LPs are struggling to find experienced impact managers or large-enough funds in the new world of impact investing, according to a research report from placement agent Campbell Lutyens. Many are turning to specialist fund managers in social and environmental themes and developing their own definitions and criteria for impact in private equity, the report found.
“We are focusing on thematics rather than investing with groups labelling themselves as ‘impact’,” said Josephine Toral, senior investment analyst at A$60 billion ($44.3 billion; €37.5 billion) superannuation fund Hesta.
Campbell Lutyens interviewed five LPs earlier this year about their impact strategies to create an impact investing guide in partnership with the Rockefeller Foundation.
Given the size of the superannuation fund, “we need to ensure that we deploy capital of meaningful scale,” said Toral. “We were reviewing impact opportunities that were small, fragmented and expensive. We made a strategic choice to focus on opportunities that we believed we could catalyse and scale over time to become a meaningful part of the portfolio.
“We have evolved our thinking to look for GPs globally who are specialists in a particular impact area. For example, we’ve been supporters of life sciences and biotech for a long time, and there are managers developing really exciting drug technologies and medical devices who are not ‘impact managers’, but rather specialists in their area.”
“A number of our healthcare managers develop vaccines and hospitals around the world but don’t report on impact, and we believe their target outcomes outweigh any reporting deficit”
During due diligence for its impact investments, Hesta asks how the GP incorporates impact into its initial investments, tracks impact over time, what metrics it looks for and frameworks it uses. But Toral does not say in the report whether Hesta sets GPs impact targets or requirements. Hesta investigates impact in its due diligence process.
A GP’s track record is also important for Glenmede, a $40 billion fund which receives 70 percent of its capital from an endowment, according to Jennifer Wong, an investment manager at Glenmede. “We typically don’t invest until Fund III, IV or V, with more established firms where there’s less team risk, but this profile doesn’t really exist in impact yet.”
So, Glenmede tries to “balance traditional managers that we think are impactful with more emerging impact managers”, added Wong. “A number of our healthcare managers develop vaccines and hospitals around the world but don’t report on impact, and we believe their target outcomes outweigh any reporting deficit. LPs need to consider whether they are willing to look at GPs who don’t self-identify as impact.”
Dutch pension manager PGGM, with €268 billion in managed assets, has its own criteria to identify impact funds and selects specialist managers in impact themes, said Maurice Klaver, a senior investment manager at PGGM. It makes “smaller, earlier stage investments than we were used to” – but getting approval for these from the investment committee, which “is used to doing larger tickets” can be challenging, said Klaver. The fund’s main client first identified healthcare, climate, food security and water scarcity as impact focus areas in 2014, but PGGM “didn’t find many private equity funds that fitted those themes”. PGGM allocated €500 million in 2019 to be invested over the next three to five years in smaller-ticket, earlier-stage private equity investments aligned with the SDGs, said Klaver.
“We went theme by theme. We started with food and tried to map all the GPs in that space – our first GP came out of that screening,” said Klaver. PGGM’s condition for an impact fund is if “at least 50 percent of the historic investments [by number and invested amount] fall into these themes”.
PGGM has an impact due diligence questionnaire which scores a GP for its impact definition, process and monitoring policies. “We also want a commitment from the GP that they’re willing to report on the relevant KPIs,” said Klaver.
“It was about being able to get exposure to small opportunities despite being a big investor – we still haven’t really found a good solution for this”
Hanna Ideström and Jenny Askfelt Ruud
Swedish public pension fund AP Fonden 4, with Skr449 billion ($51.8 billion; €44 billion) in AUM, seeks to invest with first-time teams and first-time funds in the renewable energy, resource efficiency and energy transition sectors, said Hanna Ideström, senior portfolio manager and Jenny Askfelt Ruud, alternative investments head. “It was about being able to get exposure to small opportunities despite being a big investor – we still haven’t really found a good solution for this.
“We started by looking at trends and sectors. We started from the thematic end [and] used specialist organisations within each segment,” as opposed to generalist impact managers, said Ideström and Ruud.
AP4 takes a total-portfolio approach to impact rather than having a separate impact allocation. “We don’t require separate reporting on impact. We generally follow where the rest of the industry is in terms of frameworks and best practice.” But the pension fund does want to see GPs that use the impact label to measure their impact with KPIs and ideally link their carry to their impact performance, said Ideström and Ruud.
Asset manager Hamilton Lane, with $88 billion in AUM, looks for evidence of strong financial and impact credentials – but the firm tends to see GPs that only have one of these, said its direct investments managing director David Helgerson. The firm also wants GPs to proactively report on impact KPIs. “When we need to pull the metrics out of [managers], that’s not a great fit for us.”