Mid-year review: KKR looks for ‘apolitical tailwinds’ for impact, says Mehlman

KKR was one of the earliest major private equity firms to introduce an impact strategy, launching KKR Global Impact I 2018. The firm is now raising the second fund in this series, pursuing a generalist strategy including social and environmental themes, according to public filings.

How has the scaling and mainstreaming of impact investing affected your business – is there more opportunity or more competition now?

KKR launched its Global Impact Strategy in 2018. We have since made 18 investments, built our dedicated team to 22 people and enhanced our focus to improve how we measure and optimize impact. Since we launched, one of the biggest changes we’ve seen is the impact of post-COVID and geopolitical events creating macro tailwinds on some of our investment themes. For example, the energy transition is now a global imperative, driven in part by geopolitical events like Russia’s attack on Ukraine, along with environmental and economic considerations – and there is unprecedented policy support and corporate commitment driving it. We have made several investments in this space and expect to make more. Similarly, our focus on workforce development and lifelong learning is accelerated by concerns about too few skilled workers available for the jobs in demand.

While there are more tailwinds matching the themes we are investing behind, our value proposition has remained the same – our approach is to invest in companies with proven business models that achieve impact through their core products and services, and our portfolio has continued to perform well.

Which impact themes and strategies do you consider most exciting and untapped?

Our investment strategy focuses on four core themes – climate action, sustainable living, lifelong learning and inclusive growth. Supported by this thematic approach, we evaluate a broad range of markets and industries to identify leading businesses with solutions to global challenges. For example, our portfolio company CoolIT, a provider of scalable liquid cooling solutions for computing environments like data centers, not only provides a solution to increased computing demand at a lower cost, but also reduces energy demand, carbon emissions and water consumption compared to alternative cooling methods. CMC, which optimizes packaging size to match the objects being shipped, reduces overall packaging waste, energy use/emissions in shipping, and costs for e-commerce companies as online ordering and shipping needs increase.

Do you use benchmarks to evaluate your impact? Is it a useful exercise?

A core part of our approach is leveraging leading third-party measurement frameworks to bring greater credibility and consistency to the impact investing market. We measure each of our portfolio company’s contribution toward one or more of the UN Sustainable Development Goals using indicators defined by third-party reporting frameworks, track performance against impact projections and collaborate with external experts like Business for Social Responsibility. We are also a founding signatory of the Operating Principles for Impact Management, and we use these principles to inform our approach, learn from others and improve our effectiveness.

Has the political ESG backlash in some US states affected your fund?

Debates around sustainability agendas are increasingly at the forefront in the US and around the world. As fiduciaries, we are obligated to our partners and the beneficiaries they represent to maximize financial returns. As noted earlier, there are sectors today like the energy transition and workforce development where there are significant opportunities to invest in high-performing businesses and also scale impact. I mentioned CoolIT and CMC earlier – those are great examples of companies with proven business models that offer financial benefits by improving their customers’ bottom lines, while also helping to scale impact. Ultimately, we believe focusing on the commercial success of impactful companies enables us to find resilient investments with intrinsic and apolitical tailwinds.