Moving Impact Investing From Hope to Proof and From Proof to Scale
Matthew Weatherley-White, managing director at The Caprock Group, was interviewed on May 17 by Darshini Shah.
Q: Give me a little bit of background on what The Caprock Group does.
A: Caprock Group is a fairly traditional multi-family office. We provide single-family office services to more than one family. We currently work with about 125 families around the world. We advise on about $3 billion of capital and we’re aiming for $4 billion by year-end.
Q: How many of those families are involved in philanthropy and/or impact investing?
A: All the families that we work with have demonstrated or have clearly articulated a philanthropic intent. It’s one of the screens we use before we accept any family to work with. Of that $3 billion of assets that we work with, roughly one-third has been deployed with an impact mandate, and the remainder has been deployed conventionally. And yet, over the past two years, we have heard from more and more of these conventional investors that they want to know what we are doing with impact investing.
Q: Is there a big difference in the thought processes by the older generation versus the younger generation when it comes to impact investing?
A: Yes, and it’s not exclusive to just a generational thing. I went out for dinner the other night with three Dartmouth students who are graduating and all of whom are starting on their careers either in Wall Street or consulting. I asked them what they thought. One of them said: “Oh, I would definitely sacrifice financial performance as long as I know my money was making a positive impact in the world.” Another, who was raised without a lot of resources in her family, said: “Oh, I’m not sure. I need to make some money because I need to pay off my student debts.” There is a big-picture trend that the wealth transfer between the wealthy first generation to their children will result in a shift in the investment processes. What we see with our families is not purely the younger generation being involved in impact investing. For example, in one of the families we work with, the patron of the family — who made all of his money digging oil wells — he was the one who, at age 80, said: “I want to use my money to support these at-risk communities where I made all my money in rural Colorado. And I want to do it as an investor, not as a philanthropist.”
Q: How do you introduce families to impact investing?
A: When families who have a philanthropic aspect to their wealth-management strategy first hear of impact investing, their first reaction is always almost the same: “I don’t want to sacrifice financial performance.” That is the instinctive, conditioned response. Yet, when we frame it differently — when we say: “Well, you’re already investing for philanthropy, but you’re giving all your money away. That’s a 100 percent loss of capital. What would you think about doing a similar strategy which helps a cause, but also getting some notional return on capital from that investment?” When you put it that way, most people see it as “Ah, that’s a different way of thinking about philanthropy — earning a financial return on capital that would otherwise be given away.” And that opens up the conversation to impact investing — pursuing a positive financial performance as well as creating a positive impact. One thing to emphasize — it’s not an either/or when it comes to philanthropy and impact investing; it’s a yes/and.
Q: Talk me through the process of a family going from: “Okay, I want to do impact investing” to actually investing in that particular project.
A: Within Caprock, we solve for a client’s financial needs first and pursue impact to the optimal extent possible within that primary objective. So, we determine an after-tax target rate of return for the family and then we start reverse-engineering from an allocation perspective by filling in all of the asset classes. Once we have that infrastructure in place, we do a deep-dive into a family’s mission. We have found that families are typically motivated to do impact investing along two primary axes. The first is: What problem am I trying to solve in the world? Is it environmental, like a sustainable food chain or technology related to climate change? Is it a social issue like affordable housing or education? The second axis is: Where in the world am I trying to solve that problem? We see everything from hyper-local investors to total generalists. For example, we serve one client who invests in sustainable organic food systems in the Pacific northwest of the U.S. and we serve another who wants to invest in “access to essential services” in emerging and frontier markets. So once we have those factors in place, we do a landscape overview of the available investments, which solve for both the mission question and the financial question. The interesting thing is when you look at the portfolio that we build, if you don’t look deep enough to understand the impact component, it would look like a totally conventional portfolio — public fixed income, a layer of public equities, some private debt, early-stage venture capital, private equity, hedge funds, some real assets, etc. These portfolios would look similar to the range of bespoke portfolios that we create for the families who do not have an impact focus. Yet, you look one layer down, and suddenly you start seeing — as you would with, for example, the Ford Foundation — totally fascinating projects that are being funded through the capital markets.