Drawn in by the potential for attractive investment returns, limited partners are increasing their exposure to impact- and sustainability-themed private funds, according to new research.
Rede Partners’ survey of 80 institutional investors reported that most of them (61 percent) have increased their allocation to sustainability-themed or impact-themed funds over the last two years; 14 percent saw their allocation more than double. Similarly, 62 percent of respondents said they expect their allocations to increase during the next 12 months.
Amid a dramatic slowdown in fundraising across wider private markets, impact funds have proved, if not immune, at least resilient to headwinds.
“In cases where LPs have struggled with tight allocations, discussions with investors revealed that in many cases capital has been prioritized to sustainability/impact over other areas of the market,” the report states. “So while capital has not increased in absolute terms, it is clear that it has gained share on a relative basis, clear evidence that impact is increasingly viewed as a strategic priority by these LPs.”
In terms of strategies, venture capital ranks third behind growth and buyouts, but not by much, say LPs focused on impact. Growth is the most popular strategy, with 41 percent of LPs identifying it as either their primary focus (26 percent) or secondary focus (15 percent). Buyouts is next with a combined 40 percent (28 percent primary and 12 percent secondary), followed by VC with a combined 37 percent (15 percent primary and 22 percent secondary). Infrastructure and credit funds are the least popular, with less than 30 percent of LPs saying they are their primary or secondary focus.
Rede notes that LPs in VC funds are often investors in growth funds, too. “There is something of the two-way street here, with successful venture houses often launching growth equity strategies and vice versa, so LPs may find themselves reviewing both growth and venture under the umbrella of a single manager,” the report states.
Rede attributes the strong investor interest in venture and growth to three factors:
- “The relative abundance of opportunities within growth and VC, compared with the slimmer hunting grounds of other areas such as buyout.”
- “Many LPs recognize the urgent need to invest growth and venture capital in order to accelerate development and deployment of sustainable technologies on a mass-market scale. This is highlighted by the IEA, that [about] 75 percent of the emission reductions required to achieve Net Zero are expected to be delivered by technologies that are not yet commercially mature.”
- “Some LPs see a strategic advantage in investing into earlier stage asset classes, as it allows their broader institution insight into the cutting edge developments taking place within the market and a better understanding of directional travel across the broader economy.”
A representative of a North American pension fund says in the report, “We maintain flexibility across stages and want to build a broadly diversified climate portfolio though we’ve leaned towards venture and growth investments to not only achieve impact but
also to bring learnings on early, innovative decarbonization and climate-related technologies back to our broader organization.”
Impact funds have held final closes on $21.6 billion of commitments in the first nine months of 2024, according to data from affiliate publication New Private Markets. This is almost double the total for the equivalent period last year, but some way off the heights reached in 2022.
Under the impact umbrella, “climate is still king,” with 58 percent of investors surveyed by Rede saying “climate as a thematic is more important today than it was in 2022.”
That sentiment is supported by exclusive research by Venture Capital Journal, which shows that climate-focused venture funds raised $7.1 billion in the first nine months of this year, up from $5.2 billion for all of 2023.
While impact investors are concerned about the climate, the primary driver for increasing sustainability allocations is the attractiveness of the risk/return opportunity, according to Rede’s report. The investor organizations’ values are an important factor in these increasing allocations, but are most often a secondary consideration, the report states.
Rede illustrates the point by noting that of the 174 LP commitments to Rede-represented impact funds over the previous 18 months, a large majority (74 percent) came from “generalist” investors, rather than impact-oriented institutions.
“Those we interviewed were keen to emphasize that the risk/return requirements for impact funds should be in line with their regular-way investments,” the report states, citing 10 in-depth LP interviews that supplemented the survey findings. “They made clear that they were applying similar diligence processes for both types of investments as relates to the underlying financial and operational performance, risks and opportunities of the fund manager – and that impact-specific requirements are typically overlayed after these diligence hurdles have been met.”
One notable way in which LPs’ impact investing programs can differ from their other investment mandates is in the approach to first-time funds or emerging managers.
Impact is a relatively young category in private markets; Rede calculates only 17 percent of the impact funds they track are investing from a fourth generation fund or later.
“Given the overall youth of the asset class, investors serious about committing to sustainability-focused strategies still need to make tough decisions about their willingness to compromise and engage with younger firms or fragmented/adjacent track records,” the report states.
More than a quarter of LPs (26 percent) have adapted their impact investment approaches to include a willingness to invest in emerging managers.
A smaller proportion (16 percent) are more willing to back platform extensions, where an established manager launches a separate impact-focused fund line. “This is no surprise given the continued importance of these products within the impact landscape,” the report states.
Additional reporting by Lawrence Aragon
Drawn in by the potential for attractive investment returns, limited partners are increasing their exposure to impact- and sustainability-themed private funds, according to new research.
Rede Partners’ survey of 80 institutional investors reported that most of them (61 percent) have increased their allocation to sustainability-themed or impact-themed funds over the last two years; 14 percent saw their allocation more than double. Similarly, 62 percent of respondents said they expect their allocations to increase during the next 12 months.
Amid a dramatic slowdown in fundraising across wider private markets, impact funds have proved, if not immune, at least resilient to headwinds.
“In cases where LPs have struggled with tight allocations, discussions with investors revealed that in many cases capital has been prioritized to sustainability/impact over other areas of the market,” the report states. “So while capital has not increased in absolute terms, it is clear that it has gained share on a relative basis, clear evidence that impact is increasingly viewed as a strategic priority by these LPs.”
In terms of strategies, venture capital ranks third behind growth and buyouts, but not by much, say LPs focused on impact. Growth is the most popular strategy, with 41 percent of LPs identifying it as either their primary focus (26 percent) or secondary focus (15 percent). Buyouts is next with a combined 40 percent (28 percent primary and 12 percent secondary), followed by VC with a combined 37 percent (15 percent primary and 22 percent secondary). Infrastructure and credit funds are the least popular, with less than 30 percent of LPs saying they are their primary or secondary focus.
Rede notes that LPs in VC funds are often investors in growth funds, too. “There is something of the two-way street here, with successful venture houses often launching growth equity strategies and vice versa, so LPs may find themselves reviewing both growth and venture under the umbrella of a single manager,” the report states.
Rede attributes the strong investor interest in venture and growth to three factors:
- “The relative abundance of opportunities within growth and VC, compared with the slimmer hunting grounds of other areas such as buyout.”
- “Many LPs recognize the urgent need to invest growth and venture capital in order to accelerate development and deployment of sustainable technologies on a mass-market scale. This is highlighted by the IEA, that [about] 75 percent of the emission reductions required to achieve Net Zero are expected to be delivered by technologies that are not yet commercially mature.”
- “Some LPs see a strategic advantage in investing into earlier stage asset classes, as it allows their broader institution insight into the cutting edge developments taking place within the market and a better understanding of directional travel across the broader economy.”
A representative of a North American pension fund says in the report, “We maintain flexibility across stages and want to build a broadly diversified climate portfolio though we’ve leaned towards venture and growth investments to not only achieve impact but
also to bring learnings on early, innovative decarbonization and climate-related technologies back to our broader organization.”
Impact funds have held final closes on $21.6 billion of commitments in the first nine months of 2024, according to data from affiliate publication New Private Markets. This is almost double the total for the equivalent period last year, but some way off the heights reached in 2022.
Under the impact umbrella, “climate is still king,” with 58 percent of investors surveyed by Rede saying “climate as a thematic is more important today than it was in 2022.”
That sentiment is supported by exclusive research by Venture Capital Journal, which shows that climate-focused venture funds raised $7.1 billion in the first nine months of this year, up from $5.2 billion for all of 2023.
While impact investors are concerned about the climate, the primary driver for increasing sustainability allocations is the attractiveness of the risk/return opportunity, according to Rede’s report. The investor organizations’ values are an important factor in these increasing allocations, but are most often a secondary consideration, the report states.
Rede illustrates the point by noting that of the 174 LP commitments to Rede-represented impact funds over the previous 18 months, a large majority (74 percent) came from “generalist” investors, rather than impact-oriented institutions.
“Those we interviewed were keen to emphasize that the risk/return requirements for impact funds should be in line with their regular-way investments,” the report states, citing 10 in-depth LP interviews that supplemented the survey findings. “They made clear that they were applying similar diligence processes for both types of investments as relates to the underlying financial and operational performance, risks and opportunities of the fund manager – and that impact-specific requirements are typically overlayed after these diligence hurdles have been met.”
One notable way in which LPs’ impact investing programs can differ from their other investment mandates is in the approach to first-time funds or emerging managers.
Impact is a relatively young category in private markets; Rede calculates only 17 percent of the impact funds they track are investing from a fourth generation fund or later.
“Given the overall youth of the asset class, investors serious about committing to sustainability-focused strategies still need to make tough decisions about their willingness to compromise and engage with younger firms or fragmented/adjacent track records,” the report states.
More than a quarter of LPs (26 percent) have adapted their impact investment approaches to include a willingness to invest in emerging managers.
A smaller proportion (16 percent) are more willing to back platform extensions, where an established manager launches a separate impact-focused fund line. “This is no surprise given the continued importance of these products within the impact landscape,” the report states.
Additional reporting by Lawrence Aragon
