ESG Investing

Will Billion-Dollar Investment Funds Change the Field?


Recent impact investing trends have helped increase more than just the size of the overall market. They’ve also increased the size of the individual funds within it.

Several new funds have even surpassed the symbolic billion-dollar threshold. The entry of such massive funds into the industry signals a mounting demand from investors for portfolio choices that align with their values.

The Billion-Dollar Fund Landscape

TPG Capital is one of the major players in the space. In September 2018, the private equity firm revealed plans for its second impact fund following the success of its 2016 $2 billion Rise Fund. TPG said it hoped to raise $3 billion for the new fund to continue investing across a range of impact categories.

Earlier in 2018, KKR unveiled its Global Impact strategy, while the Swiss Partners Group announced plans to start PG LIFE. Both billion-dollar funds aim to help solve the challenges identified by the United Nations’ Sustainable Development Goals. And they both share a focus on returns: Global Impact looks for investments where “financial performance and societal impact are intrinsically aligned,” and Partners specifies that PG LIFE’s “dual mandate [is] to achieve attractive risk-adjusted financial returns alongside measurable, positive social and environmental impact.”

Private equity firms like these aren’t the only ones with the resources to allocate and raise funds of this size. Prudential, for example, aims to build a $1 billion impact investment portfolio featuring social enterprises, financial intermediaries, and real assets by 2020.

New entries also include funds that don’t yet have name recognition. Last year, a group of female investors launched The Billion Dollar Fund for Women to invest $1 billion over the next decade in companies founded by women.

While it’s too soon to measure the returns—or the impact—of billion-dollar impact funds, if they succeed, their success could be a significant force in winning over those who are still skeptical about the industry.

The Causes and Possible Effects of Billion-Dollar Funds

The growth in fund size reflects multiple impact investing trends. For one, the industry has benefited from improvements in impact measurement and management. Roughly a quarter of respondents to a 2017 survey by the Global Impact Investing Network (GIIN) said they had seen “significant progress” over the last three years in impact management research, tools, and understanding. As the underlying metrics that define and measure sustainable impact grow stronger, institutional investors may become increasingly comfortable funneling capital towards billion-dollar funds. In fact, the Rise Fund and the Bridgespan Group have developed an “impact multiple of money” metric, which they claim can quantify the terminal value of an investment’s impact.

The GIIN and others have also added to a growing body of evidence that targeting impact doesn’t have to mean sacrificing returns. And the endorsement of impact investing by prominent entities like BlackRock has raised the industry’s profile. These factors help explain TPG and other firms’ confidence in their ability to attract billions of dollars in the name of impact investing. Eighty-six percent of respondents to the GIIN’s 2018 annual survey said their motivation for making impact investments was client demand.

While it’s too soon to measure the return—or the impact—of the funds, if they succeed, their success could be a significant force in winning over those who are still skeptical about the industry. The funds themselves are viewed with uncertainty by some experts, though. Jed Emerson, author and senior fellow at ImpactAssets, has questioned whether massive funds might emphasize breadth over depth, forgoing smaller opportunities for larger ones that have looser interpretations of “impact.” Raising billions of dollars “doesn’t mean that size equals effectiveness or that by attaining levels of scale, we’ll achieve the corresponding levels of purpose we intended with impact,” Emerson said. “We have to apply these tools in an effective manner.”

Regardless of the outcome, this trend will likely at least bring further awareness of impact investing to mainstream investors. In that vein, some firms have tapped big names to helm their funds. KKR is led in part by former Republican National Committee chairman Ken Mehlman; Rise’s founding board includes the likes of Virgin Group founder Richard Branson, U2 frontman and philanthropist Bono, and LinkedIn cofounder Reid Hoffman. That’s all part of the plan, according to finance columnist Felix Salmon. “What we are really seeing with the first generation of impact funds at private equity firms is a testing of the waters in terms of marketing,” Salmon writes. “The only way that the space will grow is if they can get investors interested in it and persuade them to demand an impact allocation.”

Ronald Cohen, founder of Bridges Ventures, expects to see more institutional investors entering the space and ultimately creating a multitrillion-dollar market. “If you look at the potential application of agreed impact principles across all asset classes, the numbers are absolutely huge,” he recently told PitchBook. “It is not a stretch to imagine that in a few years’ time a small percentage of the public markets, government and corporate debt, private equity, and venture capital will all be investing under the agreed impact principles.”

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