Source: New Private Markets

Two mega firms and an impact-focused VC debated the relative merits of impact strategies in a frank – and at times tense – discussion at the Women in Private Markets Summit in London this week.

At the heart of the debate were two bones of contention. One was whether a firm can credibly manage an “impact” fund while managing other less impactful strategies. The other was where the line is drawn between impact and ESG.

Apollo Global Management is a private markets giant with $481 billion in assets. In December 2019 it registered its first impact vehicle and is reportedly seeking $1.5 billion in an ongoing fundraise.

Joanna Reiss, co-lead of Apollo’s impact platform, gave an impassioned defence of her firm’s strategy of targeting later-stage mature businesses when asked whether it was “more ESG” than impact.

“What we set out to do when building Apollo’s impact Platform is take 31 years of success in private equity, half a trillion in assets, 2,000 employees worldwide and frankly an unparalleled reach and ability to find interesting assets and make better decisions and get better outcomes, and apply it to impact,” she said.

“Frankly we thought we had the ability to do it successfully, given all the prior creds, and that it was an incredibly interesting business opportunity, given the tailwinds behind these kinds of businesses,” Reiss continued. “And it was something that, frankly, was the right thing to do.

“Much like if you’re an EQT – another one of the largest players in the world – why shouldn’t you apply that incredible intellectual capital behind trying to solve our social and environmental issues,” said Reiss. “We are doing it in a way that is consistent with the way we have invested, not trying to reinvent the wheel of what has made Apollo, Apollo.

“We are trying to find those assets, own them with a high degree of intentionality, measure the impact,” said Reiss, adding that the firm hopes to settle the question of whether you can have profit and purpose.

Cameron McLain, co-founder and managing partner of impact GP Giant Ventures, responded that, as more and more companies are founder-led and investment capital becomes more of a commodity, “I think brand and authenticity for the firms investing is hugely important… I think entrepreneurs and CEOs of these companies will look at the firms they are taking capital from in the entirety and see what they’re doing.

“I think that’s an important component firms need to consider if they are building in impact,” continued McLain, in an apparent reference to multi-strategy firms who decide to raise a dedicated impact fund.

Apollo’s Reiss responded: “My money’s pretty green.”

Returns an ‘open question’

Whether you can have both profit and purpose is “still a very open question in the minds of many allocators,” Reiss had said earlier in the conversation. As a “relatively late entrant” to the impact space, she hoped that Apollo would be able to settle the question. The ability to deliver market-rate returns is “absolutely critical to the success of the impact industry”, said Reiss, who joined Apollo last year from private investment firm Cornell Capital.

EQT is currently raising its first impact product, which the firm says it doesn’t see as a “pure impact” fund; EQT Future is a long-duration vehicle that the firm describes as “impact-driven” and has a target size of €4 billion. Joining the panel remotely from Copenhagen was Rikke Nielsen, an 11-year EQT veteran who co-founded the impact platform.

“We fundamentally agree that the question is not if you can have both profit and impact,” said Nielsen. “The statement, on the contrary, is that you cannot have a future-proof business that has only one of them.”

Nielsen likened the importance of impact to the trend towards digitisation in private markets investment. “Any fund manager that does not take impact seriously is headed for a massive headache,” she said, “it is no different to what we saw with digitalisation.”

“I am convinced you cannot deliver the winner in any given industry if that company is not also the company with the most ambitious and well thought through impact strategy,” said Nielsen. Far from being concessionary, an impact strategy “mutually reinforces” good returns and contributes to companies’ “licence to operate”.

Reiss countered: “I push back on the concept that everything will ultimately be impact.” She gave the example of the cosmetics industry; a make-up manufacturer can be well run, operate more cleanly and pay its employees well, but you cannot argue that it is an impact investment.

Rikke countered that she wasn’t saying “that everything will be impact”.

“I am saying,” she continued, “that it is unrealistic to think that the winner in any given industry is not going to be the company who is most digitised and among the most impact-oriented.”

EQT’s Future fund has a portion of its carried interest linked to sustainability goals for its portfolio companies. Specifically the three targets relate to: reduced greenhouse gas emissions using the Science Based Targets; improved employee well-being, as measured using eNPS (net promoter score); and increased gender diversity “where progress will be tracked towards a 50 percent split within the top 20 percent of earners in each company”, the firm previously said.

There then followed some confusion as to whether such targets – GHG emissions, diversity, employee wellbeing – were being touted as examples of impact. “ESG again: I keep seeing ESG,” said Apollo’s Reiss, who explained that if a target company is providing a product that benefits an underserved population, she was “Okay if the CEO is a white, hetero, 60-year-old protestant”.

“We have to have good ESG across all our portfolio companies,” noted Reiss. “We do both, but we do them in separate pools of capital.”

EQT’s Nielsen agreed: “There is how you run your business, and there is impact.”