Private equity impact funds aim to achieve both great returns and positive impact on the society – new study sheds light on their practices

Finnish Venture Capital Association’s (FVCA) new study examines the principles and practices of impact investing among European private equity (PE) investors and the effect the different methods have on the investments’ financial performance as well as the achieved impact. 22 European private equity firms who manage 415 companies through their impact funds participated in the study.

Impact investing is one of the fastest growing investment strategies in the private equity industry. Impact investing assets under management have grown at an over 60 % yearly rate in 2013-2018. The assets under management by impact investors have already surpassed $ 500 billion in a short period of time.

“The significance of impact will only increase in the future. The younger generations are extremely worried about the challenges facing the environment and the society and they demand impact from both their investments and jobs. The companies solving global challenges have enormous business potential at hand and they can also attract the best talents to their teams”, says the association’s analyst Annemari Kirppu who conducted the new study.

The findings of the study indicate that the majority of impact investors act in many ways just like traditional PE investors in Europe: the aim is to achieve market rate or even higher returns and investments are made primarily into European companies. Thus, investors don’t have to compromise profits in order to achieve impact, but rather they can be pursued simultaneously.

The study shows also that in Europe impact investments are made widely into different domains, not just into social projects. Half of the respondents of the study aim to achieve both social and environmental impact and 15 % of them focus only on targeting environmental impact.

European impact investors’ practices vary but views are aligned

One of the central challenges related to impact investing is impact measuring: how can positive impacts on the society or the environment be measured and compared? Even though in the past few years many new impact measuring methods have been developed, European impact investors prefer to rely on their own methods instead of using some of the existing methods: almost 80 % of the respondents stated that they use self-developed impact measuring methods. Over half of them also use qualitative methods to better describe and report the achieved impacts. Out of the commonly available methods, the most popular ones are the Social Development Goals (SDG) framework introduced by the UN, the IRIS metrics developed by the Global Impact Investing Network (GIIN) and the BImpact Management Project’s IMP framework.

Among the participants of the study, those investors who use the SDG or the GRI frameworks as well as qualitative impact measuring methods seemed to have achieved the most positive impact. In the study the portfolio companies’ impact was assessed using a net impact measuring tool that utilizes machine learning methods to quantify the net impact of companies developed by the Finnish startup The Upright Project.

“Simpler impact measuring methods seem to lead to better results than the more complex methods for the time being. However, impact measuring methods are constantly evolving, and the situation could very well change in the future. The method developed by The Upright Project is a great example of new kind of a measuring method that leverages new technologies”, Annemari Kirppu notes.

There is a continuously growing demand for impact investing

Despite the varying practices related to impact measuring, there is one topic that the respondents agree on: limited partners (LPs), such as institutional investors and family offices, who invest in private equity funds are interested in impact matters. The respondents feel that the LPs interest towards impact has increased in the past few years and most importantly it will only increase in the future. This means that there is an increasing demand for impact funds and adds pressure for the private equity investors to report on their societal and environmental impact in addition to their financial performance.

“In Europe, the investors backing the founding of impact funds are often family offices and foundations who have been the pioneers of impact investing globally. In the beginning they were also the largest group of investors in impact funds. However, in the last four years, the share of institutional investors among the impact funds’ LPs has grown the most, which indicates that the funds have been able to generate good profits alongside the positive impact”, comments FVCA’s managing director Pia Santavirta.

”There are already many innovative companies in Finland who have a positive societal or environmental impact as an inseparable part of their business model. We expect new private equity impact funds to be raised in Finland in the coming years following the European trend”, Annemari Kirppu concludes.

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Annemari Kirppu
Pääomasijoittajat ry, Head of Analytics and Sustainable Finance
+358 50 361 6602
annemari.kirppu@paaomasijoittajat.fi

 

Pia Santavirta
Pääomasijoittajat ry, Managing Director
+358 40 546 7749
pia.santavirta@paaomasijoittajat.fi