Standing out through specialisation

The impact investment market has come a long way during the last decade. According to the Global Impact Investing Network, the impact market was worth around $715 billion in 2020, with annual investment growing 12-fold over the previous 10 years. Today, global impact AUM exceeds $1 trillion. Momentum is expected to continue building in the coming years, with a Barclays Private Bank survey anticipating impact’s share of investment portfolios to reach 54 percent by 2027, up from 41 percent in 2021. 

Michele Giddens, co-CEO and co-founder of impact investor Bridges Fund Management, says growth in the impact space has “snowballed” during the last three to five years, with the 2015 Paris Agreement and the release of the UN’s Sustainable Development Goals driving climate change, health and social inclusion to the top of the investor agenda.

“If you look at the market today there has been a complete mindset shift,” says Giddens. “ESG is now an essential hygiene factor on all transactions, and the investor community has accepted that you can solve environmental and social challenges in tandem with achieving strong financial performance.”

As investor appetite and attitudes to impact have pivoted, and more capital has flowed into the asset class, the number of new managers and funds coming forward with impact strategies has proliferated. 

Indeed, a Private Equity Wire poll conducted in February this year of 60 private equity professionals found that two thirds already had an impact vehicle or planned to launch one in the next 12 months. Established private markets franchises, including the likes of Bain and KKR, as well as new impact managers and dedicated impact incumbents such as Summa Equity, have all come forward with new, larger impact funds.

That special something

As the market matures and becomes more sophisticated, providing LPs with more product and more manager choice, impact is following a similar trajectory to the buyout space, where sector and investment strategy specialisation has become standard.

“Our long-term data for venture and buyout managers clearly shows that sector specialists outperform generalists,” says Annachiara Marcandalli, partner and European head of sustainability and impact investing at Cambridge Associates. “The impact market is still developing, so we do not have sufficient data to reach that conclusion yet, but the expectation that specialisation will become key for impact managers is reasonable. 

“As the impact space expands, target companies and management teams will have a choice of sponsors to partner with. For a sponsor, having specialist expertise and the capability to offer entrepreneurs something else beyond capital will become essential for their ability to access the best companies.” 

Specialisation is already becoming more prominent across the impact landscape. Paris-based private markets manager Eurazeo, for example, is raising a sustainable maritime infrastructure fund, which will invest to support the maritime industry’s transition to carbon-neutral. 

Elsewhere, Bridges Fund Management’s Giddens notes that her firm started out focused solely on private equity, but has subsequently added real estate and long-term capital vehicles to its platform, providing investors with a suite of investment horizons and risk profiles within impact to choose from.

Jonathan Dean, head of impact investing at AXA IM Alts, which has more than $1.1 billion in impact assets under management, says his firm has focused its impact strategy on the climate and healthcare verticals: “Adopting a thematic approach to our impact strategy has been crucial for focusing on areas where we believe we can make the biggest impact at the same time as delivering market returns for our investors, which is key to our proposition. 

“The urgency of the climate crisis is at the heart of public and political debate, and front and centre for investors, so is an obvious area to target, while the covid pandemic has had a similar influence on how investors are looking at healthcare.” 

Dean says specialising along thematic lines has not only strengthened and sharpened his team’s deal origination and portfolio management skill sets, but also enabled the firm to develop sector-focused impact key performance indicators that have driven progression across the AXA IM Alts portfolio. 

John Beil, managing director and head of private equity and real estate at investment office Partners Capital, says his firm subscribes to the thesis that specialists are at an advantage to generalists, so has focused its impact efforts on energy transition and decarbonisation. “We think specialists enjoy advantages as it relates to sourcing and post-acquisition value-add capabilities,” says Beil. “On the latter, we find it easier to build conviction in a tried-and-tested, repeatable playbook that specialists have developed over a less formulaic approach offered by generalists.”

According to Marcandalli, managers have become more attuned to the specific impact needs of the LP base, which consists of a broad church of investors ranging from endowments, foundations and development banks (which target impact in clearly defined geographies and thematic areas), as well as to mainstream institutional investors that are focused on deepening the ESG and impact credentials of mainstream investment portfolios.

Measurement matters

As important as specialisation is becoming in the impact space, however, LPs still see the quality of impact processes and reporting as a fundamental differentiator in a fast-growing but still relatively nascent impact space.

“The measurement and transparency of outcomes remains a key differentiator in impact management,” says Philipp Mueller, chief executive of impact investment manager BlueOrchard, a member of the Schroders Group, which has a thematic approach, focusing on inclusion and climate. Mueller says data quality and reporting is a priority area for investors for both regulatory and customer credibility reasons.

A track record and established methodology for tracking impact is still highly prized by investors, says Giddens, who expresses the hope that as global standards for impact measurement and benchmarking gain traction, investment decisions will become less about “who has the best mousetrap” and more about performance.

Cambridge Associates’s Marcandalli adds that even as standardisation becomes established, LPs will have to combine quantitative with qualitative methods when assessing “something as complex as impact”.

“Investors do not want to end up in a place where they are over-engineering impact measurement and ticking countless boxes. The objective should be to back the best impact managers, not the best impact reporters,” Marcandalli says.