Rather than trying to pick the “winning” strategy within the impact space, investors should focus their energy on manager selection. That was the takeaway from a conversation with Ed Powers, managing director in the primary investment team at HarbourVest. He was talking to New Private Markets in the run up to our Impact Investor Summit: North America in New York at the end of October, where Powers will be taking part in a panel on the evolution of GPs’ impact strategies.
“Manager selection is really, really important,” Powers told NPM. “Selecting the best managers: that’s where we start. It’s actually kind of where we finish, too. It’s the most important feature. So I wouldn’t say one area of decarbonisation is, for example, better than another, because that may change over time; it’s about the best managers.”
HarbourVest is a longstanding private markets firm with around $110 billion under management. According to its most recent ESG report, the firm runs two sustainability-focused strategies: a co-investment programme to “create a concentrated portfolio” of companies aligned with various impact themes; and an infrastructure strategy that “includes investment themes related to energy transition and social community infrastructure”. Powers declined to comment on any future plans.
Fundraising has been difficult for private capital managers in 2023, and while strategies with a sustainability angle are still high on LPs’ wish lists, they have not been immune from the slowdown.
Powers urged investors to look past short-term constraints to the long-term mega-trend. “If you believe a sector is going to be around for a while, the most important thing is whether there are deals and general partners who are basically committing their careers to the space. It can be a difficult fundraising environment at times – we respect that, and we live with it – but in the medium and long term, if you see GPs with a lot of skills coming to market, that’s a good sign it is going to work. That’s actually more important than anything else in this business.”
Don’t change the formula
While there will always be some innovation around fund structures – such as carried interest linked to impact – “the core structures are going to be here to stay”, said Powers.
“There could be some innovation on structure, but over a long period in the private equity industry the structure has been pretty stable. I would think that impact structures will be similar – if not exactly the same as – the other funds LPs are backing. They are competing in the same pipeline. More important for investors is: Does the strategy make sense? Is this the right team to do it? And is there enough performance here for me to invest?”
The relatively recent growth of the impact investing market means a high percentage of managers are younger, emerging firms. Investors should lean on their fundamental due diligence skills, said Powers: “The investors and GPs who are going to succeed in the long term are going to look at the same thing they have always done when they invest: Who are the people? What is their process for creating value? What’s their performance?”
WLTM: GPs who are crushing it
Powers has two priorities when he attends Impact Investor Summit: North America at the end of the month.
First is swapping notes with other investors on impact reporting. “We always want to know what is ‘state of the art’ there, because that is specific to this part of the asset class. We’ve seen it, we think about it, we work on it… what are the ways you solve for it?”
Second is unearthing manager talent: “We always want to hear about managers who are succeeding. Who’s on Fund III? Where is the repeat performance? We do see this, but we are humble enough not to think we see every opportunity in the market.”
Impact Investor Summit: North America takes place at the Westin New York at Times Square, New York, on 31 October and 1 November 2023. More information is available here.