Strategies that prioritise impact over financial returns could be in for a generational boost

The impact investing explosion of the last five years has been largely built on the realisation that impact-driven strategies can deliver market-rate (or better) returns, and do so on an institutional scale. Impact investing strategies that accept concessionary financial returns in order to generate outsized impact have not gone away, but they have been out of the limelight.

They have also – perhaps predictably – attracted fewer dollars. A 2023 survey of 230 impact managers by the Global Impact Investing Network found its respondents collectively raised $12.5 billion from investors seeking market-rate returns and just $350 million from investors seeking below-market-rate returns in the 2022.

But is the balance about to shift?

In the US, $84 trillion of private wealth will be transferred into the hands of the next generation over the next two decades, according to analysis by Cerulli Associates.

These millennial, Gen X and Gen Z heirs “will be a huge driver of impact investing in the future”, said Bank of America’s Sarah Norman, a managing director and head of sustainable investing for the bank’s chief investment office, speaking at last week’s ImpactPhl summit. “We’re seeing a tremendous amount of assets [among these investors] flow into sustainable and impact products.”

Over the past few weeks, New Private Markets has heard several wealth managers say the next generation of their clients are willing to accept concessionary returns in pursuit of impact-first strategies.

“We definitely see shifts when a patriarch dies and the money goes to the widow, or the parents die and the money goes to the next generation. They’re emphasising impact rather than just maintaining the corpus,” Rockefeller Philanthropy Advisors environment and climate change practice lead Heather Grady said at the Accelerate 2050 summit this week.

Rockefeller Philanthropy Advisors manages the assets of the Rockefeller family and is an investment adviser for external family office clients. Grady reported seeing inheritors take a “spend now” approach, liquidating inherited assets to deploy into catalytic or concessionary impact opportunities that would not lead to total-portfolio growth or security.

Meanwhile, private wealth is growing as a share of the overall investment base for private markets. Blackstone’s Q1 was its highest quarter for private wealth inflows, affiliate publication Private Equity International reported last month, while Hg, KKR and EQT are setting up private wealth channels to tap into this sector. Just this week, Brookfield president Connor Teskey said that while the firm’s private wealth platforms “today represent a modest portion of our overall fee-bearing capital”, it expects private wealth to be a “new engine” for the firm’s growth.

Perhaps this combination of generational change and the growing importance of private wealth is why investment managers expect concessionary investors’ allocations to grow much faster than non-concessionary investors’.

Investment managers anticipated fundraising from investors seeking below-market-rate returns to reach $1.6 billion in 2023, a nearly five-fold increase in fundraising in a year, according to GIIN’s survey. From investors seeking market-rate returns, fundraising was expected to grow by 1.8x to $21.9 billion over the same period.

Bank of America’s Norman said that while the majority of her sustainable investing office’s current business is in pursuit of market rate returns, she is seeking to add more catalytic and concessionary products to its platform in response to client demand, particularly from the next generation. The world of impact investing may be about to experience a second revolution.