The impact investment market is entering a phase of differentiation

Increasing competition coupled with LP appetite for thematic investment suggest impact firms will have to start thinking hard about standing out from the crowd.

Benoit Valentin is both head of impact investing and head of private equity fund investments at Temasek, the Singaporean state investor with assets of S$381 billion ($277 billion; €258 billion). As such he is well-placed to make observations about the parallel development of the two markets.

When I asked him in May whether he saw any qualities or innovations in one market that he thought should bleed into the other, I expected him to identify some cutting-edge piece of ESG or impact “technology” – like carried interest linked to sustainability – that in his view should be adopted by the wider PE industry.

Instead, he implored impact managers to learn a lesson from their mainstream counterparts: “differentiation.”

We have noted in the past that investors are pursuing their impact goals by identifying themes and seeking managers that play into these, regardless of whether they market themselves as “impact”. As current themes go, climate is the 800-pound gorilla; many investors are carving out climate-focused allocations. But different institutions have different priorities. For example, The Guy’s & St Thomas’ Foundation, a £1 billion ($1.2 billion; €1.2 billion) hospital endowment, is channelling its recently expanded impact allocation towards opportunities relating to improving health: not just life sciences and medical technology, but to more “upstream” determinants of health in the community, such as housing.

Does this mean life for the generalist impact manager is starting to get tough? It stands to reason that if more investors want impact managers to align with specific strategies, then the generalists will suffer.

When Nuveen recently closed its debut impact fund, which invests for both environmental and social impact outcomes, its co-head of private markets impact Rekha Unnithan described how the firm had encountered some investors who “preferred one or the other [social or environmental impact] and couldn’t quite wrap their heads around our first fund.” Unnithan said it was “too early to say” what the strategy for the group’s next fund will be.

Generalist managers can differentiate themselves through the quality of their impact process, of course. But as a greater number of firms start to build sustainability into their investment processes and reporting, simply having a robust approach will not be enough to stand out from the crowd.

As the impact market becomes more crowded, managers would do well to heed Valentin’s advice and look to conventional private equity GPs who have doubled down on specialist areas and created differentiated brands successfully.