Funds with impact-linked carry are ‘unappealing’ to NYSCRF

New York State Common Retirement Fund, one of the largest and most influential investors in sustainable private markets, is not a fan of funds where the GPs’ carried interest is linked to impact performance.

“We are cautiously optimistic and bullish on sustainable investments – hence doubling up the commitment,” said Andrew Siwo, the pension systems’ director of sustainable investments and climate solutions, speaking at NEXUS 2024 last week. NYSCRF recently announced an increased allocation to its already sizeable sustainable investment programme from $20 billion to $40 billion.

“Despite that, though, we are also keen on avoiding unintended consequences. And one of them is this notion of impact-linked carry and tying performance to achieving non-financial factors,” said Siwo, one of our 50 influencers in sustainable private markets.

Some GPs – particularly those with a sustainability of impact focus – have tied a portion of their carried interest to the achievement of extra-financial goals, such as ESG or impact targets. This is designed to assure investors and target company management teams that the GP will not sacrifice its stated sustainability goals for the sake of additional financial return. It has been adopted by both emerging managers and established firms launching impact products, such as EQT and L Catterton. But it is not to everyone’s liking.

“What this does is it opens the door for malperformance to be attributed to the desire to achieve non-financial objectives when impact is not tied to the thesis. And so those are products that we find unappealing,” said Siwo. “We want to make sure we are isolating the GPs’ entire activities on that fiduciary duty.”

Siwo was speaking on a panel alongside the founders of two of the largest managers of impact capital in the world, according to New Private Markets‘ Impact 50: Trill Impact and Vision Ridge Partners.

As well as the technicalities of fund structures, the discussion covered the ability of impact investing as a strategy to deliver financial outperformance. Specifically, if a private equity fund limits its investable universe of companies to only the 20 percent that meet its impact criteria, how can that drive performance?

Siwo asked Trill founder Jan Ståhlberg whether he had empirical data to support the idea that Trill’s focus on impact-orientated business would drive alpha: specifically whether businesses with an impact-aligned mission would be more valuable in 10 years’ time.

“There is no data,” said Ståhlberg. “I lecture at the Stockholm School of Economics and the academics tell me, ‘Listen: what you’re trying to do, can’t be done and there’s no data to support it.’ [But] you have to look at the future; do we believe that a 23-year-old today will want something different than the 60-plus of today? I believe so. But I agree with you that it has to be a leap of faith.”

Trill raised €900 million for its debut private equity fund in 2021 and according to regulatory filings is currently raising Fund II and a separate venture capital fund.

Ståhlberg likened the leap into impact with the establishment of EQT, a firm which has raised €166 billion since inception in 1994 and of which Ståhlberg was part of the founding team. They were told that “an industrial approach to private equity was a contradiction in terms”.

Reuben Munger, founder and managing partner of Vision Ridge, described how the application of impact to an investment strategy is a valid way of generating alpha. Before founding the sustainable real assets investment firm in 2008, Munger had been at Baupost Group, “a global deep value hedge fund that could do anything anywhere, anytime in any security”, he said, “so the broadness of our mandate was was where we brought a lot of value”.

However, the market inefficiencies that allowed a hedge fund to hunt for cheap assets around the world have “gone away”, said Munger. “The need for specialisation to realise excess returns has gone up and up and up. You need to have an angle, you need to have an edge; and in many ways impact is an edge, because it brings passion, focus, culture.”