Have the impact and climate funds finally been exposed?
Seems like these are finally being called out in Europe. Which ones won’t raise a new fund and/or should mark carry at 0?
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Based on the most helpful WSO content, there has been increasing scrutiny on impact and climate funds, particularly regarding their authenticity and financial performance. Some funds branded as "impact" may primarily serve as ESG funds for marketing purposes, rather than delivering true impact. Concerns have been raised about their ability to raise new funds and the legitimacy of their returns.
Key points to consider: 1. Authenticity Issues: Some funds are accused of being ESG funds disguised as impact funds, focusing more on screening out negatives rather than actively seeking positive outcomes. This raises questions about their true commitment to impact investing.
Mixed Financial Returns: While some funds like DBL Partners (early investors in Tesla and SolarCity) have achieved notable success, others have struggled with financial performance. This inconsistency could impact their ability to raise subsequent funds.
Fundraising Challenges: Smaller funds and those without a strong track record or well-capitalized backing may face difficulties in raising new funds. For example, funds with less than $500M in AUM for VC/Growth or $250M for true VC might struggle in the current environment.
Carry Concerns: Funds with poor financial performance or questionable impact may need to mark carry at zero, especially if their investments fail to deliver expected returns or additionality (i.e., making a difference that wouldn’t have occurred without their involvement).
If you're evaluating specific funds, it’s crucial to assess their track record, financial returns, and the authenticity of their impact claims.
Sources: Impact Funds Oncycle Recruiting?, Megafund PE -> Impact Investing (IFC World Bank)? Am I Crazy?, Megafund PE -> Impact Investing (IFC World Bank)? Am I Crazy?, Q&A: European PE professional at a Large-cap Megafund, Will Iger’s Sequel Be as Good as the OG? | The Daily Peel | 11/22/22
I don’t think this is the general sentiment at all. Given national security concerns, transition will only get more prominent. For example China is currently the leader in clean tech, and the only reason that BYD cars aren’t in every house is because of controls and/or extremely high tariffs. This is a pretty common belief espoused by everyone from equity analysts to woke leftists. There is no way Germany or the UK will let China unilaterally lead the way, doing so gives up too much soft power.
Yeah the “climate” funds that invested in some dumb software or carbon credits or something that isn’t a real asset are probably going to be taken underwater, but also, no one who was actually serious about climate was involved in those investments or genuinely believed in their potential. Even just considering word of mouth, if you have been spending almost any time on WSO lately, most people have noticed a rising interest in Energy Transition PE and Infrastructure PE because it covers renewables as an asset class. You would think biotech would be the boom but that’s largely been basically ignored.
Anyone that thinks that carry is going to get written to 0 or that there is a massive expose waiting to happen is honestly probably a misled ideologue. There are legitimate concerns to bring up when it comes to climate but this is probably not the lane you want to march down if you have them. Even in the US, you have some of the most conservative Congresspeople backing some climate investment (see Sen Mike Lee w Geothermal). It’s not an unfair assumption to say that the reason they weren’t before is because the left was demonizing oil and gas while the new wave of climate founders & investors have a much more nuanced way of how things will work.
In summary, I think any climate fund that is ‘exposed’ is more a symbol of that fund not ~actually~ being a climate fund and more trying to massage ESG ratings of companies so that they can claim a mandate to invest in them. The funds that are actually investing in climate and real assets are probably going to perform very much in line, if not slightly better than typical Infra, but admittedly won’t see the returns of something like consumer PE
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