5.5 Role of Intermediaries
5.5 Role of Intermediaries
As described in Section 3.2, intermediaries104 can help bring mainstream capital into the impact investment sector; ultimately, mainstream banks and brokers are needed for capital to move at scale. Until then, both niche and mainstream intermediaries can advance key priorities including, but not limited to, those recommendations listed below.
Recommendation 1: Aggregate data on impact investment deals and publish the findings. As has been discussed in Section 4, small direct investments are costly to make because they require similar due diligence processes as those required for larger investments; as a result, they are infrequently made. Furthermore, every transaction is different and requires different documentation. As part of this initiative, certain investors described the need for a library of best practices, term sheets and shareholder agreements. An intermediary is best positioned to aggregate this type of information and provide example term sheets in an effort to reduce due diligence costs for smaller investors.105 In addition, an intermediary is well-suited to aggregate, report and segment sector information on impact deals, track records, demonstrated exits and realized returns. Multiple databases exist for traditional private equity that tracks information such as net IRR, multiples, rankings and benchmarks. Similar databases and information transparency will help institutional investors that seek to allocate capital towards impact investment private equity firms.
Recommendation 2: Promote a common platform that aligns capital and deal flow. The question regarding scarcity of capital versus scarcity of deals depends on the type of deal and its relative risk profile. Investments need to be better classified by factors such as performance, risk, expected return and exit timeline in order to better align investor preferences with deal flow. An intermediary is well-positioned to help articulate these optimal pairings through investment platforms. Currently, variants of these platforms do exist but they are early-stage and niche.106 Mainstream intermediaries will need to support a common platform in order for momentum to build and scale to be achieved.
Recommendation 3: Advocate for a baseline set of principles to define the practice of measurement. A common language around social metrics and standards (e.g. IRIS) allows stakeholders to communicate more effectively, benchmark and compare investments, and evaluate social and environmental performance. Comparable metrics allow investors to employ different strategies on the social bottom line, and thus are important for mainstreaming impact investing. Intermediaries can play a key role in advancing this common language. However, more important than standardization of metrics is a baseline set of principles to define the practice of measurement. Metrics should be driven by the demands of institutional investors; ultimately their level of interest, concern for comparability, and willingness to pay for measurement and assurance will determine what specific metrics are used. Intermediaries can thus play a key role in advocating and endorsing for baseline principles on how social and environmental metrics are measured and reported.