“Pension funds tell us: ‘We feel the pressure from our constituents to do impact investing, but we don’t know what that is,’” former fundraising director at Leapfrog Investments Xenia Loos tells New Private Markets.
Loos left Leapfrog after helping raise the firm’s $744 million third fund, and she has since co-created an impact investment advisory firm, Collective Action, with Marlene Stam, a former director at Russell Investment Group.
“Many of the larger institutional investors have a lot of internal restrictions which make it difficult for them to invest in private equity impact,” said Stam. “Institutions in the Nordics and Northern Europe have internally decided they want to invest in impact. Some started creating these impact allocations three or four years ago already, but along the way realised they couldn’t find matching opportunities to allocate that capital to, as the private markets impact ecosystem does not match with the existing internal investment requirements.”
Asset owners come in with a wish list of the types of funds they want to invest in, Stam added, noting that these institutions may have selected the UN Sustainable Development Goals they want to contribute to but they may not have included venture capital on their list of favoured fund types. Similarly, they may be unable to invest in emerging managers or emerging markets. “They’re typically looking for buyout funds above $500 million, as they need to make larger allocations and only have so many resources available,” Stam said.
“If you add up all these hurdles, you can’t really invest for impact. There aren’t many buyout funds like that yet,” Loos added. “Many impact managers are emerging managers raising first or second funds. They’re targeting $200 million or $300 million. They aren’t first-time investors, but they’re first-time teams. And the impact strategies they’re focused on are typically emerging areas of the economy, so these need to be VC and early-growth-stage investments. Getting comfortable with that requires time.”
Another hurdle institutional investors face is a resources squeeze, Loos said. “Many asset owners are not equipped today to do a proper due diligence on an impact fund. These are relatively small teams. To allocate a full-time employee to only look at impact funds is often impossible.”
Collective due diligence
Stam set up an impact-focused placement agent, XS Investments, in 2006 with her Russell Investments colleagues. Loos joined XS in 2018 as managing director. “We saw first hand that high-quality GPs were finding it quite tough to raise capital for impact strategies,” Loos said. Stam and Loos spun out Collective Action in 2020 to address these issues from the LP side. Institutions are only just starting to change their internal processes, the pair says. “That’s why we are here to help institutions make that shift together,” Stam said.
Collective Action pools together or takes over the deal sourcing and due diligence work that institutions would otherwise have to do alone. It holds thematic “sounding boards” several times a year to introduce investors to the available funds and impact strategies for the theme. Previous themes have included water, health, food, circular economy and the energy transition.
It also plans to recommend deal-by-deal investments for institutions to jointly anchor. The institutions would be direct LPs, but “we do due diligence as a group. Some investors will be involved in due diligence, visiting the manager and taking the meetings, and some will delegate that to the group,” said Loos. “We create a group of investors that are willing to back a manager, catalysing their first or subsequent close, allowing them to fundraise faster, to be on the road for less time, so they can start deploying capital and making impact faster.”
Collective action has not yet facilitated a group investment in a manager, but “we’re on the cusp of engaging in our first due diligence,” Loos said.