venture to debt to real assets—everything is on the table,” Patrick said. “We’ll invest directly or through fund of funds. I’m here to learn. Come teach us.”Chicago Treasurer Kurt Summers, Jr., had similar words for the impact investors in the room, but took his message a step further: It’s the obligation of early-adopter impact investors—especially high-net-worth individuals—to help the fledgling industry scale up, he insisted. Summers, who was elected to his first full term as Treasurer in late February after being appointed by Mayor Rahm Emanuel to fill the vacant seat last December, acknowledged that the $7 billion under his management hasn’t seen any impact investing filters yet. But he added that he’s eager to move in that direction, and that he and the city will need help in getting there. In other words, if current proponents of impact investing want to see it do the most good, they’re going to need to have a role in helping it scale up. “While we may not be organized to be early adopters, we’re your greatest leverage,” Summers said. “We should be informed, pushed, lobbied. We’re not going to think of this on our own; we’re not going to connect the dots on our own. You are.”