LPs in impact are no longer accepting a ‘trade off’ with financial returns

Investors expect impact funds to perform as well as or better than their generalist private markets funds, according to a survey by placement and advisory firm Rede Partners.

The concept of impact investing has historically been associated with concessionary financial returns; investors who wanted to create a positive external impact with their capital would have to accept below-market-rate returns. This percepection has changed as sustainability moved from niche concern to investment trend.

The survey by Rede supports the idea that perceptions have shifted. Of 160 limited partners surveyed over the course of 2022, more than 90 percent said they require impact funds to perform in-line or better than their generalist private equity benchmark. Within that group, 22 percent expect impact to outperform generalist funds.

This positivity is reflected in commitment plans: among LPs that have made previous commitments to impact funds, 85 percent plan to allocate the same or more capital to impact strategies than they had in the previous year.

Some investors, says Rede, will allocate capital to impact funds as a way of mitigating a slowdown or volatility in wider capital markets. “Anecdotally, we are now seeing some LPs including impact within their definition of a ‘safe-haven’,” the report’s authors write. “These LPs typically view impact as offering advantages that are both ‘offensive’ (ie, sustainability as a source of competitive advantage) and ‘defensive’ (ie, investing in ‘future-proofed’ businesses in the context of regulation or consumer demand).”

The report also notes that 50 percent of the LPs surveyed are allocating to impact strategies from their generalist pools, rather than from a dedicated impact bucket (24 percent), although there is a significant variety of approaches. Writes Rede: “In search of incremental impact, a number of impact pockets surveyed have increasingly focused on emerging managers and emerging themes. Accordingly, these pools of capital tend to have a more flexible approach and can support strategies with less developed track records or newer-formed teams whilst underwriting to achieve a market-rate risk-adjusted return over time.”

Climate in focus

Climate and the environment have established themselves as the dominant themes in impact investing; the largest impact funds raised to date – Brookfield Asset Management’s Global Transition Fund and TPG Capital’s Rise Climate Fund – are in this space, as well as a host of smaller vehicles. It was the dominant focus of LPs surveyed by Rede: 51 percent identified climate change mitigation as a core focus for their programme and 32- percent said it was an “emerging focus”.