Retail investors drawn to ‘super-hot’ climate space

There is a new stream of capital for impact funds to tap into: retail. As private markets experience a wave of “democratisation” – with more capital raised from individual and retail investors – impact and climate funds are taking a slice of the rapidly growing retail pie.

Carbon Equity, a platform giving retail investors access to climate-focused venture capital funds, has launched its second Climate Tech fund this month, having just closed its first pooled fund 60 percent above target.

“We’re the impact alternative to Moonfare,” said Jacqueline van den Ende, chief executive of Carbon Equity. For context, Moonfare has raised €2.4 billion from retail investors to date for private equity and venture capital funds.

Climate Tech II is a fund of funds structure with a minimum investment size of €100,000. It has a €75 million fundraising target and targeted returns of between 2x and 2.5x. Carbon Equity is planning to reduce its minimum ticket size to €50,000 later this year.

Market on the make

Wealth managers are also channelling client capital into impact – but their impact funds are typically marketed privately to existing clients and investment minimums are typically higher. Platforms such as Carbon Equity market their funds publicly and offer lower minimum ticket sizes, catering to a mass affluent investor base.

Carbon Equity is not the retail impact platform offering the lowest minimum ticket size. VC platform Further, for example, offers £2,000 ($2,400; €2,270) minimum ticket sizes to access a range of funds, such as impact fund Ascension. Octopus Investments’ Future Generations venture capital trust opened a new £30 million fundraise last month with a £3,000 minimum ticket size. CommerzReal’s Klimavest, which invests in greenfield renewable energy projects and reached €1 billion in capital raised in January, has a €10,000 minimum ticket.

Carbon Equity’s first fund of funds closed on €41 million in December 2022 after launching in February that year with a €25 million target. Carbon Equity has two strategies: as well as the fund of funds strategy, it offers a handful of ‘direct’ funds. The direct funds co-invest directly in companies alongside venture funds along specific climate themes or specific geographies.

Climate Tech II will commit to between seven and 10 climate-focused venture funds. Carbon Equity has already struck partnerships with six such funds: Lightrock, Astanor Ventures, Energy Impact Partners, Clean Energy Ventures, Azolla Ventures and ArcTern Ventures.

There is a one-off 1 percent setup fee and annual management fees of 30 to 90 basis points. Carbon Equity takes no carried interest for the fund: “We want to optimise for volume [of individual investors’ capital]. And we want to maximise their returns.”

Growing investor base

Van den Ende aims to grow Carbon Equity to €1 billion in assets under management within the next five years. Private equity and venture capital platforms for retail investors form “a very fast-growing market”, she said, as mass affluent populations and their wealth are growing. Statista forecasts the volume of private wealth will rise to $315 trillion by 2025, having stood at $250 trillion in 2020.

“It makes sense for a lot of mass affluent individuals to commit 10-15 percent to venture capital to diversify their assets,” said van den Ende. The fund of funds structure offers further diversification for commitments that, though relatively small in the VC market context, nevertheless often form a significant share of an investor’s assets.

Investors typically fall into two camps, said van den Ende: around half are “impact-forward” investors for whom impact is as important as returns. “Millennial investors – but not exclusively millennial investors – are [increasingly] looking to invest in line with their values.”

The other half are more ambivalent to the impact, but see climate technologies as a “super-hot”, high-growth sector in the middle of macroeconomic tailwinds and want a slice of the upside, said Van den Ende.

Trust issues

What makes individual investors trust Carbon Equity with their capital, given its limited track record – the platform was founded in 2020 and has not yet returned any investor capital – and the digital nature of the transactions.

“A lot of retail investors primarily rely on referrals from their network, whereas institutional investors [typically] rely on their usual due diligence,” said van den Ende. The senior team’s reputations in the investment industry are often the tipping point for investors to get comfortable with Carbon Equity’s model, said Van den Ende, and her team’s interactions with individual investors as “more emotional” than the LP-GP relationship with institutional investors.

Potential investors express interest in the fund through personal connections with Carbon Equity’s team or via the platform’s website. Investor relations team members have a 20 to 30 minute call with nearly every investor to build trust, discuss their appetite and confirming they understand the risk and illiquidity of an investment. “A minority [of commitments] are no-touch interactions, but our hope or expectation is that that will shift to more no-touch interactions” as the minimum is lowered to €50,000 and the brand gathers more trust and familiarity in the market, said Van den Ende.

Choosing funds

Carbon Equity’s fund selection process “starts with climate diligence”, said Van den Ende. “We look first and foremost at intentionality… how impact is embedded in the process – the team, the governance and the marketing and execution of the funds.” Carbon Equity has developed a scorecard of 40 to 50 questions covering topics such as impact targets for the fund – and whether these are fund-level or company-specific targets – and who in the team is responsible for measuring and monitoring impact. “Do they make their carry incentivised or dependent on achieving those impact targets?”

Finding funds that set and report on impact targets is not a challenge, said Van den Ende. “What is hard is that almost everyone uses a different impact measurement framework.”

Venture capital presents a particular challenge for impact reporting: “A lot of the impacts that venture funds base their decision-making on are forward-looking. They’re looking at the impact potential, and there’s a whole lot of assumptions that go into forecasting that impact potential. That’s not comparable across funds.” Van den Ende cited avoided emissions as a particularly unreliable form of impact reporting for climate technologies.

Reporting challenges, the authenticity of impact-linked carry… Van den Ende is echoing the comments of many impact investors. Platforms such as Carbon Equity may soon become blended into the typical roster of impact investors.