PG Impact: how LPs differ on return expectations

Limited partners expect different returns from impact investing depending on their geography, a conference has heard.

European LPs are more tolerant of lower debt-like returns from impact funds, while Asian and North American investors expect to see performance akin to other private equity strategies, Urs Baumann, co-founder of Zug-based multi-asset fund PG Impact, told delegates at the Credit Suisse Asian Investment Forum in Hong Kong on 27 March. Baumann was speaking on a panel entitled Mission-driven investing – where are the best impact opportunities in Asia and globally?

PG Impact is independent of Swiss private equity giant Partners Group but utilises the firm’s resources and is funded in part by several senior partners of the firm. PG Impact closed its debut fund on $210 million in December with around one-third of its capital provided by staff, friends and family, and the remainder coming from a handful of institutions and ultra-high-net-worths.

Europeans are comfortable with steady, lower or uncorrelated returns, Baumann said. “In the US everybody wants to have equity returns – 20 percent or more – or also I think in Asia you probably see more demand for equity rather than debt or multi-asset class products.”

Only 3 percent of respondents to the Global Impact Investing Network’s Annual Impact Investor Survey 2018 said their impact investments underperformed expectations and 15 percent said they had outperformed.

Private equity impact strategies generated a 17 percent gross return on average since inception and 17.6 percent in emerging markets for those seeking market rates, according to the report. Such investments returned 7 percent and 8.2 percent respectively for those expecting below-market rates.

LPs also differ on where they want to make an impact, Baumann added. “In Asia we see a lot of people want to invest in Asia, rather than in Africa or elsewhere in the world [but] Europeans don’t mind investing across the world in emerging markets.”

Differing attitudes to impact investing require firms to tailor their approach to potential LPs, Dave Chen, principal and chairman of sustainability-focused real assets firm Equilibrium Capital, said on the panel. Altering one’s vocabulary is key to winning around an investor like the $227 billion California State Teachers’ Retirement System, he noted.

“When we talk to a pension plan like CalSTRS, we generally don’t talk about impact investing; we talk about the fact that agriculture and food are one of the last sectors that have not been completely disrupted by technology or disrupted the value chain,” Chen said, adding that agriculture had remained relatively unchanged over the past 10,000 years until the introduction of automated machinery.

“In some ways you shouldn’t talk about impact investing; you should get back to the fundamentals of what’s going on in the industry […] and the way that the sustainability aspect can create a competitive advantage. That’s a much, much more effective way for us of communicating the value creation.”