4 key trends driving private market impact funds: One CEO explains

The impact fund market is at an interesting inflection point. As pointed out in a recent World Economic Forum whitepaper, over the past four years, these investments, which aim to generate positive social and environmental outcomes alongside financial returns, have seen an uptick in demand, likely from growing awareness of global challenges such as climate change and social inequality among the wider populous. In addition, investors seek to align their investments with their values while still achieving competitive returns.

No one understands this transition quite like Matilde Segarra of APG, one of the world’s largest pension investors. The firm’s US chief executive officer sat down with World Economic Forum senior fellow Michael Eisenberg for a broad discussion on developing trends and how limited partners – those who contribute capital to funds – and general partners – those who drive a fund’s implementation and strategy – challenge themselves to make even smarter and more impactful choices.

Segarra had the following to say on how this market can best drive scale for people and the planet.

Despite an otherwise slow market, limited partners are increasingly allocating capital specifically for impact, energy transition and sustainable solutions. The Global Impact Investing Network (GIIN) estimates that the size of the worldwide impact investing market has now surpassed the key milestone of $1 trillion under management since 2022 and is expected to keep growing at a double-digit compound annual growth rate until 2030.

For instance, the California Public Employees’ Retirement System recently announced a $100 billion commitment toward climate solutions by 2030, moving its portfolio closer to net zero. Additionally, the New York State Common Retirement Fund announced this February that it would double its commitment to sustainable investments to $40 billion. The move restricts its investments in oil and gas and was intended to protect state pensions from climate risk.

More limited partners in Europe are committing certain percentages of their investment portfolio to Sustainable Finance Disclosure Regulation Article 9 funds, which must fulfil certain requirements to be classed as sustainable.

At the same time, more limited partners are looking to align their impact programmes with other limited partners, focusing on impact management and measurement expectations. Such moves create an environment with even more capital for the energy transition.

More European general partners, active managers and decision-makers running venture funds are launching and closing their first impact funds. In fact, many established players have been deepening their offerings. For instance, this spring, British global investment firm Permira announced the launch of its first energy transition fund. Meanwhile, private equity company EQT announced the closure of its EQT Future Fund – the largest impact fund ever raised in private markets.

At the same time, private equity firms Ardian, Eurazeo and Tikehau have launched nature, biodiversity and other specialized funds focused on clean hydrogen, sustainable agriculture and energy transition funds in credit, real estate and other underpenetrated asset classes.

As these funds deploy more capital and demonstrate a track record and progress towards raising new impact funds, the industry continues to grow. It offers more directed and specific solutions for limited partners, thus mobilizing substantial capital toward innovative solutions that address pressing environmental and social challenges.

Some of the largest US-based general partners and investors are focused on energy transition platforms. Brookfield, TPG Rise Climate, Apollo, Ares, Blackstone and KKR have all announced new energy transition funds and commitments to energy transition investments over the last year. The ambition and focus from the largest platforms in private markets investors across multiple asset classes show a particular focus on private equity and infrastructure.

This comes at a time of growing consolidation amongst general partners, led primarily by large managers looking to respond to their limited partners’ interest in increasing commitments to positive impact through exposure to infrastructure and impact investments.

In their latest 2023 Impact Investing Allocation, Activity & Performance, GIIN estimates that the five largest impact investing general partners accounted for 47% of the total assets under management in the impact investment market.

Since last May, several world-class private equity firms have, via acquisition, added infrastructure investing to their capabilities. This represents not only a broader trend of managers offering a wider range of strategies to limited partners but also a pickup in firms bringing in new energy transition competencies and skillsets into their firms.

Energy transition and impact talent has been increasingly prioritizing sustainable, circular, energy transition and nature-focused products and services and deploying traditional operating and commercial excellence capabilities to accelerate the growth, seize green premia and quantify the top-line growth potential of those services.

Historically, this work focused mostly on driving more energy and resource efficiency, cost savings and operating expense reductions. However, today more general partners are deploying their top-line growth acceleration capabilities around market research, customer insights, corporate strategy, go-to-market capabilities, and sales and marketing capacity to identify and scale greener products and services.

These capabilities can help drive climate adaptation efforts and also give comfort as asset owners continue to commit capital in the coming years.

Investors, says Segarra, can take note of these changing trends for impact investing and the potential upsides they could bring for the long term. “Having positive impact doesn’t need to be concessionary,” she says. “And actually, investing for impact can strengthen returns.”

She also stresses that new regulatory guidelines, such as the Sustainable Finance Disclosure Regulation, have forced European investors to consider responsible investing carefully and to define it clearly and be transparent about it. Changes like these can spark key questions, she says, like “What does impact mean? How are we going to talk about it? How are we going to report about it?”

But it will be critical, she says, to explore, especially with general partners, how to link impact to things such as carry arrangements and performance fees, further aligning general partners’ incentives to create greater impact outcomes.

More than anything, she stresses flexibility. When it comes to thinking about brown to green strategies and the move from fossil fuel-intensive solutions, “there’s a little bit of a reluctance” since some solutions might not be seen as the type of sustainable investments everyone would expect they’d “put in the shop window.” Limited partners must discuss frameworks and approaches and learn the many paths where positive impact can be made possible. Segarra says:

“It is important that we have good conversations on what are the different ways to have impact, what type of targets can be set to make sure that strategies are intentional and recognize that there is risk with impact investing.”