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Impact Investing

Survey: Strong deals abound for impact investors

As the market for lucrative assets with positive effects on the environment and society grows, impact investors are finding it easier to source deals.

As the market for lucrative assets with positive effects on the environment and society grows, impact investors are finding it easier to source deals.

In 2018, 65% of respondents to a Global Impact Investor Network survey of 308 global impact investors said they found it challenging to find strong deals to meet their needs. In 2023, that percentage fell to 26%. GIIN is a nonprofit group for the impact investment industry.

The strategy, which couples financial return goals with investments intended to generate a social or environmental impact, established a market that grew from $95 billion in AUM in 2017 to $213 billion at the end of 2022, according to GIIN. Out of all asset classes surveyed, PE generated the highest gross realized returns for impact investors over the three-year period leading up to 2022 and exceeded the group’s average return target by 4%.

Impact investors—asset managers with impact funds and the institutional investors that invest in these funds—allocated the largest proportion of assets through PE investments, a testament to the strategy’s evolution since its inception.

In its earliest iterations nearly two decades ago, impact investors acquired stakes in early-stage companies, largely in the cleantech sector, said Pete Murphy, Nuveen’s head of ESG and impact for private equity.

Murphy said those assets have matured in recent years and graduated into later-stage companies, primed for PE portfolios. In 2022, survey respondents allocated the greatest share of capital to mature, private companies—typical characteristics of a company held in a PE portfolio.

“That graduates inherently from being a more venture-oriented, high-technology risk to more growth- or even buyout-oriented,” said Dan Connell, a managing director on Commonfund Private Equity’s real assets and sustainability team.

Connell attributed the broader opportunity set for impact investors to this maturation of the impact marketplace, paired with growing consumer demand for environmentally friendly products and shifting public policy objectives. When sourcing deals at Commonfund, Connell’s team places an emphasis on assets that are profitable or show a clear path to profitability.

The energy sector attracted the greatest proportion of impact capital at 17%, according to the survey, followed by financial services at 13% and healthcare at 9%.

“We’ve seen the same shift,” said Neha Champaneria Markle, head of Morgan Stanley Private Equity Solutions, which invests in funds from asset managers ranging from small VCs to large buyouts using an impact investing strategy. “Today, we see the opportunity set as much larger.”

Companies big or small require plans for the changing climate from a risk management perspective, Markle said, which has heightened the demand for impact investor backing.

Still, impact investors aren’t immune to market pressures.

Buyout deal activity has slowed significantly in the past two quarters as the asset class grapples with the high cost of debt and a pullback in lending. Buyout multiples have ticked down slightly so far in 2023, dropping from 11.7x EBITDA in 2022 to 11.1x EBITDA in Q1 2023, according to PitchBook data.

Over half of impact investors in the survey said the influence of global headwinds worsened their financial performance.

“I wouldn’t expect the impact part of the market to perform any differently than the broader market,” said Markle. “We’ve been waiting for the sky to fall for a long time.”

Featured image by HelloRF Zcool/Shutterstock

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