The challenge of meeting disclosure requirements in impact secondaries

Impact secondaries are a nascent and growing subsector of the wider secondaries market, with well-known managers such as Summa Equity, manager of the largest impact fund dedicated to Europe, making headlines this year for its continuation fund process.

Speaking at New Private Markets‘ Impact Investor Global Summit London 2023 on Wednesday, impact secondaries specialists agreed that disclosure requirements can be one of the biggest challenges to dealmaking and the further growth of this market.

“There are way more opportunities [in] the GP-led, continuation vehicle situation where you can really present an asset that you know and work backwards from that and develop your SFDR strategy on that basis,” said Daniel D’Ambrosio, a partner at Kirkland & Ellis, who is a member of the firm’s ESG and impact practice group, referring to the 2021 Sustainable Finance Disclosure Regulation, which imposes mandatory ESG disclosure obligations for asset managers and other financial markets participants.

Some sponsors “in the early days of SFDR [used] that mechanism to test an Article 8 strategy and then apply that to the next main fund. I think that’s a practice that can be adopted here as well with Article 9”, D’Ambrosio said.

Under SFDR, Article 8 and 9 funds promote environmental or social characteristics or sustainable investing, among others.

Impact secondaries remains a small proportion of the overall secondaries market, with Adam Black, a partner and head of ESG and sustainability at Coller Capital, referring to this sub-market as “tiny”.

Still, there is a need for dedicated impact secondaries capital, according to Nicolas Muller, a managing director and head of funds and co-investments at Blue Earth Capital.

“We definitely see [that] as the impact market is growing on a primary basis, the secondary market is following,” Muller said. “Traditional secondary players typically have an aversion for both venture capital and/or emerging markets, which have been two very large pockets of the impact investing space. We see a need for specialised impact investors to provide solutions on a secondary basis, both LP stakes and GP stakes.”

Buying an LP stake in a fund can be much trickier when it comes to complying with disclosure requirements than with GP-led processes, panellists agreed. In the latter deal type, there are higher quality assets coming to market, Black said, adding that Coller does not have a dedicated impact secondaries fund.

“That’s where you have more opportunity to do a bit more than the standard screening that you would do on a fund position,” he said.

Muller added that there are ways around retrieving relevant disclosure data from older funds.

“If we’re buying a stake in an old fund that was not Article 8 or Article 9, but their latest fund is, likely they put in place systems to report this data for all of their companies. So we can use that as a basis, but it’s tricky. GP-led transactions are significantly easier in that regard,” Muller said.

Tom Jorgensen, a managing director at North Sky Capital, who co-leads its impact secondaries strategy, noted that GP-led transactions allow a reset of expectations and rules with the manager.

“You, as the lead, co-lead or anyone that’s investing in that transaction, you can make that known – what your expectations are,” Jorgensen said. “Sometimes the GP has that capability internally and they’re able to provide that reporting so it’s systematically done and consistent. In other cases, it will require you to potentially make introductions [with] third-party service providers that will help with that data collection.”

Some specific situations are particularly challenging for secondaries investors, the panel heard. In distressed opportunities in sectors such as cleantech and in emerging markets, for example, Muller said: “That has been very difficult for us to get comfortable with. If you don’t see a path for the assets you’re acquiring to continue to generate impact during your ownership period as a secondary investor, it’s probably not going to work for us.”

Panellists said the sectors where they see the greatest impact secondaries opportunities are climate, health and wellbeing, food and agriculture, water, circular economy and waste management.