Impact investing, where funds seek to generate positive social or environmental impact alongside financial returns, has matured in recent years but the pandemic seems to have become the final push it needed to move into the mainstream.

Buyout firms in Europe are betting big on impact, with 17 vehicles currently looking to raise $21bn, the largest sum targeted for the asset class in the past five years, according to data provider Preqin. The funds’ goal is also four times the $5bn GPs in the region were aiming to collect in the first nine months of last year.

Some major global private equity firms have been backing the trend, with Apollo launching a dedicated division, Apollo Impact, last month. Many firms, such as the UK’s mid-market Palatine, which hired a new impact fund manager just last week, are also rushing to hire new executives to oversee their new initiatives in the segment.

Elaine Chim, head of private equity at fund administers Apex Global, said she has noticed in the past six months a growing appetite for impact investing among clients.

“This is not surprising since what this global crisis has highlighted is how critical it is to prioritise society and environmental issues. Part of the focus comes from investor pressure who are the ones pushing for certain ESG targets to be achieved as a condition for coming into a fund,” Chim said.

The sector has gone from a niche discipline just a few years ago to a $715bn market globally, according to estimates from advocacy group Global Impact Investing Network (GIIN). The non-profit organisation has seen its membership grow from 20 in 2009 to 30,000 in 2019, including private equity firms and limited partners.

The growth trend is set to continue to accelerate in the post-Covid world, market insiders told Private Equity News.

The pandemic is now highlighting a number of social challenges – from poor healthcare and education to access to water, electricity and housing – that can be addressed by private capital, Amit Bouri, GIIN co-founder, said.

Investment firms, which have traditionally focused exclusively on financial returns are realising they can generate both: performance and positive impact. “We can demonstrate to the world that money can do so much more than just make more money,” Bouri added.

Dress rehearsal for a disaster

For Jamie Broderick, board director at the UK-based Impact Investing Institute, Covid-19 is “a dress rehearsal for a big disaster, which is climate change”, he said during a virtual BVCA Summit last week.

With the planet under pressure, impact investing may be at a tipping point.

Michele Giddens, partner and co-founder of Bridges Ventures, a specialist fund manager dedicated to sustainable and impact investment, explained during the virtual conference the asset class is moving from the “early majority” to “late majority”, where large firms are coming onboard with impact investing propositions.

“It is an incredibly pivotal time, where there’s an enormous amount of pressure, but there’s also a huge amount of opportunity, particularly in private equity to really push further that agenda,” she argued.

Broderick, on the other hand, believes the sector is not there yet. But, according to him, “there is no need” to be close to a tipping point.
“If 10% of private equity is investing in impact [by 2030] that would be half a trillion dollars. And to paraphrase the late US senator Everett Dirksen: a trillion here, a trillion there, pretty soon you are talking real money,” he pointed out.

In June, a GIIN survey found most impact investors expect to maintain or boost their commitment to impact investments this year in response to the coronavirus pandemic, and most plan to stick to strategies focused on addressing the United Nation’s sustainable development goals.
So, why is investing in impact funds proving to be such a challenge?

Florian Kemmerich, managing partner of Geneva-based Bamboo Capital Partners, an impact investing platform, believes there is still a “psychological barrier” linked to the idea that it does not deliver attractive returns.

Founded in 2007, Bamboo focuses primarily on financial services, energy, agriculture and healthcare investments in emerging markets around the world. Since its inception, Bamboo has raised more than $400m in funds and invested in more than 30 developing countries.

Smaller ticket

“Because you can do a smaller ticket, you have more investments and, therefore, it is less risky; we believe that there is real value to it,” Kemmerich told PEN in a phone interview.

“Of course, we will not promise a 25% or 30% IRR because it’s not reasonable. However, if we go for impact investing early stage, you have attractive recurrence because your risk-reward is adjusted.”

Kemmerich added many firms still perceive it as an asset class when it should be an “asset style”. But this is clearly changing.

“People are more concerned about making a difference and requiring more transparency. That also gives a push from the demand side towards sustainability, ESG and impact investing,” he said.

Source: Private Equity News


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