This article is sponsored by Apollo Global Management.
What is your impact philosophy? Where does ESG end and impact begin?
ESG and sustainability are core principles on which Apollo has been highly focused for more than 13 years. It is a growing function that applies across our strategies, and we think of it in terms of operational factors. Each company has its own ESG risks and opportunities, which we manage and seek to improve.
This is table stakes for PE today; it is fundamental to our licence to operate, whatever type of companies you invest in.
Impact is a related but different concept which, in our view, is all about business models. Why does that company exist and how does it improve the lives of underserved individuals, communities, or the environment? Impact also needs to be central to the company’s financial success. This is a concept we call collinearity, where impact and financial performance are mutually reinforcing.
Beyond the importance of collinearity, we believe it is necessary to take impact from the anecdotal to the analytical. We quantify the impact that portfolio companies have and incentivise it.
Finally, we view impact as an incredible investment opportunity because businesses that are addressing the needs of people or the planet are structurally advantaged in today’s world.
Why is collinearity so important and what else are you looking for in a target company?
Collinearity is important because we want to be in a position whereby the more successful a company is with respect to traditional financial metrics, the more impact will be achieved. Apollo is differentiated by maintaining a strong focus on impact at scale, which means taking the impact mindset to later-stage and larger businesses. Most of these companies are not owned for impact at the point of our funds’ investment, with no measurement in place and certainly no impact-orientated value-creation plans. We see tremendous opportunity in introducing that intentionality to both the corporate culture and strategy, thereby driving the impact at scale that we target.
While most of the management teams, founders and family owners are not coming into discussions with impact in mind, we find that when we talk about impact, their eyes light up. This is their life’s work, and it is refreshing for them when an investor wants to discuss the benefits of the business for the community or environment, rather than just focusing on basis points.
How do you look to drive impact post-investment?
We use a similar set of tools to those that we use to drive value creation in the traditional sense. We choose KPIs that capture the impact the business is generating and set targets around them, in the same way that we would target revenue growth, EBITDA or cashflow.
We use those metrics to tie compensation to impact – including a portion of the management team’s long-term equity compensation and a portion of the fund’s carried interest – which is critical to creating alignment among ourselves, portfolio company management teams and our LPs.
We then bring to bear all the resources associated with being one of the world’s largest alternative asset managers, looking to improve all aspects of portfolio company operations, from commercial excellence to capital markets expertise and M&A. Ultimately, the entire process is focused on seeking to maximise value both in terms of returns and impact. Provided that portfolio companies have impact at the heart of their success, there should be no inherent tension between the two.
What advantages can the private equity model offer when it comes to creating impact?
Private equity offers unique advantages, particularly within a control investing strategy, which allows for the opportunity to help set strategy, effectuate outcomes and align objectives, while also making the tough decisions that any business will inevitably face as you chart that course. I also believe that private equity is the natural home for business models going through change, given the long-term investment horizon. This allows us to incubate ideas, strategise and execute without the noise of daily stock price movements or quarterly reporting.
How do you address social impact through your investments?
When driving social impact, we are fundamentally looking to address the unmet needs of communities around the world. For example, Apollo-managed funds are investors in Smart Start, a provider of alcohol monitoring solutions. Excessive alcohol consumption is a meaningful problem around the world. It is estimated that at least 5 percent of the population has an alcohol use disorder and alcohol is responsible for at least a quarter of vehicular fatalities, according to the National Highway Traffic Safety Administration. In the US alone, 11,654 people died in alcohol-impaired traffic crashes in 2020, a 14 percent increase versus the previous year, per NHTSA data.
Smart Start reduces incidences of drunk driving by installing a breathalyser in the cars of individuals that have been convicted of driving under the influence. The device prevents the car from starting if the driver is under the influence, which keeps themselves, their passengers and others on the road out of danger. The company’s devices stopped over a million car starts last year alone, and so the business model is making the world a safer place in a visible, tangible way. We are proud to be supporting the business on that mission as it grows domestically and internationally.
Meanwhile, Apollo-managed funds also recently made two acquisitions to create a company called Heritage Grocers Group, which is focused on offering affordable, healthy and culturally relevant foods to the Hispanic community. Apollo has a long history of investing in grocery with great success and this differentiated industry knowledge has been brought to bear as we build this new platform. We see potential for profound impact, as well as outsized financial returns, based on demographics – the Hispanic population is growing at a far faster rate than the US population as a whole, according to the Pew Research Center. The company now has a presence across four states, offering improved quality of life for its customer base.
What are some of the common challenges you face as an impact investor and how can these be overcome?
There is still a fair amount of scepticism on the part of allocators and other parties in terms of whether you can have both profit and purpose. The only way to overcome this problem is to perform – to prove, definitively, that it is possible to have it all when investing in impactful business models. We believe that this will help get investors off the sidelines and allocate to impact.
Another significant challenge the industry faces is around data. This is less of an issue for control investors, but for public market investors, it can be more difficult to discern what is known and what is simply inferred. That data challenge is going to take longer to resolve than proving out the power of collinearity.
How would you describe LP appetite for impact as it stands today, and what concerns persist?
There is certainly a great deal of interest among LPs of all sizes, although many are still in the early stages of determining their approach. As the space continues to develop, I think we will see LPs become increasingly more sophisticated and begin to build out their own impact frameworks, similar to what we have seen with ESG. One of the key drivers of this will be the recognition that impact companies are structurally advantaged. LPs naturally want to back commercial winners. We are also noticing a generational shift, particularly within family office groups, where the new generation is looking to align capital allocation with values.
In terms of concerns, I think investors are still focused on determining levels of authenticity and are worried about the potential for impact washing. They want to know that what they are investing in is not just a rebranding exercise. They also want to be sure that the promised impact can actually be achieved, particularly given that so much capital has been allocated to early-stage companies. Will the business make it to the breakout phase? Will it scale effectively? That is where we believe our later-stage model will pay dividends.
How do you see impact evolving within the broader private equity industry?
I expect to see impact evolve from a relatively small niche within broader private markets to an asset class that commands a much larger share of capital allocations. However, I do not expect impact to become the only investment strategy in PE. Impact investing means investing in business models where the goods and services provided are improving the world – there are many companies that perform well against operational ESG metrics that do not meet that definition, which means there is a place for both impact with intentionality and traditional, non-impact funds.
That said, we hope to continue to widen the aperture of impact and, in particular, to take impact from early-stage investment to the mid-market in order to achieve impact at scale. We will do this by proving that these companies exist, that they can drive meaningful and measurable impact and, importantly, that investments in these companies can be made without sacrificing returns.
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