This Stanford Social Innovation Review article challenges the standard fund model for impact investing, and describes the proven effectiveness of the holding company model that we use at ThirdWay Capital.
By Suchitra Shenoy & Shreedhar Kanetkar.
Today’s impact investment funds use a model pioneered by the venture capital and private equity industry—typically an annual management fee of around 2 percent of assets, an annual performance fee around 20 percent of profits, and an exit in 7 years or so.
But there is reason to believe that such a model is ill suited to creating value that goes beyond the financial. In their book, Impact Investing, authors Antony Bugg-Levine and Jed Emerson observe: “This fund structure forces the investor in slow-growing social enterprises to liquidate the fund before many portfolio enterprises have taken off. Relying on the standard management fee also limits fund managers’ ability to cover the costs of executing the many small deals they find and the additional services they need to provide investee companies.”