Pressured impact funds need to stand out from the crowd. Here's how
Impact funds are now “fighting for a share” of an increasingly competitive market – but demonstrating their impact credentials will help them both attract capital and sign new investment deals.
- Explore The Impact Papers: a special series with EVPA exploring, celebrating and asking honest questions about investing for impact
BMW Foundation, whose assets totalled €142m in 2020, uses its endowment to invest in impact funds, including those run by Ananda and Maze. Bryan Scheler, who oversees impact investing at the foundation, said he looked for funds that could demonstrate “additionality” – focusing all their activities on generating positive impact – as well as achieving market-rate returns.
Above: top row, Bryan Scheler and session moderator Chiara Borneman of Phenix Capital Group; bottom row, Antonio Miguel and Zoe Peden
Ensuring that both the fund team and their portfolio companies had “impact at their core” was an obvious way to ascertain this. But there were also “big differences” in approach at fund level, Scheler said.
That’s when you know that fund managers are fully incentivised to optimise for impact performance and for financial performance
“Do they really assess impact in their due diligence, do they have an impact report, or do they even link their carry [the financial return obtained from holding an investment] to the impact?”
Firms like Lisbon-based Maze, which does tie its carry to impact performance, sent “a very strong signal” to potential investors, Scheler said.
- Read: Luciano Balbo: Everything and therefore nothing: why we must reject the ‘impact’ investors adding nothing new
Antonio Miguel, managing partner at Maze, echoed this: assessing a fund’s impact based on its portfolio companies was “fundamental”, but not enough on its own, he said. Different funds had different criteria: the legitimacy of a company was “in the eye of the beholder”, he said.
Maze sets up impact metrics and targets for each investee and at portfolio-wide level (weighted according to the amount invested), Miguel explained. The fund must achieve at least 60% of its impact goals before it is entitled to any carry, even if it achieves a huge financial return on one of its investments.
Such structures could show asset owners that a fund was serious about impact, Miguel said. “That’s when you know that fund managers are fully incentivised to optimise for impact performance and for financial performance… I wouldn't be surprised if in the next few years we see more sophisticated and accurate mechanisms.”
How to win the deal
The benefits of impact-linked mechanisms could also help funds to secure competitive deals, suggested Zoe Peden, a former tech entrepreneur and now principal at London-based Ananda Impact Ventures.
“I always tell all the other founders, the way to spot impactwashing is [to] ask, ‘Is your carry linked to the impact, not just the financial returns?’. You’ll be amazed how many funds still don't have that.”
Ask, ‘Is your carry linked to the impact, not just the financial returns?’ You’ll be amazed how many funds still don't have that
Funds that could demonstrate commitment to impact, meanwhile, would stand out among a growing field – one that was also being flooded by mainstream investors.
“The current landscape is very competitive,” said Peden. “There’s a lot of capital around, and we are fighting for our share. Having a narrative like that really resonates with founders, and helps you win deals. It’s really important.”
Header image by gerain0812 on freepik
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