On 16 November, ESOFON conference “Global Impact Investments” will take place for the first time in Geneva. The independent industry expert Markus Hill will participate in a panel discussion. Together with decision-makers from family offices and other market participants, he will discuss product selection, due diligence, and market trends in the field of impact investments. IPE Institutional Investment Editor-in-Chief Frank Schnattinger spoke with him about current topics.
IPE Institutional Investment: Which topics will be addressed at the conference “Global Impact Investments”?
Hill: At the conference, Impact Investments will discuss trends, growth prospects, and portfolio management. In particular, the perspective of investors from the family office sector will be considered. The topics SRI and Impact Investing will also be intensively discussed. In this context, the areas of real assets, agricultural investments, and product structures will also be discussed. It seems interesting to me that one topic deals strongly with the area of conflict between private equity, the contrast between liquid and non-liquid investment structures. Asset allocation in the mentioned areas as well as risk management, reporting, and measurability criteria for impact investments are also discussed.
IPE Institutional Investment: Which specific points are taken up and discussed by your panel?
Hill: The panel will discuss product selection at Impact Investments. The topic is interesting because even before the discussion starts, there is still a lively debate about the definition and measurability of such concepts. SRI, ESG, philanthropy, social impact investing, infrastructure investments, and more – many topics often converge here. At the very least, there is an attempt to take more account of issues from the conventional asset management world in this area. What is the significance of the track record? How is it to be measured, which criteria are to be applied here? How can products be structured? Market prospects and sales prospects in this field discussed in a larger group.
IPE Institutional Investment: Are there any specific points within the conference or panel that might be of additional interest?
Hill: As mentioned above, the battle has started in the area of impact investing interpretation. Different groups, expressed in a completely non-judgmental way, are trying to define their role, function, and identity in this area. These discussion groups are often reminiscent of other terms such as family offices and also the fund boutique sector. Admittedly, at Impact investments, there are, due to the involvement of large organizations, tangible criteria for inclusion, and exclusion of certain products. Last year I had the opportunity to participate in a panel on impact investing at the Goethe University in Frankfurt at the invitation of Karen Wendt – author of “Responsible Investment Banking”. I am currently involved in a project with her in this area. It is a great pleasure for me to exchange ideas with Ms. Wendt. She has given me some good ideas for Geneva. In the past and current discussions with her and with family offices and foundations in this field, I have noticed that people often forget that there is still a form of market division in certain areas. There are liquid and non-liquid investments, “communicative-complex” and “communicative-simple” product approaches and approaches to issues for investors. What does this mean for the area of impact investments in the current discussion? In the case of non-liquid approaches, due diligence very quickly brings me into the operation of product testing for private equity, venture capital, start-ups, and direct investments. Pure “number crunching” only helps me to a certain extent at this point. Why can I possibly reach a limit as a selector here? One explanation could be that, due to the lack of market transparency, it is not possible to simply use comparative values. As a selector, you strain to go into more depth in terms of investment content: The importance of unofficial networks is increasing here – the classic area of family offices, HNWIs, entrepreneurs with specialist knowledge, etc. – and the importance of the investment process is growing. This situation is often found in a modified form even in more liquid areas, such as fund boutiques: In all these processes, the quality of the players involved is at the forefront: it’s all about brains!
IPE Institutional Investment: “Number Crunching”, unofficial networks and minds – what significance can this have for the impact investing sector?
Hill: Here the topic of scalability of industries is addressed, similar to the FinTech area. Scalability in the sense of process optimization and growth potential sometimes inevitably reaches its limits in certain areas. Specifically in the case of impact investments: If the eye of the needle is good investment opportunities and the comparability of these does not prove too easy, this has an impact on the type and quality of the selection process on the investor side. If this bottleneck cannot oust out, then a striking educational, advisory, and product provider landscape will develop for a while, which – in the long run – will be difficult to maintain through subsidies and product provider sponsoring. So that you don’t misread me: I have always regarded my studies of economics more as a well-founded study of politics than a classical social science. I find things like orientation towards the common good, philanthropy, and economy of meaning to be enriching aspects in the discussion of economic issues as well. I only point out this one possible path of development – my words are not set in stone. Far wiser minds than mine are thinking about this in much greater depth, perhaps even to the contrary. I am happy to be taught about it. The danger at the end cannot be overlooked if a mountain circles and give birth to a mouse. Funds need target investments – no amount of advice, literature, and conference can replace them in the end. Even with projects in the real estate and renewables sector, which I was able to accompany, it was often a central insight: the good things are already gone, where do we still get acceptable investment alternatives from the second tier? The core question remains: Will Impact Investment remains a niche or will it become a scalable industry in the medium to long term? Boutiques, like family offices, HNWIs, etc., will always play their part in this field. The whole field of club deals and co-investments is closely related to the terms of reputation management and long-term thinking. In my experience, these networks – I often characterize them as “islands of know-how and sincere substantive interest with long-term thinking” – are at least the key to the effective impetus for the Impact Investing industry.
IPE Institutional Investment: Apart from the topic of impact investing – you have been intensively involved with the topic of fund boutiques and family offices for years. Which topics are currently of particular interest to you?
Hill: In the last two years I have been working a lot in the boutique area with the topics Value Investing and Family Offices. Why? I am a firm believer in long-term approaches, in drilling down to the bone in certain cases. That has less to do with masochism – more with an interest in the substance. This is more of an owner-managed company mindset. When I look back, I was able to take a closer look at Jose-Carlos Jarillo’s book “Strategic Logic – The Sources of Long-term Corporate Profitability”, many of Michael Porter’s thoughts can be found here. I also had the opportunity to accompany him as a moderator at several events. The topics of value investing, liquid versus illiquid approaches – as with impact investments – came together in this discussion. How does an entrepreneur invest? What does an entrepreneur contribute? Only leverage or also operational know-how? Besides, I had the opportunity to be a member of the expert jury for the DividendenAdel Awards 2016 of Christian Röhl, Werner Heussinger, and Deutsche Börse Cash Markets, among other interesting personalities. In another project, I was very much involved in dividend-oriented approaches in the fund sector, with a special focus on fund boutiques. In a nutshell: The wide range of entrepreneurial funds and the product range of family offices – admittedly a communication-intensive niche such as impact investments – is currently attracting my increased interest. The topic of digitization and family offices also represents an interesting area of conflict for discussion. I am currently holding many talks with investors on these topics, and in some cases, this dialogue is helping me to sharpen my view of product selection for third parties. This dialogue is often perceived as interesting on both sides, as a broad spectrum of product approaches can be discussed concerning a market overview. One final remark: Often, besides commercial interests, intellectual pleasure can also be the driving force in working on topics. Especially with topics such as foundations and impact investing I had met some market participants who repeatedly complained that it is hardly possible to earn money on such topics. Topics such as art, culture, or public welfare orientation are difficult to monetize. Perhaps this barrier offers effective protection against the supplier industry being able to exert too much influence on a broad discussion in the area of Impact Investments due to market power. In the sense of: “Can highly commercialize, scalable structures in this area are beneficial or detrimental to the cause? Ethics of conviction versus ethics of action: A final judgment in this regard is difficult for me at the moment!
IPE Institutional Investment: Thank you very much for the interview.