Impact investment: A new breed

Development finance institutions (DFIs) account for 80% of all commitments to India-focused impact investment funds, according to Venky Natarajan, a managing partner at Lok Capital. Another 10-15% is family offices and foundations – typically based outside of India – and the rest comes from a smattering of insurance companies. Lok is currently targeting $100 million for its third fund, having raised $65 million for the previous vehicle in late 2011.

Lok is not untypical among impact investment firms. They tend to be sub-scale, with funds seldom topping $100 million. They focus on early-stage companies in a select number of industries within individual frontier markets. And they have yet to build deep fund-level track records. If everything goes according to plan, the social and financial returns can be substantial – as Lok and others have discovered in India’s microfinance space – but from an LP perspective, these managers carry a high level of risk.

This explains why institutional players account for a relatively small portion of the $21.8 billion held by private equity investors in impact funds as of year-end 2016. While these groups might be interested in building up impact exposure – and by all accounts their interest is growing – there are not enough managers that, based on size or experience, qualify to absorb their capital.

PG Life, an investment program launched this week by Partners Group, could serve as a bridge between these worlds. The program is described as a blended private markets strategy with a dual mandate to achieve attractive risk-adjusted financial returns alongside measurable, positive social and environmental impact. It is said to be targeting $1 billion that will be deployed exclusively in line with the UN Sustainable Development Goals (SDGs).

The key phrase is “risk-adjusted financial returns.” PG Life is likely to offer a filter on the normal Partners Group deal flow, giving investors exposure to investments that the firm makes for entirely financial reasons that also happen to fall in line with at least one of the SDGs. Partners Group is a seasoned investor in areas such as renewable energy, healthcare and education, so finding places to put the capital shouldn’t be too hard. By investing alongside the firm’s main funds, PG Life may also get access to some sizeable assets.

This is not the only initiative to bring more institutional LPs into impact funds by reassuring them that they won’t fail to meet fiduciary responsibilities by sacrificing financial for social returns. In the past 12 months, the North America-focused Bain Capital Double Impact Fund raised $390 million and TPG Capital closed The Rise Fund, which has a global mandate, at $2 billion. They attracted capital from the likes of pension plans and sovereign wealth funds that have previously not participated in the space.

Indeed, Partners Group itself has an existing impact strategy. Having initially made social investments through its employee foundation, the firm formed a separate affiliated investment unit in 2015 to raise capital from third-party investors. 

But PG Life is a bit different. If Lok Capital sits at the left-hand end of the impact spectrum (it pursues financial returns but would be classified as a deep impact investor; the spectrum does not include pure social investment), Rise and Double Impact are a few places to the right because they will target more mature companies, and PG Life would be to the right of them.

Concerns that the arrival of larger funds run by global firms will lead to impact dilution – with investments rebadged as impact deals to meet the needs of a certain strategy – are inevitable. But they are deploying capital that probably would not otherwise have found its way into the space. The benefits could also be distributed across the spectrum by buying assets from early-stage investors and helping them to achieve scale and full commercial recognition. 

In this sense, the biggest favor larger players could do for the impact space as a whole is give an unproven industry a dusting of success. “If you look at all the impact funds out there, most of the returns are on paper,” says one investor with a global PE firm. “If we can’t generate the right returns [with these new funds], this will become a very niche area again.” 

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• Topics
• LPs
• GPs
• Venture
• Growth
• Impact investment
• TPG Capital
• Partners Group
• ESG