What’s Possible When You Expect More from Capital

Audio Description

As foundations and nonprofits broaden their exposure to alternative investments, many are also shifting towards responsible investing. What lies at the intersection? Impact investing in private equity and venture capital—a way to raise the bar in investment portfolios.

Transcript

This transcript has been generated by an AI tool.

00:00 - 00:17

Hi everyone, welcome to Inspired Investing. I'm your host Claire Goal, head of Foundation and Institutional Advisory at Bernstein. This podcast is where we strive to connect and share insights with listeners like you who are engaged in the nonprofit sector, philanthropy and or the broader social sector.

00:26 - 01:00

As foundations and non-profit organizations increasingly consider broadening their exposure to alternative investments, we're also seeing meaningful movement towards responsible investing across the social sector. So today we're going to explore a strategy that sits at the intersection of both of those. Impact investing in private equity and venture capital. You'll hear a recent discussion between my colleague, the attacker and two experts in this field Jessica Droste Yergin and Priya Parrish of Impact Engine, an important influencer in this space. They'll share why they think it's so important to expect more from your capital.

01:01 - 01:46

Well, hello, everybody. We're recording this here in April of 2022. An interesting and difficult time for the world. Based on world events and as we recently wrote in our quarterly letter, the stresses of the last two years are clearly shaping the investment trends of tomorrow. At this moment, whether it's COVID or now, the horrific events in Ukraine, unprecedented events seemingly consistently are prompting investors to ask tough questions, not only tough questions about investing, but about impact, about where their dollars go and how they make a difference. It's questions around employment, financial security, inclusion. All those questions arose during the pandemic.

01:46 - 02:13

Now we have questions around energy security and defense that go side by side with sustainability. So the conversation today with my guests, Priya Parrish and Jessica DeRose, Yagan of Impact Engine, is very relevant to what is top of mind today. I am so excited to be joined by these two awesome women who have spent their careers really addressing these kinds of challenges. So first of all, Priya and Jessica, welcome and thank you for making time to join me today.

02:13 - 02:14

Thank you.

02:14 - 02:15

Thanks for having us.

02:15 - 02:50

Okay. So who are Priya and Jessica? Let me give them a little bit more of a bio here. Priya is the chief investment officer of Impact Engine. Jessica is the CEO of Impact Engine. And what is Impact Engine? This is a firm based here in Chicago. That's an important impact, influencer and investor in the private equity venture capital and direct companies space. So we're going to have a conversation with them about their career journey and the recent partnership that we have formed at Bernstein with Impact Engine to really make impact investing in the private space available to our clients.

02:51 - 03:24

All right. So let's let's jump into the conversation here. I want a level set, as is usual in the world of finance, a lot of acronyms, a lot of terms. I want to make sure that our listeners and audience here is all on the same page definitionally. The first definition that I think is important to get our arms around is impact investing. How do you define Impact investing at Impact Engine and can you kind of situate impact engine in the impact investing space for us?

03:25 - 04:19

Yeah, I'd be happy to. So we define impact investing as intentionally investing for both financial and social returns and measuring both. And that's not just our definition. That's a standard industry accepted definition of impact investing. And it's very different from ESG or environmental social governance investing, which listeners may have also heard about. Or you can align your investing with your values in a different way. ESG talks about the process of how a company runs itself, how it treats its employees, etc. It can apply to any industry, any company, any product. It with impact investing. You really have to go in knowing, like with my investment in this company or in this fund, what social or environmental issue is going to be addressed and impact engine specifically as an impact investor always makes investment with intentionality around improving economic opportunity, environmental sustainability or health equity.

04:19 - 04:21

Okay. Did you want to add anything to that, Priya?

04:22 - 04:52

No, I think that's I think that's right. The one thing that we we can also share is just our five key framework. Perhaps there's five levers to how a business can drive impact. And those five P's are product, place, people, process and paradigm. And our focus is on product based impact, which is how a business has intentionally designed, created and distributes products that create those outcomes in the areas Jessica mentioned environmental sustainability, economic opportunity and health equity.

04:52 - 04:55

Okay. That's really helpful framing and thank you for that.

04:55 - 05:53

The five acronym and also the delineation between ESG and Impact. And we're recording this at a time where there's been a lot of questions about ESG, there's been a lot of questions about the notion of greenwashing and how many investors are truly integrating and making an impact versus measuring and screening. And that's why I think it's so important to start with this definition and understand that there is this spectrum of impact that can occur under the concept of impact investing. So I think your definition is really clear. So I want to pivot. Perhaps with you, Priya, from this idea of big picture impact investing to why and how Impact Engine feels, the space in private investing in private equity and venture capital in privately held companies is an area where there's not only so much momentum, but help us connect why you can make maybe even more impact in this space relative to the public equity space. And then how do you think about it?

05:54 - 06:27

Absolutely. Yeah. That's been very intentional on our firm's part. And I think if you just start from looking at the current state, if you look at the S&P 500 or if you look at all the products and services we use today, how many companies do you think actually meet that definition or the company itself is intentionally trying to create impact? Not to say they're not doing great with their employees or supply chain, as Jessica said, related to ESG. Are they truly on a mission and doing things intentionally to solve large societal issues and problems? Not very many.

06:27 - 07:06

And so how do we create that economy? How do we use the tools of capitalism to actually have some of our largest and most successful companies creating positive social value? And in order to do that, you need to have primary capital, which is what venture capital and private equity is. This capital actually goes directly to companies and venture capital to early stage. This can be startups with new ideas, new products. They're using the capital to develop them. But private equity continues on that journey to funding directly mature companies. There are many multibillion dollar private companies, and they need that capital to continue to to grow into industry leaders.

07:07 - 07:38

The second thing to note is that as an investor in private companies, there is a huge opportunity to engage in private companies. There's usually a very limited shareholder base, and so you're having direct conversations with the C-suite and can have a lot of influence. And then the last thing I would just say is that there's a very strong risk return profile in private equity in venture capital, and that's just part of the growth in alternatives and more institutions and individuals wanting to make that a core part of their asset allocation.

07:38 - 08:25

And that makes a lot of sense. And I've often heard you say to Priya that the idea of giving money to private companies in the impact space allows you to really invest across the lifecycle like you've described it. Venture capital is very early in a company's growth. Private equity has different aspects of it. Again, let's talk about the jargon and the definitions. There's growth equity. There is buyout in private equity. But really all that means is as a company grows up throughout its lifecycle, throughout its capital structure, the type of investing that you're pursuing is giving them money to do that while really influencing and measuring the impact that they're having. And I think there's this idea of lifecycle investing in the private space that feels different than it is in the public space. Would you agree with that?

08:25 - 08:35

Absolutely. That's exactly right. So there's different junctures that a company needs capital, and that actually is what produces the strong risk adjusted returns and diversification as well.

08:35 - 08:37

Yeah. Okay. So that's really helpful.

08:37 - 08:57

So we've set the stage on definition, so let's come back a little bit maybe to both of you. How did you come to focus on this? Priya Starting with you, you've got decades of investing experience across different asset classes and with different types of clients. Why impact investing and how did that weave its way throughout your career now?

08:57 - 09:28

I came to it not initially from a love or interest in investing, but as a big believer in the power of entrepreneurship and disruption. And when I saw and experienced some of the inequities in our society and thought about How can I build a career that is contributing positively towards words that I could go into the public sector, I could go to the nonprofit sector, but fundamentally, I knew that business and the private sector had a huge amount of power and leverage and influence.

09:28 - 09:59

And as I dive deeper into that, I realized that the financial system in particular and the investment industry in particular, is a very important lever of influence to companies. And so that was the impetus and it's always been kind of the Northstar for me is how do we how do I build my career to be in different roles to help shape our financial system so that it can actually benefit all of society, not just the holders of capital, but that the holders of capital will actually stewards on behalf of all of society.

09:59 - 10:07

That's helpful. I know we'll come back to how you've seen impact investing evolve in your career and, you know, and in the private markets especially.

10:07 - 10:18

But Jessica, I know you came at this in a really different way, having had this experience at a public company, can you talk about your career and impact and how you came to be really today at Impact Engine as well?

10:19 - 10:53

Yeah, you know, I always wanted to make the world a better place in some way. And I think. As a younger person, I kind of thought, Oh, I'm going to have to do nonprofit or government work. And I was really lucky to really discover that capitalism can be a tool for social good as well. And this is really in the late nineties, it was kind of a light bulb moment for me where it was like like I was saying, capitalism has the power and the resources and the scale. And people, especially at that time, really weren't thinking of it as a tool to address many of most important social and environmental issues.

10:53 - 11:19

It was almost at odds in some ways, and over time, over these these many years since then, that's been shifting slowly and then more quickly recently. And I've been really excited to be a part of that. And as you alluded to, I spent about eight years in McDonald's Corporation in their global supply chain and U.S. supply chain, where it was my job to find the win wins between improving social and environmental outcomes in their $20 billion supply chain and always having a very, very clear business case.

11:19 - 11:40

So really, most of my experience prior to impact and Jim was on the operating side and really thinking at scale in a very large company, why does this make sense? And it really does, and that's probably one of my biggest learnings from that experience is that if you really look for the win wins and you break down that barrier that's in most capitalist brains between making money and doing good, there's a lot there. It's really exciting space.

11:41 - 11:57

So do you think there is a barrier or do you think there's a concession to you know, you said this barrier between making money and doing good. Can we just tackle this very question has been at the heart of this industry for so long. Is there a difference? Do you have to give up return?

11:57 - 12:52

You do not. I believe that very strongly. But when I was alluding to the term barrier, I almost imagine it almost like a literal brick wall in people's brains. And it's not a barrier between making a money and doing good in the sense that you can't do the two at the same time. But it's literally a barrier in how people think. Right? And it just like how they approach the question to begin with. I have found in my career and this is changing a bit over time, as I said, but you know, you start a conversation, we're going to make money and do good. At the same time. People aren't used to that and they've grown up in the sort of more typical traditional capitalist system of like, oh, that's that's not possible. You know, you can't do that. And I literally there's this brick wall and you sort of like break it down piece by piece by showing people, look at this great investment it made money into. Good look at this great initiative that happened right at McDonald's where it improved the business and it good. And you show people enough examples that that wall starts to break down.

12:52 - 13:17

I love that metaphor and that visual of taking apart the bricks. I think it's a very appropriate for you. Let's bring that metaphor back to private equity and venture capital. This is a big industry. Billions of dollars have been raised in this space in the last, you know, decades. Certainly so much has been deployed. How much of this space today is really focused on impact investing and what's changed in the space recently?

13:18 - 13:53

Let's actually step back to look at how impact investing has evolved and then will come into private markets. So in public markets, for example, it really started with the divestment movement and then values based screening. That's where I started my career in the early 2000, building those products in public markets. And then you had ESG integration, which was more about considering how a company manages its environmental, social and governance practices may affect financial performance. And then I would say that investors were in many ways dissatisfied with just that.

13:53 - 14:32

Right. So what's the what's the impact? What's the actual additionality or the change that the company is making? And that is really where impact investing kind of began. And in private markets with this idea that funds would start investing in these companies at various stages to create companies that were intentionally trying to create impact. And it started out very much with smaller early stage venture capital funds. Part of that was because that was more of an asset class where folks thought about innovation and disruption and things they hadn't thought about before. They were willing to take that risk that they're already taking in venture capital.

14:33 - 14:53

And as those funds started to prove that they can generate just as strong risk adjusted returns, investors started to ask for more. And I think some of the light bulb went went off around, well, if this is possible in these startups, what happens to these same companies when they grow up right. And they're at the growth stage and when they need a different capital needs.

14:53 - 15:14

Right, they need to do a buyout. They need to do a recap. Then what happens? Where are those investors? And so we have started to see the product proliferation occur of truly impact investing strategies and funds, but now at multiple stages of capital. And with that as well, with that intersection, greater depth in terms of domains.

15:14 - 15:58

So I think early on a lot of it was focused on quality jobs, community, certainly climate change. And back then it was clean tech is what people called it. Now it's climate tech. And I would say it's gotten even more specific. And so but I would say the other thing that's really evolved is mainstream private equity has gotten the same kind of pressure that mainstream public equity got, which was, what are you doing? And they too have followed the same life cycle of first saying, Well, of course we care who's going to say they don't. We care about our employees, we care about communities. And so they put these reports together showing their volunteer hours. And then they started to say, of course we care about ESG in our portfolios. And they started to hire ESG experts and they show how they consider that in their investments.

15:58 - 16:53

And people can continue to say, well, and so what does that mean? What's the actual result of that? And so eventually they started to say, okay, we're going to launch an impact fund. And so now you have these sleeves of impact funds at more and more very large asset managers, and they're hiring dedicated teams to do that. And so that's an important part of the ecosystem. But also are these pure plays firms like Impact Engine and many, many others that from the very beginning we were committed to this. It's gone into every single decision we've made from who we've hired, the products we launched to our investment strategy, to how we report, how we communicate to the world, how we engage with our companies. It's all the way. And that's really kind of I think the evolution is there are certainly more players. There's certainly more companies because of the good work that venture capitalists have done and entrepreneurs have done. But there are now higher expectations. People want measurement, they want authenticity, they want true intentionality. And that's kind of where we're at. Who's going to do it?

16:53 - 17:29

It's a busy time for the industry. Clearly, like you said, not only have the investors demanded more like Jessica's point about the brick wall, the investors have educated themselves more and big companies are changing and more small companies are starting. And then also, I like what you said about there's more sector specialists coming out. The idea that there's climate tech, there's femtech. When you think about health equity and access, what used to be more generalist funds and access, and now we're moving into this world of sector specialists. And I think that's happening in the public equity space, too. So it's really parallel, but it feels fast to me and I'm sure it feels even faster to you.

17:29 - 17:47

You've been experts in this space for much of your career, and it feels to me from the outside a bit that the last three years have seen this enormous acceleration. Do you feel that same sense of speed?

17:47 - 18:41

Absolutely. Yes. Yeah, absolutely. And and I think it's it's the right time in that clearly what's happened in the world and a lot of the existential challenges we're facing right now has led folks to feel a sense of urgency around what can I do right. You can vote. But I think a lot of people are dissatisfied with what their government and leadership is doing to address these issues. You can certainly donate, but a lot of folks feel like that's not enough. And all of a sudden you can look at your investment portfolio and by the way, you can always look at what you purchase, who doesn't exist. Yes, you should. But so there's this urgency. But that's all juxtaposed against the fact that this industry has been building internally the impact investment industry for, you know, 20, 30 years. It's good timing that we were ready, that there are really talented professionals, there are really great firms, really credible, compelling investment strategies. And so the timing is right.

18:42 - 18:53

And that's not coincidental. You know, it's a virtuous cycle that's fed on itself from the people who were early and who didn't make those first investments so those first funds could show their track records.

18:53 - 19:32

Yeah, it's very exciting because it's like the investment industry. What keeps it so interesting is that there is the never stale and there's constant innovation and challenge and disruption. And it's just a question of where are you in the cycle of identifying that innovation and disruption? And for many years, when you think about the biggest disruption to asset management, in some ways it was Vanguard, it was passive. That was the single biggest disruption in terms of financial inclusion and access for investors. And I wonder if ESG and impact investing will one day be as big as that level of disruption. The acceleration and speed of this movement, I think, over the last couple of years has real potential for that.

19:32 - 20:01

But let's let's circle back to some additional questions for you. I mean, Jessica, I want to come back to you because in addition to your career and what you learned in the public equity space and then your transition to more, the private market investing, you've shared with me that you really made a decision personally on behalf of your family to be a 100% impact investor, and you learned a lot along the way. What are some of your top lessons, if you will, while this evolution has been going on, what have you learned yourself?

20:01 - 20:45

Yeah, well, first of all, I have to give partial credit to my husband since we decided together to do this. And that was a long conversation, which I'm sure others can identify with. I think the first and most important thing we've learned that I want everyone to know is that it is possible to align. We're not at 100%. We're very close. But what we have learned from having the vast majority of our assets also aligned with impact because. There's impact investing, particularly on the private side. We also do a lot of ESG in the public markets. But it is possible to meet or exceed market rate returns on the financial side. So I have seen that myself. And so, I mean, I know we've read studies. You know, there's there's facts out there. But I'll say again, it's possible and I've experienced it.

20:45 - 21:29

I would say that it also feels really good to feel like you're making progress to align your money with your values. I think when I first discovered Impact Investing, I was working at McDonald's. And honestly and I'm embarrassed to say, like, it never occurred to me to think about my investment dollars. You know, I was doing all this work trying to change, you know, on the on the operations side inside a company. And we did have money. We were investing. And I never even asked I never even wondered what it was doing. And then once I knew that every investment dollar has an impact, we just don't necessarily know what it is. Then I immediately was like, I need to know what all my money is doing. How do I have money out there with my name on it as doing these things in the world that I don't sometimes agree with? It doesn't feel good.

21:29 - 21:39

When I share just the good news story. But what mistakes did you make? We got to get the honest truth out here, too, Jessica. It can't all be good, right? What were the bumps along the way in your journey?

21:39 - 22:02

You know, there are mistakes all the time, right? I can't say there was one like big existential mistake. I've made bad investments for sure. I would say, particularly for folks who are going to go do direct investing like an angel investor, investing in small social entrepreneurs. It can be extremely rewarding. It can be extremely successful, but it's extremely risky. It takes a lot of time. You want to have a lot of diversification.

22:03 - 22:28

I personally came to the conclusion that I'd rather work through great fund managers, and of course that includes Impact Engine in my case. And I guess another thing that I learned that other people might benefit from is, you know, I wish I had pushed harder earlier with the advisors that we work with to work with advisors outside of obviously our private equity venture capital impact investing is for impact engine, but otherwise we have help.

22:28 - 23:13

And originally I started asking questions and it was just like, you can't do that now, sorry, you're going to lose your money now. You can't do that. And I think I let it go and I saw like, okay, they, they, they know what they're talking about. And, and I kind of forgot, like, I also know what I'm talking about. I had learned a lot. And also it's my money, you know, I think sometimes people forget, like your money, you know, and you can push and demand that you get more information. And that doesn't mean you're going to be able to invest in exactly the type of impact you want in every asset class and all that stuff. It depends what your goals are, but I think for most people they could probably they could probably achieve more than what they think is possible in terms of aligning their values with their with their money.

23:14 - 23:16

That's a great lesson. Thank you for your honesty.

23:16 - 23:36

I want to come back. I know that I'm sensitive to our time together. There's so much here on this on this topic. But one thing I would love our listeners to hear about is you have described some managers in the private equity and venture capital space as impact whisperers. This is a new and exciting term. Can you explain what that means and why the term exists?

23:37 - 24:30

Yeah, absolutely. I mentioned earlier the two types of firms, right. One are pure plays like Impact Engine. From the beginning we were committed to this. It's literally in our name. And then they were the asset managers that have started to create impact products. And there's also this term impact washing that's out there, which is firms and people who are talking companies. We're talking about their impact, but they don't have very little to show. And so they're quite loud, but they're not really walking the walk. And as we were out there meeting with venture and private equity fund managers and we have an open door policy, we want to meet with anyone who is trying to do this legitimately as a private equity or venture capital strategy. And as we were doing this, we would notice that there were these firms that when they talked about impact, it's like they literally got quieter and it was like, wait, what did you say to tell me more about that?

24:30 - 25:13

Right. It was like the subtle thing and we tried to understand why they were doing that and we kind of realized a few things. One is that if you look at the history of the space for a long time and it still persists today, somewhat not as strong this belief or bias that it means that you're not here to generate strong returns if you're here to create impact. And so they are still, I think, operating and communicating in a way that they're worried that when they talk about what they're doing to create impact, some investors may view that as they're not here to make money. And so they were being kind of careful with it. And it was like, wait a minute, we definitely don't believe that. You can't be loud with us. Come on, who are you going to be loud with?

25:13 - 25:24

Yeah, it's so interesting that they're minimizing their impact. And Ted, with that. But that, again, the brick wall, the Jessica brick wall. Right. This feeling of these are bricks that you're putting up. Okay, light. Round.

25:25 - 25:48

I'm going to ask both of you. We talk about investing with intention here at Bernstein, which is really about extending your values into your life and investing. I think I know what your answer is going to be to this question, but any quick responses to this idea of what investing with intention means to you and what you've learned along the way that you haven't already shared?

25:49 - 26:17

I mean, I've already shared it, but I'll just say again, I think knowing what my money is doing and trying to make it align with my values and beliefs is really meaningful and rewarding. When I often think of a quote from Gandhi, which is Happiness is when you what you think, what you say, and what you do are in harmony. And I think a lot about that in my life. And it's not just about money, but it applies to money. And you feel the disconnect when you're not aligned. And I think I think our money is part of that great quote.

26:17 - 26:18

Priya.

26:19 - 27:07

Yeah, I think of it very similarly and maybe because I've kind of grown up as an investor, I always think about intention as thinking about the multiple effects. And so, you know, we're all taught in the first thing you think about is what is the return? But, you know, you also think about what is the risk, what are the tax implications, what is this and that? And there's so many dimensions. And so for me to be fully intentional, it's also thinking about, well, what's the outcome for the planet, for the employees, for the customers, etc.. And again, back to that core belief I have that, you know, we should all expect more from capital. We shouldn't just expect financial returns. And it's actually a better way to invest because you see from all corners what a company is doing and you end up becoming a more informed investor. So that's the intentionality I look for, too.

27:08 - 27:24

Awesome. Well, thank you so much, Jessica and Priya, for sitting down for the conversation today. Thanks for your commitment to investing with intention, really, in your daily lives, in your professional life. And Jessica, thanks for the Gandhi quote. I have not heard that before, and I'm sure that will resonate with many of our listeners today.

27:25 - 27:27

Thanks for having us. We're excited to work together.

27:27 - 27:28

Thanks for doing this, Seattle.

27:30 - 28:00

And thank you all for listening. If you'd like to learn more on Bernstein Foundation and Institutional Advisory Services, please see the link to our blogs in this episode's description. If you enjoyed this episode and haven't subscribe to our podcast yet, please go to the iTunes Store, Google Play or wherever you listen to podcasts to subscribe and rate us. Also, please email us with your thoughts, questions and feedback 

Host
Clare Golla
Managing Director—Head of Foundation & Institutional Advisory Services

The information presented and opinions expressed are solely the views of the podcast host commentator and their guest speaker(s). AllianceBernstein L.P. or its affiliates makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this podcast. This podcast is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.

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