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What links impact investing and private equity?

In this article:

    In impact investing, investments can contribute to a measurable positive social and/or environmental impact alongside earning financial returns. In our view, impact investing strategies work particularly well in private equity.  

    Here are the three reasons why:

    1. Investors can exert a stronger influence on the target companies’ strategies and business than is possible for shareholders in listed companies

    2. Investors have access to the information, management tools and data necessary to steer a company and its activities

    3. The long investment horizon (generally four to six years) allows a private equity investor to drive meaningful change.

    Private equity has thus historically lent itself particularly well to impact investing. According to the GIIN Annual Impact Investing Survey, 16% of the impact investing market is through private equity investments[1], after private debt and listed equities.

    What can private equity investors expect in terms of risks and returns?  

    Firstly, it is worth noting that private equity can be an attractive asset class to diversify a portfolio since its performance tends to be less correlated with that of listed markets.

    On performance, October 2020 studies by Invest Europe[2] have estimated that European buy-outs delivered an average annualised net internal rate of return (IRR) of 15.00% between inception and end-2019. That is far ahead of the 5.84% achieved by the MSCI Europe index.

    The European growth capital private equity segment has done consistently well, generating an annualised IRR of 13.28%, outperforming the MSCI Europe which returned 7.32% over a 10-year horizon.

    We believe that access to the top performers and diligent selection are both critical to building a successful and resilient portfolio. In that regard, a fund-of-funds strategy can be a good way to expose a portfolio to private equity. A good fund-of-funds manager will construct a diversified portfolio, mixing primary commitments with secondary transactions and co-investments, which can achieve an attractive risk-return profile over time.

    There is a misconception that impact investing requires a trade-off between financial and impact performance. We believe that impact investing strategies – in private equity as well as in other asset classes – offer an array of risk-return profiles that investors can chose from depending on their financial and impact objectives.

    In the end, it is a matter of investment fundamentals: A community development impact fund supporting weakly financed small and medium-sized enterprises (SMEs) in a remote area is unlikely to deliver the same return as an industrial decarbonisation private fund in a major economic centre.

    We note that more than 80% of private equity-focused Investors surveyed by the GIIN during 2019 were seeking market-rate returns.[3]

    Finally, when assessing impact investments, investors should bear in mind four elements: Financial return and risk as well as impact return and risk.

    How does investing in impact private equity affect the investment process?

    Adding in the management of the impact return affects what you invest in and how you invest. In general, there are three characteristics that set impact investing apart from other investment strategies: Intentionality, additionality and measurement as introduced in our recent blog.

    They apply to private equity in the following ways:

    1. Intentionality: Capital should be invested with the goal of helping to overcome a societal challenge. A thematic fund will have assessed the problem to be addressed – such as the depletion of natural resources or lack of access to quality healthcare – and the types of solutions that a company’s products and services can provide to address that problem. The assessment of impact factors should be fully embedded across the investment process, the decision-making process and governance. These should be given the same priority as financial factors. Also, the alignment of the fund performance fee and the impact performance is a strong indication a manager’s intentionality.

    2. Additionality: Private equity investors should be able to show how they will drive the companies in the portfolio to achieve a positive impact throughout the holding period. Impact plans are typically defined and monitored, with resources and expertise dedicated accordingly, and responsibilities shared across the investment team. There are various channels to drive impact while growing and transforming portfolio companies, by scaling impact through horizontal acquisitions or deepening impact through vertical ones.  

    3. Measurement: The investor should set realistic, evidence-based goals for what the investments can achieve and use these to manage impact performance throughout the investment process. Measuring its additionality is an emerging practice.

    What impact investment themes do you currently deem attractive?

    Across Europe and North America, we are increasingly seeing opportunities across sectors. That said, some themes are more investable than others.  

    Healthcare is one example, especially after the pandemic and the stress it put on the healthcare infrastructure, revealing major inefficiencies. We see managers focusing on health outcomes and investing in companies that can compete on the basis of quality of care, access to care or its affordability.

    Another is social care, which spans a broad spectrum of activities. For example, there are investment strategies targeting companies focusing on: 

    • Maintaining the independence of the elderly
    • Increasing awareness of mental health issues
    • The social ramifications of the growing number of working parents. 

    On education, providing learning and training opportunities to individuals at all stages of their careers and adapted to their personal situation is increasingly recognised as a need and thus presents investment opportunities.

    We are seeing more venture capital approaches targeting sustainable food and agriculture, including the blue economy.

    Finally, the circular economy is a booming theme – the need to reuse resources and materials and develop sustainable product designs, services and supply chains. This area is expected to grow significantly and can be seen as critical in fighting climate change and reducing the pressures on natural ecosystems.


    [1] Global Impact Investing Network (GIIN) 2020 annual impact investor survey. This captured data from a record 294 of the world’s leading impact investors who collectively managed USD 404 billion of impact investing assets, representing a significant segment of the USD 715 billion global impact investing market.  

    [2] Source: European private equity outperforms listed equities over long term, new research shows | Invest Europe  

    [3] GIIN 2020 Annual impact investor survey 


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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