[J-TAO Report] Investors come in more shapes and sizes than hats and tacos: Angel, VC, limited, corporate, banks, institutional, friends and family—these are just some of the categorizations used to describe them. Now, a recent paper explores who might be the most important investor of all: the anchor investor in so-called impact funds, or funds that hope to create positive social or environmental impact.

In Anchors Aweigh: Analysis of Anchor Limited Partner Investors in Impact Investment Funds (pdf), the authors describe anchors as “generally the first investor to make a substantial capital commitment to a fund.” The group surveyed 13 fund managers about 28 funds, and conducted qualitative interviews with six anchor investors.

The paper was written by Shawn Cole, the John G. McLean Professor at Harvard Business School; Rob Zochowski, program director of the Social Impact Co-laboratory and the Impact-Weighted Accounts Projects at HBS; Fanele Mashwama, a research associate at HBS and Harvard University; and Heather McPherson, MBA candidate at The Fuqua School of Business at Duke University.

Sean Silverthorne: What is an anchor investor and why are they important?

Shawn Cole and Rob Zochowski: An anchor investor is the first investor to commit capital to a new fund. Anchor investors can have an important influence on a fund’s ability to raise meaningful amounts of capital; our interviews suggest that an early endorsement by a respected investor has a catalytic halo effect on a fund’s future investments.

"FUNDS WITH ANCHORS ARE, ON AVERAGE, $9 MILLION LARGER THAN THOSE WITHOUT ANCHORS AT LAST CLOSE."

The initial anchor investment can serve as a quality indicator to other investors, including those that are more risk averse, less experienced, or have less infrastructure for evaluating impact funds. Additionally, anchor investors, on average, provide larger early investments than nonanchor investors. These larger investments provide efficiency to newly launching managers who might not have an embedded distribution and sales team.

Silverthorne: You interviewed a number of anchor investors. Did you learn anything unexpected about who they are, the impact they have?

Shawn Cole and Rob Zochowski: Impact investors seek to create impact, and many investors viewed seeding new funds as an extension of their impact, in addition to the portfolio companies their capital would fund. In contrast to traditional private equity settings, none of the interviewed anchors sought fee breaks or other preferential economic terms. Some were attracted by the ability to shape the direction and legal structure of the fund or serve on the LP advisory board.

Their responses corresponded with the experience of development and fundraising professionals in the impact investing space—that anchor investors are motivated by the ability to catalyze additional change by supporting fund managers early in their fund raise, often providing a signal to other potential investors and providing a more reliable source of recurring investments for managers raising subsequent funds.

Silverthorne: What roles and value do we see anchor investors bringing to impact investment funds? For funds seeking to find anchor investors, where are some places to look?

Shawn Cole and Rob Zochowski: Our relatively small sample limits what we can say, but we note some intriguing patterns. For early fund managers, anchor investors can provide a critical signifier of quality to other investors who may be sitting on the sidelines. Funds with anchors are, on average, $9 million larger than those without anchors at last close. Given the average fund size of $69 million at last close, this would represent a meaningful difference. A second interesting fact is that the size of the initial investment seems less important than its presence: larger anchor investments did not lead to larger funds.

For managers who decide it makes sense to actively seek anchor investments, our results suggest that banks with CRA (Community Reinvestment Act) requirements and foundations represent the large potential allocations. Investment advisors also represent a significant allocation of capital, though depending on the level of discretion that an investment advisor has on their client’s assets, interaction may require substantial work at both the investment advisor home office as well as with individual clients.

Based on our interviews, securing the allocation early likely depends on the manager making a case for how the potential anchor’s impact will be magnified by early allocation to the fund.

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