PitchBook Launches Analyst Series Focused on Emerging Activity in Impact Investing, Given the Growing Demand from Asset Managers

PitchBook Launches Analyst Series Focused on Emerging Activity in Impact Investing, Given the Growing Demand from Asset Managers

Today's Release Uncovers LP Strategies for Impact Investment

SEATTLE, NEW YORK, SAN FRANCISCO and LONDON, March 23, 2018 /PRNewswire/ -- PitchBook, the premier data provider for the private and public equity markets, today released the latest analyst note in a series focused on impact investing. Impact investing is a strategy that seeks to create financial returns, in addition to positive social or environmental externalities. These investments are most commonly made through the familiar structure of closed-end private equity and venture capital funds. Impact fund managers are differentiated in two camps: funds that target market-rate returns, and those that accept concessionary returns in exchange for greater social impact. 2017 saw over $3.4 billion committed across PE and VC impact funds globally. Historically, development finance institutions (DFIs) have been the leading contributors of capital to impact funds. However, there is growing interest from LPs beyond government agencies such as high net worth individuals (HNWI), foundations and pension funds. While more than half of capital raised by impact funds in 2017 is accounted for by TPG Growth's $2 billion Rise Fund, this niche strategy is expected to become more mainstream as major players like KKR and Bain enter the space.

"So far, we've seen impact fund managers raise predominately smaller vehicles focused on emerging markets investments, with some larger funds targeting sustainability sectors in the US and Europe," said Joelle Sostheim, PitchBook analyst. "It is difficult to forecast what future fundraising will look like, but with commitments from notable LPs like the Ford Foundation, in addition to a piqued interest from industry leaders like TPG, Bain, and KKR, we expect to see increased fund sizes and activity."

The PitchBook Platform currently tracks data on more than 390 VC and PE impact funds that are managed by both impact-focused firms and mainstream firms overseeing discrete, dedicated impact funds. This analyst series starts with a holistic overview of impact investing that answers the following questions:

    --  What Constitutes an "Impactful" Investment? Unlike socially responsible
        investing, which is predominately used with public market securities,
        impact investing is a private market investment strategy that targets
        investment in social enterprises or impact funds. Social enterprises are
        companies that are both financially stable and create positive
        externalities through the goods and services they offer, the populations
        they serve, the jobs they create, or a combination of these factors.
        Because of the subjectivity of "impact," investors actively track
        outcomes with unique metrics that correspond to their specific goals,
        and often require their portfolio companies to do the same.
    --  What Strategies Are Employed by Impact Funds? The ecosystem consists of
        two dominant strategies: those targeting market-rate returns, and those
        who accept concessionary returns. Impact funds are typically structured
        as closed-end VC or PE funds with traditional LP agreements and fixed
        investment periods. The investment instruments utilized by market-rate
        impact fund managers include equity stakes, leverage, and hybrid
        instruments, such as revenue-based financing or convertible notes.
        Conversely, impact fund managers who accept concessionary returns
        predominantly use fixed income instruments to achieve returns, focusing
        on debt investments in riskier but highly impactful businesses.
    --  What Differentiates PE and VC Impact Investment Funds? Impact funds are
        usually smaller vehicles than generalist PE or VC funds - 59% and 86% of
        PE and VC funds, respectively, are smaller than $100 million.
        Additionally, many of these vehicles target companies in emerging
        markets. Our data finds that PE fund managers concentrate on investments
        in Africa, while VCs focus more on South Asian countries.
    --  Which LPs Are Contributing to This Alternative Asset Strategy? - Sources
        of capital for impact funds are a mix of for-profit and not-for-profit
        LPs, including DFIs, foundations, HNWIs, family offices, and pensions
        and insurance companies. DFIs are uniquely positioned to commit capital
        to impact funds, and are the greatest contributors, because of their
        long-term financial positions and social/environmental development
        goals. They show the strongest aggregate commitment, as nearly 9% of all
        their VC and PE fund commitments since 2002 have gone to impact funds.
    --  What's Next for Impact Investing? - At a base level, impact investing is
        an innovation on philanthropic capital that socially-oriented investors
        can utilize to scale the reach of their allocation, while still enjoying
        financial returns. As this investment strategy matures, the performance
        of pioneering impact funds will be crucial for establishing credibility,
        solidifying best practices, and setting the stage for future managers.
        While the entrance of mainstream firms will help attract a larger base
        of capital, uniformity around impact metrics is crucial so that
        investors can compare and benchmark investment opportunities.

Download the latest installment here.

About PitchBook
PitchBook is a financial data and software company that provides transparency into the capital markets to help professionals discover and execute opportunities with confidence and efficiency. PitchBook collects and analyzes detailed data on the entire venture capital, private equity and M&A landscape--including public and private companies, investors, funds, investments, exits and people. The company's data and analysis are available through the PitchBook Platform, industry news and in-depth reports. Founded in 2007, PitchBook has offices in Seattle, San Francisco, New York and London and serves more than 14,500 professionals around the world. In 2016, Morningstar acquired PitchBook, which now operates as an independent subsidiary.

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