Compensation for impact managers could distort performance

Tying compensation for impact fund managers to social or environmental change may not be in the best interests of limited partners, a conference has heard.

“I’m cautious about giving people financial incentives based on the impact numbers,” David Wilton, chief executive of US-based impact consultancy Zheng Partners, said during a panel at EMPEA’s Sustainable Investing in Emerging Markets Summit in London on Tuesday. Wilton served as head of impact investing at Morgan Stanley Alternative Investment Partners until February and was chief investment officer for global private equity funds at the International Finance Corporation from 2000-14.

Wilton pointed to one instance during his time at the IFC where an impact manager had been offered an incentive based on job numbers at the portfolio company level.

“They were reporting very good job numbers, so then you go to do some diligence on the ground and you find out that a lot of these jobs are pretty meaningless,” he said.

“I’d rather not cause that sort of distortion. You’re going to get the impact results anyway if you meet the financial targets, so you might as well keep things simple and just give people financial-based incentives.”

Hany Assaad, co-founder of emerging markets investor Avanz Capital Partners and former chief investment officer for private equity at the IFC, told delegates that a successful impact strategy was crucial to the continued financial success of such managers.

“Your current fund and your impact measurements or impact results are going to drive future fundraising. You’re not going to be able to raise more money in the future unless you are really good at delivering impact.”

One issue with tying compensation to impact is the lack of an established market-standard definition. Terms would therefore have to vary from fund to fund, creating a headache for LPs.

The IFC – which has a $57 billion investment portfolio – published a draft of nine operating principles for impact management earlier this month. The principles include conducting exits with continued impact in mind and ensuring impact is progressing in line with expectations.

KKR is among the latest firm to launch an impact strategy after registering its debut impact fund in Luxembourg this year. The firm joins Bain Capital, TPG and Goldman Sachs in targeting social and environmental impact with a dedicated vehicle.

Private Equity International is holding its Global Impact Investing Network Investor Forum 2018 on 30-31 October at the Marriott Rive Gauche Hotel in Paris.