Two significant private markets firms have joined the ranks of firms linking their carried interest to impact performance.
Just Climate, the climate-led investing offshoot from Generation Investment Management, is linking all of the carried interest in its debut fund to a singular impact goal, according to senior partner Clara Barby.
“We’re a private market manager, so we have a performance fee as a profit share, as you would expect,” she told delegates at the Impact Investor Global Summit last week, “and ours is 100 percent adjustable by impact, and we defined that relative – not to peer performance in a benchmark – but relative to an absolute threshold.”
The threshold is a level of greenhouse gas avoidance and/or removal “that’s very, very ambitious for the portfolio,” said Barby, “The further away we get from delivering that absolute level of impact, the more we suffer financially, even if we’re making a lot of money for our clients.”
Just Climate is nearing the final close for its debut fund, as New Private Markets reported earlier this year.
L Catterton, the preeminent consumer-focused private equity firm which launched an impact strategy last year, has also introduced an impact-linked element to its carried interest share, delegates were told.
The firm is raising its debut impact fund, which New Private Markets understands has a target of $400 million. The firm declined to comment on the fundraising target but Tehmina Haider, a partner at the firm focused on the impact strategy, said on stage at the event that 10 percent of the GP’s carry will be linked to impact.
Impact-linked carry is still emerging as concept and the approach varies from fund to fund. Typically a portion of the carried interest (examples range anywhere from 10-100 percent) will only go the general partner if certain impact or ESG targets are met. How those targets are set, and what happens to any “unearned” carry, is an ongoing discussion point.
Haider described setting up the structure in a field where there is little in terms of precedent to follow: “I don’t know that that [10 percent] is the magic number for a first time fund, and we may end up hopefully being able to lean into it more over time, but we felt like that was significant enough that it’s actually quite important to us as GP that we achieve that.”
L Catterton will chose one “keystone” metric, specific to the impact objective of each portfolio company. This will help “drive the most accountability both to ourselves as investors and to the management team”, said Haider. The firm did contemplate a singular metric applied across all companies in the portfolio, but felt this risked being “a bit to the side” of the individual businesses in question.
Funds with sustainability- or impact-linked carry are still very much in the minority; 7 percent of impact investors use this type of mechanism, according to research by verification firm BlueMark. However, the addition of two more influential names in private markets to this group will prompt more investors and managers to discuss the concept. Arguably the highest profile firm to link carried interest to sustainability objectives is EQT, which has done so for its Future fund.
“We’ve started the conversation with a number of GP partners around impact-linked performance incentives,” said Diane Mak, director of impact measurement and management at Allianz Global Investors, on stage at the event. “We are eager to see how we learn from this discussion, acknowledging that it’s an emerging practice and – especially for the more generalised funds where you need a basket of indicators and you weight it – the structure becomes a little bit convoluted.”