Nowadays, it’s hard to escape headlines about income inequality. The 1% is a buzzword, morphing from a description in a 2011 Vanity Fair article by former Clinton Administration economist Joseph Stiglitz of the tiny percentage of Americans owning the bulk of US wealth to a ubiquitous term illustrating the gap between the world’s richest and poorest.
But more than a decade ago, Michele Giddens, co-founder and current partner at Bridges Ventures, and fellow founders Sir Ronald Cohen and Philip Newborough
predicted this global trajectory, and in response set up impact and sustainable investment manager Bridges Ventures, an approach to investing for positive return and positive impact.
Speaking to Responsible Investor about its development, Giddens says: “What sparked the conversation was a view that we had seen a decade of growth for business and entrepreneurship, and the birth and growing-up of the private/venture capital industry – all of which had created immense wealth.
“But at the same time – and Ronald and I shared a vision on this – we continued to see an ever-growing gap between rich and poor.”
She said they were both excited about the idea of turning the tool of investment and entrepreneurship to solving some of society’s most pressing challenges, and to scale the concept, they were determined to find ways to invest that would make highly attractive investor returns as well.
It led to Bridges Ventures, modelled on the approach of private equity where Sir Ronald had made his wealth investing in entrepreneurship.
In 2002, it raised the first Bridges Sustainable Growth Fund, and has since launched seven funds centred on different types of impact and return. Its earlier funds, focused on sustainable property and sustainable growth, deliver competitive financial returns while addressing a societal challenge.
Its newer social sector funds, seeded by the Bridges Charitable Trust – which receives 10% of all the carried interest by the Bridges team and has power of veto over any change to the firm’s social mission – address societal challenges that may require a below-market financial return for investors.Over time, Bridges Ventures has developed four impact themes where it scopes out investment opportunities: education & skills, health & well-being, sustainable living and underserved markets. Successful exits from its growth and property portfolios have generated returns from 1.5 times to 21.6 times
Giddens says Bridges Ventures has helped demonstrate that there need be no trade-off between return and social impact, and is challenging the perception that sustainable investing means lower returns.
It has certainly attracted some high-profile investors, including French insurer AXA, West Midlands Pension Fund, Greater Manchester Pension Fund, Greater Merseyside Pension Fund, and UK pension giants Railpen and USS.
Across the whole of Bridges, 83% of its investors are institutional, the rest are family offices, endowments, and high-net worth individuals.
Bridges is noted for its consistency with impact measurement. Giddens says the danger of what she terms “impact risk” is not talked about as much as it should be.
“You can have a situation where the commercial fortunes of a company take off, but the impact diminishes along the way. That is what I would call ‘impact risk’. Just as in every investment decision there is a financial risk and return, so we look at impact risk and return.”
Bridges embeds impact into its investments from the beginning to the end through its Bridges Impact Plus division. This includes engaging with companies to maximise their positive impact and tracking results on impact over the life of an investment. It also uses its ‘Bridges Impact Radar’ at the selection process, which seeks to put down a measure of the potential impact return, and the risk to whether that impact will be achieved. It also reports on impact performance to investors, alongside financial performance.
Bridges Ventures started life as a sustainable investment manager, but in recent years has developed products in the social impact investment space, most recently its Bridges Social Impact Bond fund, which has attracted £25m in capital from a range of high-profile investors, including the European Investment Fund, Great Manchester Pension Fund, Merseyside Pension Fund, Deutsche Bank and the Prince of Wales’s Charitable Foundation.
Social impact bonds are a nascent tool to tackle societal challenges through private investment. Investors get a return if measurable outcomes are achieved. In the UK, where the first social impact bonds developed, the original investors were charitable foundations and high-net worth donors, but as they expand globally, this is changing.
In Australia, superannuation funds NGS Super and Christian Super have invested in social benefit bonds, the Australian version of social impact bonds, and Australian insurer QBE plans to invest US$100m in social impact bonds across the world over three years.
“In terms of numbers, there have been 31 social impact bonds commissioned in the UK so far, and Bridges has invested in 13 of them. And the pipeline for our social impact bond fund is looking very good at the moment. It is beautifully diverse as well, so we are investing in social impact bonds addressing issues like adoption, fostering, troubled families and teenagers, homelessness and community health,” says Giddens.
She envisages that they could be a very attractive investment as they develop: “If through a social impact bond teenagers stay in the school system and get better results, they may end up being employed rather than on welfare. The success of that investment is correlated to different factors compared with typical investments, and that’s exciting from an investor perspective.”
But, social impact bonds remain a controversial tool, especially with unions who feel it is encroaching on the public sector.Also, some have criticised the returns social impact bonds deliver. A social impact bond centred on early education in Chicago will deliver a rate of return of 6.3% to investors.
Giddens says: “If the social impact bond is structured correctly you are only getting a social return because the social outcome is strong. So what is really important to us is that the outcomes are set appropriately – if the investor is doing well, it is because there is a really strong and positive social impact.”
She adds that, currently, the risk and return on social impact bonds is not yet proven and says the Bridges Ventures fund will help the industry decide what return is appropriate for the level of risk.
Bridges’ next step will likely be expansion into the US. Giddens is tight-lipped about it, but news reports say it is a raising US-focused fund, following six months of expanding its brand in the country.
Looking forward, Giddens says a true focus on the long-term by institutional investors lends itself well to sustainable and impact investments: “Institutional investors think about investments which are responding to underlying challenges like climate change or an ageing population.
“If you are investing in response to these challenges that should produce an enduring mechanism for growth and value. It’s not about what’s happening in the stock market; it’s about taking a long-term view to underlying challenges and finding investible solutions. That’s where it gets really exciting.”