Investors are setting up bespoke impact investing mandates with fund managers instead of investing in pooled impact funds as investor demand outpaces the market of established impact funds.

Pensioenfonds Detailhandel, a Dutch pension fund with assets worth €36 billion, allocated €100 million to Tikehau Capital to invest in private debt for impact in March. In April, Pensioenfonds Detailhandel allocated €100 million to impact investment manager Symbiotics to invest in SDG-aligned debt in emerging markets.

German insurance company Barmenia awarded a €100 million mandate to Schroders Capital last month. Schroders will deploy most of the capital in co-investments alongside impact funds managed by Schroders and the firm’s impact investing subsidiary, BlueOrchard.

Blue Earth is investing mandates totalling $210 million from a German family office and a Swiss foundation for social impact funds in emerging markets. This is part of the firm’s wider strategy to expand its mandates business under new chief executive Stephen Marquardt.

NN Group, a Dutch pensions and insurance provider, recently committed €500 million to CBRE to develop low-carbon affordable housing.

Some of these mandates are to co-invest alongside the fund manager or investment adviser’s own funds on a deal-by-deal basis – as Schroders will do with most of Barmenia’s capital. Others are to invest in third-party funds sourced by the investment adviser, as Blue Earth is doing with the capital from a German family office and a Swiss foundation. Still others are ‘funds-of-one’: when the manager develops and manages direct investments, as in the case of NN’s allocation to CBRE and Pensioenfonds Detailhandel’s mandate with Symbiotics.

Growing demand

Symbiotics, for example, is seeing increased demand for bespoke impact mandates as more and more institutional investors create large allocations to impact, the firm’s head of operations and marketing, Willem Redert, tells New Private Markets. The firm creates funds-of-one for clients with more than €100 million to provide credit in emerging markets. These funds are structured like typical pooled private debt funds in terms of management fees and carried interest, a source familiar with the firm told New Private Markets.

“Within the impact investing opportunity set, we think the biggest growth area is in co-investments. We’re very active in working with GPs to source co-investments,” says Edward Powers, managing director at private markets firm HarbourVest. “Some LPs might want to invest in new entrants and emerging managers, while others may choose to invest with established managers who create impact strategies.”

“If you have €100 million to invest in impact, I would recommend you set up a mandate rather than invest in a fund, because that can give you the diversification and we can have a conversation about what impact you want to create,” says Symbiotics’ Redert.

“The challenge is the capacity of firms like ours to keep up with the demand from investors and generate high-quality deal pipelines.”

Meeting target allocations

LPs already struggle to meet their impact target allocations. A recent LP survey by HarbourVest found, on average, a 9 percentage point gap between LPs’ target and actual allocations to sustainable and impact investing strategies. And this gap is likely to grow amid rising investor demand: 72 percent of global LPs planned to increase their exposures to sustainability and impact investments in the next two years, HarbourVest’s survey found.

Impact mandates share many of the advantages that generalist private equity investment consultants provide – an investor can delegate the burden of sourcing multiple investment opportunities to meet the target allocation and conducting due diligence to one fund manager that has more experience in the impact market.

They can also provide diversified portfolio construction and access to global markets, including emerging and growth markets. These are particularly critical in impact investing, where market opportunities are predominantly with smaller, earlier-stage funds with emerging managers. Large institutional investors seek to make large commitments to large funds and experienced fund managers, as New Private Markets has previously reported.

Targeted impact

The other factor drawing investors to mandates is targeted impact. Direct investing and co-investing alongside funds on a deal-by-deal basis can allow investors to target narrower impact themes or opt out of investments that do not meet their investment or impact criteria.

“Certain investors are very focused on specific themes. When clients come to us, some will ask to align with specific themes,” Reid Smith, principal at investment consultant Mercer, tells New Private Markets. “Depending on what the theme is, it becomes more or less challenging to invest against that with high-quality managers. In education, affordable housing, agriculture, health and wellness, for example – the specific opportunities [funds] targeting those individual themes tend to have been more limited, historically.”

On the impact measurement side: “A co-investment allows an investor to see exactly what impact a company is creating, rather than just at the fund level. That is harder to get in other parts of the asset class [private equity],” HarbourVest’s Powers adds.