Impact investing is an approach that seeks to balance financial returns with positive social or environmental impact. Over the past 10 to 15 years, the impact investment field has gained much traction, producing successful companies that deliver financial gains while simultaneously adding value to the ecosystems they exist in.
In the MENA, many established family offices, new investment firms, and individual investors are adding impact investment to their portfolios. Many see this new reality as an extension of traditional philanthropy — a continuation of the legacy of social responsibility built into their operating companies.
Clear strategy is the first step to building a successful impact investment portfolio. However, despite the growing interest and proven efficacy of the approach, there exists a relative vacuum when it comes to available resources in the region. MENA’s Family offices have limited access to outlets where they can exchange thoughts on the topic or access tools to jumpstart their impact investing practice.
Regardless of this lack of resources, the options for purposeful investment are seemingly limitless, and for some, potentially overwhelming. That said, there are a growing number of impact funds or other investment vehicles that first-time impact investors might want to join before considering direct investments. In this article, however, we formulate a few recommendations for family firms to consider when it comes to building their direct impact investing portfolio.
1. Clarity of Vision
New investors must first solidify their vision and goals. What impact are you trying to create? What financial returns would you like to achieve? How can you realize both these goals simultaneously?
Working from this foundation, set targets both for your impact portfolio as a whole, as well as for your individual investments. In doing so, make use of the many available tools and international standards to ensure your KPIs are tangible and realistic.
Remember, you are working to help maximize the impact of your investment, not turning your investee into a “reporting organization” overburdened with impact metrics that do not drive the long-term impact of the business. We recommend working with an investee’s management team to select a key set of impact metrics directly correlated to growing commercial success and heightening impact. Impact returns must be as measurable as your financial returns. Successful investors hold their impact investments to the same standards as their non-impact investments.
3. Due Diligence
A robust due diligence process is essential for both impact and non-impact investments. For impact investments, however, this process must be conducted through an impact lens: ensure that your impact goals are clearly addressed throughout the entire process.
4. Where to Invest
Start by investing in markets or industries you know well. The likelihood of spotting opportunities and understanding potential challenges is much higher if you can use the knowledge and expertise that already exists within your family business ecosystem.
5. Manage your Impact Expectations
Impact investing is about managing risk and expectations at the same time. It is important to be realistic about the type and scale of change that one company (or a portfolio of companies) can achieve. Having a balanced view of what is in reach while holding these companies accountable to the impact returns that were promised will ultimately yield more consistent and sustainable change; overburdening individual projects with excessive expectations will result in less than favourable outcomes. In the same way that financial risk is a reality in your conventional investment portfolio, “impact risk” and variation of impact returns will exist within your impact investing portfolio. Some companies will exceed your impact expectations, some will meet your impact expectations, and some will fail to meet your impact expectations altogether.
Channels for open communication between family members, co-investors, and target companies are an essential part of any successful collaboration. Address your impact concerns as directly and clearly as you would address financial or strategic concerns before you make your investment, and continue to do so as a shareholder or board member. To get a sense of a company’s commitment to impact, talk with founders and management teams about potential scenarios and key decisions that could arise during the company’s lifecycle. You can speak with seasoned impact investors and impact fund managers to get a better sense of nuanced considerations and case studies, but oftentimes, potential stumbling blocks will become obvious when considering a company’s key drivers, and examining how future opportunities might affect the business.
Adding impact investments to your portfolio can bring much personal fulfilment, while also serving as a tool to engage family members who might not otherwise involve themselves in commercial decisions. In many cases, impact investing projects serve as a unifying force for both investors and their families and have led to conversations about new collaboration models and next-generation engagement.
Farida El Agamy is a lawyer, entrepreneur and governance expert. She’s the founding GM of the Tharawat Family Business Forum, the private network and knowledge hub for family-owned companies in the MENA.
Ms El Agamy is also a 2nd generation family business member and is Editor-at-Large of the Tharawat magazine, and a Director at Target Developments LLC and Orbis Terra Media LLC her family’s firms in Switzerland. In 2019 she joined her two co-founders in setting up Zoí, a company focused on developing sustainable solutions to FMCG products.
Ms El Agamy holds a Masters in Law from the University of Freiburg, Switzerland and was admitted to the Bar in 2009.
Beau Seil is the Co-Founder of Patamar Capital, SE Asia’s leading impact VC firm. With 10+ years of investing in the region, Seil has seen the evolution of the early-stage VC ecosystem as well as the rise of impact investing in backing visionary companies.
Seil has a deep passion for helping founders develop leadership skills and maintain their mental health during the intense journey that accompanies the scaling of a start-up.
Patamar backs impact-driven founders launching sector defining companies to serve the “mass market” of low and middle-income customers through financial services or tech-enabled distribution and aggregation platforms.
Taken from: tharawat-magazine.com