Prudential Financial is not afraid to invest in smaller and first time managers as it eyes impact investing opportunities.
“We are one of few institutional investors willing to look at first- and second-time funds,” said Ommeed Sathe, vice president, Impact Investments at Prudential. “Impact investing requires willingness to deviate from traditional rules. Although performance of our investments has been quite strong, it can be inefficient to evaluate smaller managers and that’s the reason most large capital holders typically have a fairly high minimum check size.”
With investments of $200-250 million made every year, it has grown in tandem with its GPs that help Prudential meet its deployment requirement, Sathe said.
The firm plans to grow impact assets under management to over $1 billion by 2010 from about $500 million today, composed of about 60 percent debt and 40 percent equity. Since inception the portfolio has made just under $2 billion in investments. Prudential does direct investing for two-thirds of its portfolio, while one-third is done through fund managers, Sathe said.
Earlier this year, Prudential partnered with LeapFrog Investments to launch a $350 million vehicle to invest in life insurance companies in Africa, as reported by Private Equity International.
Prudential has more than 100 different active investments in its portfolio today, of which there are approximately 35 funds. A typical check size for Impact Investments is about $10 million for direct investing and $5-20 million for fund commitments. While there is pronounced effort to deepen those existing relationships with GPs, Sathe said Prudential will “modestly increase” that number of partnerships with fund managers.
As a limited partner, Prudential is rigorous about demanding a high level of impact measurement and evaluations, Sathe said. Prudential requires its GPs to undergo an assessment (administered by B-Lab) of themselves and their portfolio companies in a process involving over 200 questions, collecting private data and benchmarking it against Prudential’s investments and against the overall industry.
Another conversation it has with its GPs, in addition to measurement, revolves around best practices, and making sure Prudential is aligned with its partners.
“One of the nice things about the impact space is it tends to be better-aligned than other spaces,” Sathe said. Given the relatively new landscape of impact investing, the 10-year fund lives have extension options and longer exit periods than typical private equity funds. This allows them to avoid short-term frothiness that mainstream funds face, Sathe said.
Opportunities to invest in impact funds are becoming larger and richer, thanks to factors like predictable cash flows in affordable housing and a massive transformation in growing middle-class consumers in the emerging markets.
Since its founding, Prudential has been an active investor in and around its Newark headquarters and gradually expanded to work to other communities facing challenges similar to Newark, including New Orleans, Detroit and Oakland among others. Across the United States it focused investments on affordable housing, charter schools, community banks and social purpose businesses.
Then, about 10 years ago, Prudential expanded its Impact Investing mandate to include international work, primarily focused around financial inclusion. Today, about one-fifth of the firm’s impact strategy is done internationally, while the rest is domestic. Globally, it invests primarily in emerging markets, mostly in South and Southeast Asia and Africa, and some in Latin America.