LPs, what do you think of ESG and impact investing?
There has been a lot of discussion in recent years about the rise of ESG and impact investing. Many firms such as the MFs have started raising impact specific vehicles that take into account impact criterias as well as financial criterias for investments.
It seems to be a common opinion that these new impact vehicles are just a way for these firms to capitalize LP interest in the area and raise more money. For those who work at impact funds as well as those on the LP side, what is your honest opinion of these funds and how do they play in your portfolios?
Impact Funds are a great way to dress up lower returning deals that would ordinarily not have been pursued by the flagship fund to meet less return oriented LP sleeves of capital. Win, win.
it's all a ponzi scheme mate
They suck
Aswath damodaran, a well-known nyu professor has quality takes on this exact topic. I have a few friends on the LP side, and from their point of view, there isn’t much value put on this, especially from FoFs and family offices. An elite firm is an elite firm, and no LP is deciding if they are going into a fund with stellar returns based on if they have a formal ESG policy or not. Obviously larger pensions and endowments may have a formal mandate to target ESG conscious firms but I have yet to see a name like Bain Double Impact or Two Sigma Impact really knock it out of the park from a returns perspective over time. Solid firms and respect the people that work there but it’s truly impossible to quantify these metrics of socially responsible investing across the board.
Vistria is another, lesser-known name, I’d add that seems to have a targeted focus on impact. But take a look at their portfolio, specifically healthcare and financial services, and you’ll see a lot of typical run of the mill traditional buyouts with maybe a small impact component to the transaction. The term impact is truly whatever your firm wants it to mean.
I think you need to start by separating out ESG versus impact investing. I am all for ESG as a diligence framework if you are using it as a risk mitigation tool and asking what things might arise to cause problems with your investment that you can't understand just from the financial statements. The focus should be on material issues only there. The SASB standards, for instance, do a good job of tracking what ESG issues are material for a given industry.
I used to be more enthusiastic about impact than I am now. So far, the returns from "impact investors" have by and large disappointed, although there are a couple impact managers that have really outperformed their non-impact peers. You can still make money with an impact strategy but it seems increasingly apparent that there is a concessionary element to it. There are plenty of LPs that are okay with that trade and they're happy as long as they're still getting a median return from an impact PE portfolio while being mission-aligned. This directive really comes from the board or whoever is calling the shots, at the end of the day. My perspective at this point is that I want to maximize my risk-adjusted return while also minimizing negative externalities generated by my GPs' investments. This way, my organization has the most possible money to fulfill its mission that's a net positive for society.
The impact funds raised by GPs who have many other strategies are clearly just asset gathering. Let's not kid ourselves. The specialists are more interesting. After all, if you'd invest with a healthcare specialist or an enterprise software specialist, why not a decarbonization specialist?
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