Impact Investing: The Right Thing to Do

The first reason private equity firms should consider launching impact investing vehicles is that impact investment has a critical role to play in addressing 21st-century challenges, such as persistent poverty, growing inequality, accelerating climate change, the stark human costs of COVID-19, racial injustice, and other crises and inequities that characterize our world. Indeed, the UN estimates that there is an annual financing gap of $2.5–3 trillion in what is needed to achieve the Sustainable Development Goals by 2030. There is simply no way to fill a gap of this magnitude without enlisting private capital and private enterprise.

Private equity can effect change in ways that neither the public sector nor public market investors can. Firms are uniquely positioned to not only direct capital to opportunities that achieve meaningful outcomes for society, but also ask more probing strategic questions about a company’s products and services. They can roll up their sleeves and shape operations around the triple bottom line of people, planet, and profit. That gives them powerful leverage over their portfolio companies’ impact.

Impact Investing: The Potential for Strategic Benefits

Doing the right thing is not the only reason, however, for private equity firms to think seriously about a move into impact investing. Competition is increasingly intense; limited partners now have a wide range of options for where to deploy their capital. General partners are upping their game in how they differentiate themselves and create value. And one increasingly prominent source of differentiation is impact.

Significant shifts in both the makeup and demands of key constituents within limited partner groups are driving this trend. Importantly, pension funds are realizing that responding to even the narrowly defined interests of future pensioners requires taking long-term social and environmental considerations into account. These funds are among the largest sources of capital for private-equity-focused impact investors. In addition, millennials, who see their legacy in terms of social change, are gaining influence in family offices. Meanwhile, high-net-worth individuals and foundations are thinking about maximizing their influence by integrating financial return and impact considerations across their philanthropy and investment portfolios, rather than allocating x for one and y for the other.

These trends point to interesting opportunities for private equity firms, with those able to demonstrate impact along with competitive rates of return likely to be in demand among limited partners.

Read the full article about launching an impact investing vehicle by Michael Etzel, Ben Morley, Erica Kelly at The Bridgespan Group.