Back in 2018, we met a publicly listed business in India that makes affordable insect repellents that helped protect families from malaria for 2 US cents a night. During a demonstration in their R&D lab, we were struck by the huge positive social implications of this company’s profit-driven development of an effective product at such an affordable, accessible price point. Arisaig were already invested in this business as we thought it offered great returns prospects. In fact, we’d already owned it for 15 years – as is typical of our buy-and-hold investment approach – and had been engaging with management on social and environmental factors for the lifetime of our investment. This engagement was not altruistic, but based on the belief that the business would generate better long-term returns if it managed the interests of all its stakeholders along the way.
Two years later, in 2020, we launched our public equity impact investment strategy for emerging market investors. I can say that launching a new strategy in a still-to-be-defined investment theme during a pandemic is not for the faint of heart. But as we pass the three-year mark for the strategy, there is growing acceptance, against the backdrop of an industry fed up with greenwashing, that allocators can move beyond good ESG scores and deliver positive impact. For example, the Global Impact Investing Network published its inaugural Guidance for Pursuing Impact in Listed Equities earlier this year, a significant endorsement of the category from one of the most prominent impact investing associations. Perhaps more importantly, there is huge potential among publicly listed businesses to help address the USD3.9tn funding shortfall required to meet the SDGs[1] and deliver investment returns.
Our on-the-ground investment trips in emerging markets make it clear to us that a great deal of the responsibility for driving social progress naturally falls onto the shoulders of for-profit, private sector organisations. Often, we find it is local entrepreneurs who are making the most significant contributions towards raising standards and increasing access within critical industries such as healthcare, education, and financial services. In doing so, private enterprise is sometimes making significantly greater contributions to societal wellbeing than can be achieved by the patchy, low-quality coverage of state entities.
For such businesses, the scope for impact generation and the long-term revenue growth opportunity are one and the same. As they scale, the benefits conferred by their core operations extend from thousands of consumers, to potentially many millions. The growth of such companies genuinely makes the world a better place. This is particularly true of those enlightened businesses which seek to benefit not just private shareholders, but all stakeholders: customers, employees, and society as a whole. In doing so, they often generate greater financial value over the long-term than they would have done by seeking to ‘artificially’ elevate short- term profits, and by extension merely deferring costs to the next generation. At Arisaig, we refer to such businesses as ‘Purposeful Growth’.
We have always been mindful that the most stringent definitions of impact investing entirely exclude the public markets. In essence, the argument is that since publicly listed shares are simply ‘resale’, the shareholder is incidental to any impact generated by the underlying business – “it would have happened anyway”. Our view is we don’t mind what you call us. And it absolutely does matter who owns public companies. Engaged, long-term minded stewards of capital have a key role in ensuring businesses providing solutions deliver on their promise and don’t get knocked off course by short-term investors looking at next quarter’s earnings, and instead focus on growing the market and delivering impact and returns.
In practice, we believe there is little difference from an impact perspective between us and a private markets impact investor. In many cases we are on the same shareholder registers. We both provide capital to impactful enterprises in the hope of generating both financial returns and positive social outcomes.
One area where public markets have an advantage is the greater existing scale and reach of listed businesses, which allow them to deliver impact in truly mass-market fashion. And where such companies have been previously ‘incubated’ by the private markets, it is critical that once these early backers are replaced by public equity investors, the business retains the ability to grow sustainably while further extending its positive impact.
Being publicly listed provides ‘permanent capital’ to positive impact businesses, enabling them to expand at an appropriate and sustainable pace, and not leaving them subject to the exit requirements of major investors. Private equity investors can be just as financially ruthless and focused on short-term targets as hedge fund managers, particularly when it is approaching its target exit or hoping to dress a company up for IPO.
Our focus as investors is to own companies where impact and returns go hand in hand, because the business model itself helps generate impact, whether through technological advantage, IP or distribution and execution abilities. Our portfolios are concentrated by public equity standards, with 30-35 investments, and centred on three pillars of impact:
– improving health outcomes (through access to healthcare products or services or preventative health);
– supporting equal opportunities (through education; financial inclusion; enablement of SMEs, the key employers in emerging markets; and supporting gender equality); and
– providing environmental solutions (solutions for climate change mitigation and adaptation, and resource efficiency).
This may be different to the tailored opportunities to invest in companies aligned with one or two specific impact goals in the private space (e.g. ‘climate funds’ or ‘gender funds’), but we believe the depth and breadth of outcomes is compelling. Last year, for example, our holdings served 727 million people, reached 2.6million students, supported 15 million SMEs and helped generate 300,000 GwH of renewable energy[2].
These metrics point to the success we have had in terms of measuring and managing for our holdings’ impact. We devise a theory of change for all our investments and complete a detailed assessment based on the Impact Management Project’s Five Dimensions of Impact. We also score all investments using our proprietary scorecard, which factors in 12 impact-related metrics. Comprehensive monthly reporting on this impact is provided to all our clients. In emerging markets, disclosure of impact metrics can be imperfect. Our deep knowledge of the emerging markets we invest in, on the ground investment approach, and “360-degree” due diligence allows us to plug disclosure gaps. We might have to ask for it, and sometimes we have to commission independent research, but it can be done.
A final material advantage for public equity impact, we believe, is our ability to offer greater liquidity for our clients compared to the longer lock-ins mandated by private equity, which means that impact can compete for capital against mainstream parts of the portfolio. Doing so can drive increased volumes directed towards impact, helping to address the SDG funding shortfall. A desire for flexibility does not mean that our allocators are less patient though. Our average client tenure of 10 years, despite generous terms across all our strategies, has proven that offering liquidity does not always mean attracting flighty capital.
Our risk-return profile is that of a focused emerging markets portfolio: occasionally volatile but supported by the powerful tailwinds of rapid economic growth and demographic destiny. But we are firmly non-concessionary: we buy businesses that see vast growth potential in the delivery of social and environmental solutions at scale. Nowhere is this opportunity greater than in the developing countries with the brightest economic growth prospects, large and growing populations, and vast undercapacity in essential goods and services. We hope that through allowing access to these investments in a liquid, diversified vehicle, yet with undiluted impact potential, we can help allocators to achieve both attractive financial returns and positive social outcomes at unrivalled scale.
[1] https://www.oecd.org/finance/global-outlook-on-financing-for-sustainable-development-2023-fcbe6ce9-en.htm
[2] Based primarily on data from holding companies’ most recent full year results available as of 31 Mar 2023. May include Arisaig estimates where data is not available. Figures are not adjusted to reflect the size of investment or weighting in portfolio. We have made best effort estimates to avoid double-counting (i.e., where certain individuals are customers of more than one holding). Excluding cash, which is held for ancillary liquidity. Sources: Company annual reports and other publications, World Bank Databank, Arisaig Partners analysis.
