Specialists and established impact brands fare better amid ‘dimmed’ fundraising environment

Some managers have managed to raise impact capital despite a slower market in H1 2023.

Amid a slower fundraising climate, allocators of impact capital are favouring more established managers, according to senior executives at firms with private markets impact strategies.

After two years in which more than $72 billion was raised for impact strategies, H1 2023 was comparatively barren: just $6.3 billion was raised across 30 funds, according to NPM data. This equated to an average vehicle size of $213 million, compared with $520 million for the prior two years.

“Impact strategies have not been immune from the broader turbulence in fundraising so far in 2023,” said JPMorgan Private Bank’s impact head Carlotta Saporito. “The pace is generally slower, with funds staying open for longer.”

Managers from across the impact landscape have seen the effects of a slower fundraising market. Lightrock, an impact focused GP, has seen a “less buoyant” market for venture and growth capital funds, according to partner Umur Hursever.

For Energy Impact Partners, a decarbonisation-focused manager, the fundraising landscape has “undoubtedly been dimmed” due to managers and allocators “being more conservative in where they are placing their bets across the board,” according to founder Hans Kobler.

“Prolonging fundraising periods has become normal,” explains Julian Pearson, co-founder of placement agent FirstPoint Equity. “We have seen GPs die on the vine, something we haven’t really seen in recent years. That said, climate and sustainability are at the head of the queue, and have fared better than most areas.”

Slow fundraising does not mean no fundraising. EQT and TPG have between them raised more than $5 billion towards their respective impact vehicles currently in market. Blackstone raised what it described as the “largest energy transition private credit fund ever raised” when it closed its transition-focused credit fund on its $7.1 billion hard-cap in August.

Track record tells

What, then, allowed certain managers to buck the fundraising trend? “Managers with strong track records are still able to raise funds,” said JPMorgan’s Saporito.

Lightrock’s Hursever pointed to the “advantage seasoned managers possess thanks to pre-existing relationships with time-pressed institutions”.

There are other factors to consider, too. “Track record is important, but what is most important for managers is having an actionable pipeline,” explains Pearson. “Take energy transition for example, it’s a very broad term. LPs in this space want to drill down to the specifics of what that will look like for a particular manager’s portfolio.”

Funds that have been able to differentiate themselves through specialisation fared better, according to some market participants. “We remain encouraged by the interest shown by investors, particularly towards the value they derive from our specialist approach”, said Shane Swords, managing director at NextEnergy Capital, which held two closes on funds in H1.

Swords was more bullish in his assessment of the market than most, reporting “good traction with investors” despite what he described as “the numerous challenges currently facing the fundraising environment”.

“LPs increasingly want specialised managers for their impact strategies,” FirstPoint’s Pearson said. “The appreciation of specialised managers has become much more widespread”.

Brighter outlook

Looking forward, there appears to be comparatively more confidence in the market for the second half of the year, with a number of fund managers preparing to launch new products. EIP, for example, has launched its third flagship fund, which targets climate-tech solutions across energy, industrial, transport and built environment sectors. “From our Deep Decarbonisation Frontier Fund to our European Flagship Fund, our Credit platform to our Elevate Future Fund, interest remained strong across all asset classes and regions from both financial and strategic investors,” Kobler said.

Beyond this, GPs are taking heart from a perceived increase in the number of LPs looking to involve themselves in the impact world. Twenty-seven percent of limited partners plan to increase their allocations to “impact/sustainability”, according to a recent survey by placement and advisory firm Rede Partners. This was more than both tech and industrials (both 17 percent) and second only to healthcare (37 percent).

“We are seeing global LPs of different types and sizes establish dedicated impact allocations, indicating that investor awareness and interest in these strategies is scaling, and that is exciting,” said Apollo impact co-head Joanna Reiss.

Michael Wehrle of BlueOrchard, the impact investing vehicle of Schroders Capital, agreed: “We see more attention by investors for impact investing. Many investors are concretely considering allocations to impact investments.”

Ultimately, a sluggish six months has done little to shake the belief that impact is continuing to scale-up. In the words of Todd Cook, a partner in Bain Capital‘s Double Impact strategy, the impact industry is “on the verge of witnessing a wave of exits that prove the direct correlation between impact and growth”. The result of this is likely to be ever more managers crowding into the sector, irrespective of the wider economic climate.

“We will see more generalists GPs come into the impact space as managers see that there are returns to be made,” said Pearson. “Where there used to be concessionary returns, there is now a premium placed on sustainable assets.”