Investor demand for the fund of firms market is creating more specialised strategies, and its newest entrant is Zamo Capital.
The London-headquartered impact-focused firm announced last week that it would be picking up minority stakes in UK-focused impact managers that were looking to scale.
Set up by Jim Roth, co-founder of LeapFrog Investments, Zamo will make equity and debt investments of approximately £3 million ($3.8 million; €3.5 million) with around six managers.
UK-based Goodhart Partners also joined the GP stakes market this year. The firm is targeting $200 million for its debut GP stakes fund Volunteer Park Capital, which will back emerging markets-focused managers.
The GP stakes market is ramping up. According to data from Bain & Co, firms focused on the strategy expect to raise around $14 billion this year.
Asked about Zamo’s investment strategy, Roth said the merging of two sectors – impact investing and managers as an asset class – will interest LPs because it offers a more stable income stream as well as diversification. In a typical PE impact fund, GPs buy and sell businesses and the cashflows can be “very lumpy with limited liquidity”, Roth told Private Equity International.
“When you invest in GPs you can securitise different streams of the managers’ economics, such as management fee, GP commit and carry,” he said. “Second, you get all the diversification of a fund of funds because the GPs’ returns derive from different sectors, but you don’t get the double fees of a fund of fund.”
The firm expects its ownership stake per firm to be around 20 percent – a figure that could be higher in more mature firms, Roth added.
In a statement about the launch Zamo said that, along with the capital commitment, the firm aims to support its GPs in expanding their teams, adding new capabilities, funding the cost of raising more capital, opening offices, warehousing showcase deals, financing the buyout of founder partner interests and financing co-investments.
GPs backed by Zamo also benefit from Roth’s LP networks at LeapFrog, whose investor base includes insurers AXA and AIG, German development finance institution DEG, Nuveen and the European Investment Bank.
Zamo is seeded by Big Society Capital, an institution dedicated to social impact investment in the UK, for which it runs a separately managed account. Roth told PEI that the firm also plans to raise a commingled fund for its fund of firms strategy in the near term.
One Netherlands-based investor told PEI that the impact investing market will grow and that so will the AUM of these managers: “Being a minority owner in these funds gives you access to these managers as well as a fantastic investment with regard to returns.” The manager also warned that LPs need to ensure that their impact managers are in it “first and foremost for impact, and second, for good returns”.
The Global Impact Investing Network estimated the total AUM of the industry stood at $502 billion as of the end of 2018. In the UK, the impact investment market grew from less than £1 billion in 2012 to £3.5 billion in 2018, according to Big Society Capital.