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Impact Investing: Why You Should Care

For the past ten years, a trend has been slowly brewing in the skies above our lackluster bond returns and near-zero field of stocks.  This trend has the potential to change the world, in a way that all the tree hugging and all the car pooling and all the peace rallies never could.

And while this may sound like the beginning of some kind of sales letter, it’s actually just a fun way to segue into a reasonably new way for the rich to deploy their massive reserves of money: impact investing.

impact investing

Impact investing is where a person or group’s wealth is placed into a particular cause, with a particular desired outcome.  Potential examples of impact investing are the funding of start-up companies that will build affordable housing in the poorest parts of India or China.

Other potential examples could be the construction of a biofuel plant sufficiently capable to singlehandedly replace 10% of a nation’s petroleum consumption, or to purchase a million acres of Amazon rain forest, harvest something profitable from it, but do no harm whatsoever to the local flora and fauna.

In short, these investments aren’t screwing around.  They fully intend to change the world, and make a killer profit in doing so.

Perhaps you’ve heard of microfinance.  If you haven’t, its definition can be boiled down into “lending at a low interest rate, so that people in poor countries can build their wealth.”

A site called Kiva has been on the vanguard of attempting to give people in third world countries opportunities to build jobs for themselves – as individual store owners, and small time professional crafters.  Microfinance is to impact investing what your kid’s “bath tub armada” is to the yacht you’ve secretly fantasized about owning (but probably never will).

For one thing, impact investing has not yet reached the “retail investor” level.  It will most likely be awhile on that, too, since there are three major issues keeping such investments from becoming truly mainstream.

For one, the cost of entry is rather absurd for the beginning investor.  For another, the investments themselves are not even close to being of the “widows and orphans” variety.  And thirdly, these investments are still in the pupal stage of their regulation.

Do you have ten million dollars?  If not, you are not part of the target demographic for impact investing.    This is not the path by which you will make your first million, and it is structured accordingly.

If every impact fund were to completely drop the ball tomorrow, none of its investors would be likely to kill themselves in shame – or to be forced into making any substantial changes to their lifestyles.

This is the path a person takes when they have plenty of money, and want to actually do something with it beyond just “making more.”  Impact investing is a fusion of capitalism and altruism.

Can you mentally field strip a financial statement, and does your investment research typically involve ten-year cost-benefit plans?  If not, impact investing is not for you.

Like all hedge funds, impact funds seek to make 20% or more per year – and like all funds, most will fail in some way.  A few will explode, while a few will have great years and terrible years… and a few will simply vanish, crushed under the weight of their own BS.

Do you have a superhuman ability to know the unknowable?  If so, impact investing is for you.  Since goals such as “creating jobs” have traditionally been viewed differently by different funds, there is disturbingly little uniformity to these investments.

There is no regulation to speak of, and the “wild west” nature will likely continue for awhile.  In short, it may be a few years before your broker offers impact funds.

But keep your eye out for them.

Posted by on Jun 24 2010. Filed under Featured, Finance, Philanthropy. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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