Like any investor, those focused on impact generally seek a diversified portfolio with investments in a variety of asset classes. Even so, a significant portion of their portfolios tends to be in private markets, including private equity investments.
According to the Global Impact Investment Network, 67% of impact investors surveyed in 2018 invested in private equity, accounting for 22% of their total assets under management. Additional, over the past five years, assets under management allocated to impact-oriented private equity have climbed roughly 19%, according to the World Bank.
What Is Private Equity?
Private equity is one of several asset classes open to investors and is termed an “alternative investment.” Private equity involves ownership shares in an entity that is not publicly listed or traded. Private equity investments are typically funded by high–net-worth individuals, pension funds, and other institutional investors. Private equity investments are considered relatively illiquid and costly to transact, according to the National Bureau of Economic Research. Plus, the minimum amount of investment capital tends to require much deeper pockets than conventional public equity.
Impact Investing in Private Equity
Impact investors are typically drawn to private equity investment because it allows them to invest in companies directly. As a result, investors may be able to have a direct influence on company decisions by working to align activities with their impact goals, as well as contributing their own operational expertise to help a business succeed. This is especially true because these tend to be long-term investments. In addition, industry observers say that more private capital is needed to achieve the United Nations’ ambitious Sustainable Development Goals, which require $3.9 trillion a year through 2030.
At the same time, impact investors in private equity face several challenges. Along with the illiquidity already mentioned, there is no standard framework to measure the social and environmental impact of private equity investments. There are also sector-specific challenges to private equity investments. For instance, many education investments aim to lower the cost of schooling, but achieving that goal might limit the investments’ financial returns.
In addition to education, private equity impact investments can be made in a variety of other sectors. For example, impact investing pioneer LeapFrog Investments focuses on financial inclusion and healthcare in Asia and Africa. TPG Growth’s Rise Fund invests in healthcare, education, and financial inclusion as well as food and agriculture, technology, and growth infrastructure as secondary sectors.