Impact-linked incentives should be ‘key question’ for LPs in due diligence, says pioneer

Ananda Impact Ventures has a significant claim to fame: it may well have been the first private fund firm to link its carried interest to its impact performance.

“When we set out, the idea was to show an alternative to the traditional form of capitalism or venture capital,” says Johannes Weber, the founder of the firm.

Weber is soft-spoken and describes himself as a “hustler-turned-entrepreneur-turned-investor” who never set out to become a venture capitalist. Having spent time running sustainability-focused public markets strategies, he realised that he “was in the wrong asset class”: “I realised it is really difficult to have a big impact on society through secondary trading of publicly listed stocks.”

In 2009 Weber sold his stake in the asset management business and raised a €7 million “pilot” fund to invest in “social ventures”. Today, Ananda is investing its fourth fund, which closed on €108 million in May 2022, making early-stage investments in European companies with positive impact baked into their business models.

The strategy is generalist, rather than aligning with a single impact theme, and its portfolio ranges from companies that target individual lives – an early investment was Auticon, an IT consultancy staffed by autistic consultants – to planetary health – this year it invested in AIRMO, which will use satellite technology to precisely monitor greenhouse gas emissions in real time.

This year Ananda passed a milestone, both for the firm and for the wider impact investment universe: it has fully realised Social Venture Fund I, returning two times invested capital to LPs, says Weber.

Much has been discussed about the financial viability of impact investing, but to date the proof points have been based largely on book values, says Weber. “To have a fund that says ‘Look, cash over cash, this has worked’ is really important, because the articles we have read in the last 15 years have all asked whether you can earn money with impact investing,” he notes. “I think we started to prove it, and we won’t be the only ones; I think we are just happy to be the first ones.”

“Can you compare reducing carbon to helping a person with autism? Is that not playing God?”

Johannes Weber

It was back in 2014 Weber’s team sat down with the European Investment Fund (EIF) to discuss how the firm could make sure there were financial consequences to the success or failure of its impact outcomes. “There was some academic research around it, but not a lot,” says Weber. “How do we make it consequential? How can we measure impact across multiple themes? Can you compare reducing carbon to helping a person with autism? Is that not playing God?”

At the same time, they didn’t want to overwhelm their young portfolio companies with “another layer of reporting”, he adds.

What the firm came up with in concert with the EIF was a mechanism that is starting to look familiar to those in the impact investing universe. At the point of investment, the firm agrees on a mixture of quantitative and qualitative key performance indicators designed around that particular company’s impact mission. The KPIs are established and agreed upon with an investor advisory committee, which signs off on the metrics and targets.

Each portfolio company ends up with an impact score – expressed as a percentage of completion against its target – and an average score is calculated for the whole fund. A score of below 60 percent would classify as “mission drift” and would mean no carried interest for Ananda “even if we 10x-ed our fund,” explains Weber.

An impact score of between 60 and 80 percent puts the carry forfeit on a sliding scale, while a score of 80 or more means the GP gets its full carry entitlement. In the event of carry being forfeited, it goes to the limited partners.

Since this mechanism was introduced other impact-oriented firms have followed suit. The EIF has continued to use its influence as a backer of emerging impact funds to instate similar mechanisms. Storied private markets firms like L Catterton and EQT have followed suit – although it is worth noting that the terms, such as how much of the carry pot is at stake, vary from one arrangement to the next.

“I think for institutional investors it should be one of the key questions when they diligence an impact fund: is the management somehow incentivized by the impact they want to achieve? If they call themselves impact funds, why would they not do that?” says Weber.