Impact investing has become an emerging trend in private equity industry. More and more major private equity firms like TPG, BainCapital and KKR have set up impact investment funds or strategies to address social and environmental challenges while pursuing market-rate returns. This stems from increasing ESG awareness and demand from limited partners. Private equity firms can leverage their active ownership model and governance to drive positive impact. Common approaches include ESG integration, thematic investing, impact measurement and reporting based on UN SDGs. With mainstreaming of impact investing, private equity firms need expertise and credentials to ensure social impact delivery along with financial returns. Proper benchmarking tools are also required to track and disclose impact achievements. Overall, private equity’s focus is expanding beyond pure financial goals to also target sustainable value creation.
Top private equity firms launch dedicated impact investing funds and strategies
Many leading private equity firms such as TPG, BainCapital and KKR have recently announced impact investing funds or strategies. For example, TPG started Rise Fund, BainCapital initiated Double Impact, and KKR launched Global Impact. These mainstream private equity firms are responding to the rising LP demand for responsible investment products that can provide both social impact and market returns. According to private equity executive Kevin Lu, this impact investing trend is driven by ESG-focused limited partners like pension funds, sovereign wealth funds, family offices, and millennials who will soon inherit significant wealth. However, Lu warns against firms without real impact credentials jumping on the bandwagon just for branding benefits. Success requires substantial impact investing expertise to ensure dual social and financial returns as well as reporting transparency.
Impact measurement and management based on UN SDGs
A critical aspect of impact investing private equity funds is measuring and reporting social or environmental impact. According to Lu, quantitative impact metrics aligned with a company’s business plan are identified during due diligence for each investment. The metrics are tied to relevant UN Sustainable Development Goals such as zero hunger, good health, clean energy and climate action. For example, Partners Group’s PG LIFE fund has an Impact Committee that evaluates impact achievement in addition to the traditional Investment Committee approving financial returns. With standardized impact benchmarks like SDGs, private equity firms can better quantify and disclose their impact investing performance to clients.
Importance of impact expertise and investment governance
Successful impact investing requires dedicated resources and processes. Mainstream private equity firms launching impact funds often form specialized impact teams. They also implement expanded investment governance structures to ensure both financial and social/environmental returns are evaluated. Partners Group’s PG LIFE has two committees – the traditional Investment Committee reviews risk-adjusted financial returns while a separate Impact Committee focuses on assessing and enhancing social/environmental impact. Such governance processes help integrate impact across investment activities from due diligence to ownership and exit.
Expanding private equity goals beyond pure returns
The growth of impact investing shows that private equity is expanding its goals beyond pure financial returns for limited partners. Driven by ESG-focused limited partners, leading firms are developing social and environmental impact credentials alongside financial track records. While challenging, private equity’s active ownership model can be leveraged to drive positive impact through ESG integration, impact measurement based on SDGs, thematic investing and governance. With the mainstreaming of impact investing, private equity is poised to increase its role in addressing societal and sustainability challenges while still earning attractive returns.
Impact investing has gained significant momentum among top private equity firms. They are launching dedicated impact funds and strategies to meet rising LP demand. Critical success factors include impact expertise, measurement based on UN SDGs, governance processes and overall integration with financial returns.