Rome wasn’t built in a day – and neither, some fund managers argue, is lasting impact.
Swiss impact firm ResponsAbility Investments is among those embracing permanent capital, having so far raised SFr140 million ($139 million; €123 million) for its Participations fund, a shareholding company structure which targets financial inclusion businesses across regions such as Latin America, Africa and South-East Asia. Its 12-strong portfolio includes a Bolivian micro-finance bank, an Egyptian payments platform and two small Indian banks.
“Timing is of the essence in any private equity deal, but in these markets the ability to stay longer than the usual cycle of five- or six-year holding periods can make sense to ride out the short-term market fluctuations you may have,” Michael Fiebig, head of financial institutions equity at ResponsAbility, tells Private Equity International, adding that evergreen structures allow managers to better time exits, and to retain assets that are continuing to grow.
The strategy is not limited to emerging markets. Bridges Fund Management employs an evergreen impact strategy in the UK, with limited partners receiving yield via dividends and loan interest.
Impact investing sometimes involves businesses subject to complex regulation, such as healthcare or banking. Navigating these restrictions could delay the time taken to reach profitability, particularly in emerging markets, meaning a fund with the capacity to absorb a longer J-curve could be a better fit.
Bridges takes a two-pronged approach to impact, investing through both a traditional growth fund and the evergreen vehicle.
ResponsAbility does something similar, allocating half its portfolio to mature cash-generative businesses and the remainder to accelerated growth opportunities – such as fintech companies – that can be exited in a more typical five- to seven-year timeframe. The vehicle is expected to pay out regular dividends from the former bucket and its board has the freedom to distribute extraordinary dividends following an exit.
It targets a 12 percent to 15 percent net internal rate of return in Swiss francs, Fiebig notes. “In our view the long-term mature holds are lower risk, but then also slightly lower return opportunities. If we had only focused on the categories which we define as accelerated growth, higher risk, higher return, we probably would have come out at the 15 to 20 percent range.”
The strategy can be a difficult sell to some LPs due to the relative illiquidity of such a structure, Fiebig says.
“You may find quite a few people who are not comfortable with the evergreen nature and the degree of uncertainty around future liquidity, but you do find investors who are interested. The profile we were looking for was mainly pension funds.”
ResponsAbility Participations received additional commitments from German state-backed development finance institution KfW, an unnamed Norwegian foundation and several Swiss private banks.
The concept is also winning over critics. Stephen Moseley, head of private equity and special opportunities at the $65 billion Alaska Permanent Fund Corporation, is something of a self-avowed impact sceptic, and believes genuine ESG should not be separated from a firm’s regular due diligence activity.
“Private equity firms are long-term investors, but they have to sell their portfolio companies eventually. And for that reason there could be an incentive to make the wrong choice, to sweep radioactive waste under the rug, and to move on,” he says. A longer term approach could better incentivise investors to “do everything the right way”.
“Permanent vehicles should have an even greater incentive to make the right decisions on ESG matters.”