John Shire is a partner in the Corporate Department of Seyfarth Shaw LLP’s Washington D.C. office. Mr. Shire is a corporate and transactional attorney who represents public and private companies in buy-side and sell-side mergers and acquisitions, joint ventures, commercial contracts, private capital transactions and impact investments. Mr. Shire serves as outside general counsel to a variety of entities at the leading edge of innovation in the healthcare, energy, financial services and technology industries. He also represents clients before federal and state agencies and licensing authorities in connection with compliance matters.
Christopher P. Skroupa: How do fund managers assess economic risk in striking a balance between satisfying the requirements of portfolio mandates, the standards for SDG performance, and financial performance?
John Shire: In my experience, striking a balance between these objectives is the most difficult task that fund managers face when making an investment decision. There must be alignment between the fund mission, on the one hand, and deployment of capital for the particular asset, on the other hand. In short, this means there must be both conceptual alignment and actual fact-based alignment.
The first question is whether the asset deployment enhances the purposes for which the fund was established. Once this question is answered affirmatively, the diligence turns to technical proficiency: Can the asset work? Can it work for the particular deployment? Can it provide a solid financial return? How quickly can the asset be operable and, therefore, produce a return? Asset and technical due diligence must prove out. Market demand and deployment must be present. Financial performance metrics must be rooted in reality (i.e., fact-based data and comparable technology within the industry).
Skroupa: Do fund managers assign a greater value to the any of the three provinces of portfolio criteria, SDG performance, and financial performance?
Shire: From a transactional perspective, we observe that capital deployment in the impact investment space will typically be designed to meet multiple SDG criteria. Therefore, in general, the greater value is assigned to fund criteria and financial performance.
Fund managers have an obligation to meet certain performance expectations and, therefore, it is the unusual example when capital is deployed without a deep understanding of the market and metrics. Our experience is that fund managers can see significant upside in impact investments, and this has proven out historically. At the core, the investment will satisfy fund obligations in both purpose and return.
Skroupa: How do managers efficiently identify investments that are likely to become portfolio investments?
Shire: This is a great question, and it would appear to most that there must be an alignment of the stars to marry the right relationships.
It is common in today’s environment for funds and families to co-invest and, at times, it becomes a wolf-pack approach to investing. It takes a strong thought leader to step out of the pack, identify a resource that makes sense, and to then take the lead on an asset that has yet to be fully funded. Managers can efficiently identify investments with a strong likelihood of success for their portfolio by remaining true to their purpose, doing their homework, and asking questions of the asset holder. By bringing the asset holder into the fold early on in the process, the investor can quickly hone in on the key drivers of the asset, the market, and the application.
Skroupa: What has the impact investment community learned from its historical experience in portfolio selection?
Shire: There are a number of lessons learned based on historical data. First, the data supports the fact that impact investments produce solid returns. Second, these investments are producing demonstrable positive results with regard to satisfying SDGs. Finally, the demand for access to impact transactions is growing.
We are already in the midst of a massive wealth transfer process taking place in the United States and outside of the country. New generations who now hold the wealth are demanding that their assets are invested increasingly in impact-related investments. This bodes well for success in meeting the SDGs and producing returns to the investors.