Finding your speciality
The impact investing market has ballooned in the past few years. According to the Global Impact Investing Network’s October 2022 Sizing the Impact Investing Market report, the impact investing market currently exceeds $1.16 trillion in assets under management. In April 2019, GIIN estimated the market size at $502 billion and by 2020 that estimate had grown to $715 billion.
Of course, with growth comes competition, both for LP capital and deal targets. Impact funds are looking for ways to stand out, and the shift towards specialisation that has borne out in the buyouts space now looks to be materialising within the impact investing market.
“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.”
Specialisation can come in various forms, from deep expertise in specific geographical markets or sectors, to the differentiated resources or knowhow that a GP can offer portfolio companies. “We think specialists enjoy advantages as it relates to sourcing and post-acquisition value-add capabilities,” John Beil, managing director and head of private equity and real estate at Partners Capital, tells Private Equity International. “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.”
Sticking with the theme
A number of impact investors are also focusing their efforts on particular impact themes. For example, impact manager BlueOrchard – which works to tackle climate change and global inequality through its impact investments – launched its inaugural financial inclusion private equity fund in May. The same month, BlackRock announced it had raised $800 million towards a $1 billion target for its Impact Opportunities Fund, which is dedicated to investing in businesses and projects owned, led by, or serving people of colour, with a focus on Black, Latinx and Native American communities in the US. The fund spans multiple alternative asset classes, including private equity, private credit, infrastructure and real estate, and invests in themes like housing, financial inclusion, education, healthcare, inclusive transition and digital connectivity.
Funds with a social impact agenda, such as increasing access to healthcare, education or financial services, or investing in businesses run by or for underrepresented and underserved groups, are gaining momentum. The pandemic, alongside recent economic and geopolitical uncertainty, has exposed and magnified inequalities around the world. Similarly, there is growing recognition that climate change – and measures to combat it – can further heighten global inequalities. This means investing in solutions to aid communities most vulnerable to extreme weather events, for example, as well as ensuring the energy transition is as equitable as possible.
As such, even where investors are targeting particular sectors or themes, or aligning their strategy with certain UN Sustainable Development Goals, there is an appreciation that many of the challenges impact investors are addressing are interlinked. Gender equality – SDG 5 – is one such example. Jennifer Buckley, founder and managing director at Sweef Capital, which invests in “the potential of women and the future of Southeast Asia”, per the firm’s website, argues that gender equality cuts across all the SDGs. “We won’t achieve the SDGs without women’s efforts to get there,” she says.
Yet climate continues to be the most prominent impact theme. Private markets investors have channelled significant amounts of capital towards climate-focused funds over the last year. In April, the TPG Rise Climate Fund closed on $7.3 billion, becoming the largest private fund of its kind to hold a final close at the time. It was soon overtaken by the Brookfield Global Transition Fund, which closed on $15 billion in June.
Climate-orientated investment activity is expected to increase further. “This is the investment opportunity of a generation,” says EQT’s head of sustainability for private capital, Sophie Walker. “We are already witnessing a pretty significant effort to transform to a low-carbon economy and that effort is only going to gather pace.
“There will be a lot of activity emerging now as a result of legislative change in both the US and the EU, which is going to unlock big opportunities by giving the market the certainty to be able to hunker down and really focus on some of the harder to reach climate and nature investment opportunities.”
Doubling down on data
As investors’ appetite for impact grows, so does their demand for data. Speaking at PEI Media’s Investor Relations, Marketing and Communications Forum: Europe in October, Selina Nalane, a client director at Old Mutual Alternative Investments, said: “LPs are asking more and more questions around how data is sliced and diced.”
A robust and transparent approach to data could also help the industry mitigate concerns around impact-washing, which is one of the impact-related worries “keeping investors up at night”, according to Katie Manescu, associate, client solutions at impact GP Blue Earth Capital.
Indeed, LPs are playing ever closer attention to managers’ impact measurement and reporting credentials, and these are increasingly playing into decisions as to where they commit their capital. As Philipp Mueller, chief executive of BlueOrchard, notes: “The measurement and transparency of outcomes remains a key differentiator in impact management.”