Impact investment: Gray areas

Oliver Niedermaier doesn’t like to use the term “impact investment” even though it’s an accurate description of what he does. Tau Investment, the firm he leads, focuses solely on environmental and social change in Southeast Asia’s supply chains. 

The mandate is concentrated – export-oriented manufacturers serving Europe and the US, with $70-300 million in revenue, positive cash flow, advanced technologies, and a sustainability mindset – but the opportunity is huge. The apparel supply chain alone is worth $1 trillion. Below the two dozen global leaders in Southeast Asia are several hundred competent tier-two suppliers that lack investment in technology, skillsets, and access to top-end foreign buyers. Tau helps them address these shortcomings.

Niedermaier claims there is scope for operationally capable investors to add substantial value as well as a strong correlation between social and environmental impact and financial returns. The problem is selling the concept to LPs. 

“Say ‘impact investing’ and you get pigeonholed into something that viewed as a concessionary returns profile, so there’s a big trade-off question. So, you tell people that you model all cases pre-multiple expansion at a 30%-plus gross IRR and you expect huge multiple expansion because you buy at 7x EBITDA and trading multiples are double digit. Then they then turn that around and say it can’t be impact investing if you think you can make that much money,” Niedermaier told the AVCJ ESG Forum.

The notion of delivering measurable positive social and environmental impact, while simultaneously generating risk-adjusted financial returns, has reassured institutional investors that participation won’t mean they fail to meet fiduciary responsibilities. But Niedermaier’s observation captures the precarious line that some impact investors still tread. If you look too commercial, is there a danger of being branded returns-heavy and impact-lite – backing companies that meet impact criteria yet could equally well raise capital from traditional sources?

For global GPs that have entered the impact space, the starting point tends to be where their previous investments have coincided with the UN sustainable development goals (SDGs). KKR chose to focus on five areas – environment, infrastructure, energy efficiency, responsible production, and education – and Asia features prominently because of the firm’s resources and track record in the region. Sharon Yang, a director with KKR Global Impact, noted that over $5.5 billion has been deployed in solutions-focused businesses in the impact areas the firm is covering, with $2.5 billion in Asia. China Modern Dairy and United Envirotech are among those previous investments.

EQT doesn’t have a dedicated impact strategy but weaves sustainability into its general investment thesis by requiring that every portfolio company have at least five key performance indicators that are based on the SDGs. This in part led the firm to back Elevate, a business that conducts social compliance audits of garment and electronics manufacturers. Would another investor – mainstream or impact – have stepped in if EQT had not? And would that investor have provided EQT’s level of value-add? 

Greg Shell, a managing director with Bain Capital Double Impact, admitted that some LPs have struggled with the idea of a dual mandate within an impact strategy. But part of what motivated Bain to get involved in the first place was a recognition that there are huge business opportunities within the societal challenges it is trying to address. Moreover, the sectors that overlap with these challenges are expected to outgrow general economies globally for a sustained period.

Ultimately, PE firms can do little more than be transparent as to their strategy, measurement, and results. LPs must make their own decisions as to the kind of exposure they want and whether it meets internal requirements. Even then, those requirements – or responsibilities – could evolve in accordance with regulation or remits that respond to changing societal priorities. Much the same applies to the companies that mainstream private equity invests in.

“It is fascinating to see the Business Roundtable in the US think about broader stakeholder theory, perhaps marking what we will see as the end of the primacy of shareholder value,” said Shell. “Because done to excess, we see the wreckage it can cause.”

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• Topics
• Investments
• Impact investment
• ESG
• Asia
• KKR
• Bain Capital Asia
• EQT Partners