Greetings Agents of Impact!
🎁 Gift posts are here! As a valued subscriber, you can share up to 10 ImpactAlpha articles each month with up to three people each, for free. To bring along colleagues, peers, friends and family, just click the “gift” icon on the left side of any article, copy the link, and share some of that alpha in impact!
In today’s Brief:
- Crunch time for impact private-equity funds
- Sequestering carbon in soil
- Boston Impact Initiative’s call to action
- ‘Climate Capitalists’ takes the Moscowitz Prize
Featured: Looking Ahead to 2025
Finding impact alpha in private equity: Institutional investors demand performance – and their money back. It’s crunch time for impact private equity fund managers as they face restive limited partners, volatile economic conditions and few ways to exit their current portfolio investments. Add to that the uncertainties accompanying the new administration in Washington, DC, which, among many other unknowns, could unlock mergers and acquisitions and even IPOs – and also tank many promising but capital-intensive climate solutions and decarbonization plays. With many 10-year funds reaching the end of their terms, managers are scrambling to deliver on their touted potential to achieve alpha in both returns and impact. At stake: the proposition that sustainability tailwinds in the economy can enable impactful companies to outperform less impactful sectors in valuations and cash returns.
Five trends we’ll be watching in impact private equity next year:
1. As 10-year funds wind up, impact managers are on the hook for performance. It seems many private equity impact fund managers have been holding onto assets in hopes of waiting out the exit drought. That cannot go on indefinitely. The exit angst has led to a variety of strategies to keep LPs happy, from reduced fees to secondary transactions to co-investment opportunities. Many private equity firms will be obliged to take whatever liquidity options and haircuts they can get to return capital to their investors in the year or two ahead. These exits – more so than the self-reported asset valuations to date – will demonstrate whether the thesis that sustainable and impactful investments outperform is valid. Only a handful of exits by impact funds crossed our newsdesk this year (examples include Lightrock’s Ummeed Housing Finance, Leapfrog’s partial exit of Northern Arc via IPO, and Palatine’s 6x exit of Anthesis to Carlyle).
2. With quality jobs and employee ownership, some PE firms shift from cost-cutting to value-creation. Human capital management is reshaping private equity. Evidence suggests improving the quality of jobs can reduce turnover, boost engagement and decrease burnout. Going beyond pay and benefits, a growing number of private equity firms are sharing their profits with their workers. Nearly three dozen private equity firms with over $1 trillion in assets under management have joined the nonprofit Ownership Works, which KKR’s Pete Stavros launched in 2021. Blackstone launched its own shared ownership program this year. The question for 2025: How much is enough? The firms in Ownership Works, for example, tend to share with workers only about 5% of acquired companies’ equity value at exit. Nearly two-dozen smaller funds are raising capital to finance employee-ownership transitions that provide at least 30% for workers, a threshold set by CertifiedEO.
3. In raising funds, the big get bigger. How high can they go? Private equity funds capitalizing on sustainable infrastructure and energy transition opportunities are big and getting bigger. Brookfield Asset Management has raised $10.5 billion towards its targeted $17 billion Global Transition Fund II. “We have complete confidence we’re going to hit the target in the fund,” Brookfield’s Connor Teskey said on the firm’s quarterly earnings call last week. TPG has raised $6 billion out of a combined $10 billion target for its second global TPG Rise Climate Fund and its emerging markets-focused TPG Rise Climate Global South Initiative. Affordable housing counts as a bright spot as a core portfolio asset for institutional investors, “something that is low risk, that doesn’t provide outsized returns, but matches up well against their assets and provides predictable income,” says Jeff Brenner of Impact Community Capital.
4. Managers scout for opportunities in private credit, impact debt and natural capital. As private equity assets were marked down over the past two years, PE firms sought to diversify with private debt funds to capitalize on higher interest rates, and infrastructure funds to capture steady, low-risk returns. Kartesia launched an impact debt fund in 2022 (still fundraising). AllianzGI brought a climate infrastructure debt fund to market in 2023 (still fundraising). Some managers are getting downright tree-huggy, scooping up forestry and other natural capital assets, particularly those with potential to generate carbon credits. The firms are buoyed by institutional and corporate interest in natural assets and protecting biodiversity. Pension funds and insurers backed Climate Asset Management. European insurance giant AXA Group has allocated close to $2 billion for sustainable forestry. And tech companies such as Apple have committed to preserving forests through nature-based carbon removal.
5. Climate’s coming shakeout tests companies in the ‘missing middle.’ Capital is relatively plentiful for early stage cleantech startups, and after they’ve gained commercial traction and revenues. It’s the middle part that is missing. The leap from cool idea in the lab, to first, second and third commercial plants or customer deployments is often referred to as the “Valley of Death.” The immense risks and uncertainties that remain for first-of-a-kind projects and early-stage, asset-heavy companies were highlighted by the recent collapse of Stockholm-based battery maker Northvolt. In January, nearly two-dozen commercial banks had extended a $5 billion loan to help Northvolt expand its battery recycling capacity. In the US, President-elect Donald Trump has signaled he will claw back unspent funds for climate action. One likely target: lending authority not yet obligated by the Department of Energy’s Loan Programs Office, a key “scaling partner” for promising climate tech companies building their first plants.
Keep reading, “Finding impact alpha in private equity: Institutional investors demand performance – and their money back,” by Snehal Shah on ImpactAlpha.
Dealflow: Follow the Money
- Terradot, based in the US and Brazil, secured $58 million from Microsoft’s Climate Innovation Fund, Kleiner Perkins, Google, Cisco Foundation, Valor Capital, Sheryl Sandberg and other investors to sequester carbon in farm soil and improve soil health using “enhanced rock weathering.” (Startups.BR)
- Jolt Energy Storage in Michigan raised $4 million to prototype and test the design of a new, long-duration “organic flow” battery. The company says all of its input materials can be sourced in the US. (Jolt)
- Mexico’s Sofia inked $13.5 million from IDB Lab, Kaszek, Kfund and Index Ventures to provide health insurance and telehealth services to small businesses, families and individuals. (Forbes Mexico)
- Swiss startup Artem raised €1.5 million ($1.6 million) in a round led by Berlin-based Vireo Ventures to help companies with operations in the EU comply with the bloc’s Carbon Border Adjustment Mechanism reporting requirements. CBAM, which comes into effect in 2026, will impose tariffs on carbon-intense products like steel and cement imported into the EU. (EU-Startups)
- Finland-based Aisti secured €29 million ($30 million) in equity, debt and grants to build a factory to produce its sustainable, wood-based acoustic tiles, which improve the sound quality of built spaces. (Aisti)
Signals: Returns on Inclusion
Supporting emerging fund managers to drive capital to communities. Boston Impact Initiative has issued a call to action for impact investors and philanthropic organizations: Adopt a trust-based catalytic approach to first-time funds led by women and Black, Indigenous, and other community leaders of color. “Emerging impact fund managers are ready to deploy hundreds of millions of dollars in capital to build lasting wealth in communities of color – they just need the right infrastructure and support to succeed,” says Betty Francisco of Boston Impact Initiative, which released “Fearlessly funding economic and racial justice.” The report draws from the experiences of 17 fund managers from Boston Impact Initiative’s Integrated Capital Emerging Fund Manager’s program that has helped 69 community leaders launch first-time funds. More than half of the new fund managers are Black and/or women.
- Communities of color. The report spotlights Karen Washington, Melanie Allen and Olivia Watkins of the Black Farmer Fund, which is raising a $20 million second fund to provide flexible financing to 30 Black-owned farms and food businesses in the Northeast. Discriminatory and predatory practices have driven thousands of Black farmers and land stewards off their land (see, “Road to justice for Black farmers leads through flexible finance”). Avery Ebron and Nikishka Iyengar of The Guild, a worker-owned cooperative, are enabling community ownership of land, housing and real estate in communities of color in Atlanta. The social enterprise is looking to raise $17 million to invest in mixed-use real estate with affordable housing and retail spaces for local small businesses. Ownership of the buildings will be placed in a community stewardship trust governed by local residents.
- Keep reading.
Agents of Impact: Follow the Talent
This year’s Moskowitz Prize from Northwestern University’s Kellogg School of Business goes to Niels Joachim Gormsen and Kilian Huber of the University of Chicago’s Booth School of Business, and Sangmin Oh of Columbia Business School. Their paper, “Climate capitalists” explores ways to encourage companies to adopt greener practices and reduce emissions.
Squarespace hires Alina Camejo, previously at Endeavor, as an inclusion and impact specialist… Gary Community Ventures has an opening for a portfolio operations and impact investing director in Denver… Prime Coalition is hiring a partnerships director… AXA Investment Managers is looking for an impact investment manager in London… Variant Investments seeks an impact vice president in Portland, Ore… Accion Venture Lab is recruiting an investment officer in India.
Community Investment Management is on the hunt for an investment director in Mexico City… Calvert Impact is recruiting an intern… Centersquare Investment Management is hiring a real estate ESG associate… Neighborhood Funders Group is looking for two co-presidents… Migration Flexibility Fund seeks a fund manager in Bogota… The Public Health Institute is recruiting a strategic partnerships director… Project Drawdown has an opening for a private-sector partnerships director.
👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.
Thank you for your impact!
– Dec. 19, 2024
