Impact is, in many ways, the raison d’etre for private equity, so it’s no surprise the I-word is proving so popular to describe the industry’s conversion to a more proactive form of responsible investing.
Sceptics question whether it really is possible to have the best of both worlds: positive social and environment outcomes alongside strong financial returns.
Yet even the most hardened cynic has to concede that impact investing is making waves far beyond what was envisaged a decade ago when a few brave pioneers trialled the first impact bonds and eco funds.
Witness the growth of the Global Impact Investing Network from just a handful of members when it was founded in 2009 to more than 300 investors today, managing more than $303 billion of capital.
Or the entrance of some of the world’s largest global private equity firms to the impact arena via funds such as Bain Capital’s Double Impact, TPG’s Rise Fund and Partners Group’s Life Fund. And these funds aren’t just a flash in the pan. After closing its first Rise Fund at $2.1 billion in 2017, TPG immediately embarked on raising a second fund and now has $5 billion in impact assets committed to achieving measurable social and environmental outcomes with investments focused on education, financial inclusion, healthcare and clean energy, among others.
Larger firms bring “institutional awareness”, says Steve Ellis, co-managing partner of The Rise Fund, and this is helping draw in more institutional capital.
“We believe that a fundamental change, oriented to the belief that mission-driven businesses can also be profitable, will bring the weight of the capital markets marching towards impact companies,” he tells Private Equity International.
Job titles are changing too, with the big players adding the role of “head of impact” to their responsible investing rosters. Indeed the Carlyle Group’s global head of impact Megan Starr, 32, was named on PEI’s Future 40 list of 2020 rising stars this year, suggesting the growing importance of the role.
So where do we go from here? What does the next decade hold for an investment movement that, at face value, has the potential to reinvent capitalism?
Here are four key takeaways from this report:
The SDGs provide targets
Of all the frameworks in place, the United Nations Sustainable Development Goals, adopted by member nations in 2015, remain the most popular. They have galvanised the industry, providing a common language and framework for thematic investment, and provided targets for private equity firms to align with.
CDC Group, a UK development finance institution and impact investor, is one of the 56 percent targeting gender equality. “A recent International Finance Corporation and Oliver Wyman report found that gender-balanced GP teams in emerging markets generated returns that were around 20 percent higher than that of male or female-dominated teams. That’s pretty significant,” says Clarisa De Franco, CDC’s managing director for Africa funds, funds and capital partnerships.
Covid-19 offers both opportunities and challenges
A covid-19 survey of investors by the GIIN found that overall investment risk had heightened for four out of five investors. But long term there is optimism the pandemic has shone a light on the way all global challenges must be faced going forward. “I believe we are heralding an era of bold new thinking,” says Tania Carnegie, the leader and chief catalyst of KPMG’s impact venture practice. “Private equity firms have always been interested in companies that address gaps in the market, whereas impact specialists have been focused on companies that create positive social and environmental outcomes through their business model. We are seeing a convergence of the two.”
Better measurement is crucial
More needs to be done in terms of measuring impact: as Shami Nissan, head of responsible investment at Actis, says, “impact measurement is very nascent – it’s still in the early stages of being developed”.
The issue is not a shortage of frameworks, metrics and tools to measure and manage impact. The GIIN, for example reports that 10 years ago, 85 percent relied on their own systems to measure impact, whereas now, nearly 90 percent use some form of externally created tool or framework.
The issue is a lack of consensus around how these frameworks should be used: “Impact investing is hampered by a lack of standards and agreed frameworks,” says Nissan.
“I think it is vital to distinguish between observing impact and driving impact,” says Rekha Unnithan, co-head of impact investing in private markets at Nuveen. “Everyone knows that if you invest in a big enough company, that company is going to create jobs and provide access to products and services. But what additional impact are you creating with that capital?”
Impact is taking hold in Africa
According to the Global Impact Investor Network’s 2020 survey, 43 percent of impact investors have funds allocated to Africa – more than any other emerging market region. And 52 percent of investors surveyed by the GIIN plan to increase their Africa exposure in the next five years.
“The impact outcomes in Africa are more significant relative to the capital invested. For a European manager investing in Europe, achieving significant impact outcomes would be a more complicated proposition and require more capital,” says Michael Hall, head of ESG and impact at Development Partners International.