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Impact Investing

LPs push GPs to tie fund fees to impact goals

With the upper hand in a tough fundraising environment, impact-minded LPs are looking to align fund managers’ earned fees with sustainability outcomes.

As limited partners gain the upper hand for defining commitment terms, they expect managers of impact funds to more closely align the fees they charge with their sustainability outcomes.

LP mandates have become increasingly focused on environmental, social and governance factors. A 2022 report by PwC noted that asset managers expect to grow their ESG-related AUM to $33.9 trillion by 2026 from $18.4 trillion in 2021.

Even as PE fundraising slows down overall, fundraising among impact-focused vehicles has been relatively resilient. PitchBook data shows that in 2022, impact funds garnered almost $22 billion across 21 funds, globally—representing a high-water mark for total capital raised. This year, over $1 billion has been raised in four separate funds, with a total of $6.4 billion as of July 10.


“We’re seeing a lot more activity in sustainability,” said Paula Langton, partner and co-head of fund placement at Campbell Lutyens. “More new commitments going into sustainability, particularly climate. And LPs are a little bit more open to committing to people that they’ve never even heard of maybe six months before.”

LPs have also started to ask for GPs to link their carried interest to goals such as reducing carbon emissions or improving gender or racial representation on the boards of the fund’s portfolio companies.

The idea of impact-linked carry dates back more than a decade to when London-based Aureos Capital established a base rate of carry for its 2009 Africa Health Fund at 15% for achieving financial hurdles with an increased rate if the fund also achieved its impact targets.

Other firms quickly followed suit, and now Apollo Global Management and EQT are among the larger players that tie their carried interest to the fulfillment of an impact fund’s mission. This year, Unigestion, which runs a climate-action PE fund, set its policy of linking profits to the achievement of aims. The percentage of carry reliant on the completion of an objective varies from firm to firm, starting at just 10% of the total carried interest up to its entirety.

What happens to carried interest if a goal has not been met during a year in the lifecycle of an impact fund? One approach—from law firm Morrison & Foerster, which draws up impact-linked carry agreements—is that GPs could earn it retroactively once the missed goal has been achieved.

It ain’t easy being green

Measuring the impact of portfolio companies may be easier said than done—and could even have adverse outcomes.

Luke Dixon, co-founder and head of investments at Dot Investing, said LPs may not be getting the companies providing the most impact due to the focus on data collection.

“GPs may instead invest in companies where they may hold less investment conviction but where they can collect the necessary impact data,” he said.

While GPs have to bear the burden of proof for showing that an investment has made an impact, Scott Church, co-founder and partner at placement agent Rede Partners, said LPs and their consultants are pouring resources into what he calls authenticity. This is making sure a GP’s impact fund is doing what it purports and not, for example, greenwashing—a term for using marketing to inflate or fabricate a fund’s ESG outcomes.

"[Proving whether something is authentically impactful] is a whole specialism. On the reporting side, and what investors demand to see in terms of evidence that they’re delivering the impact they’re claiming, it’s huge,” said Church.

Campbell Lutyens’ Langton added that GPs are keen to show that impact investing is not an “AUM grab.”

“While there were less than 10 GPs doing this just four years ago, this number is more like 50 to 60 today,” she said.

Regulators have become involved in determining how funds label themselves. In November, the European Securities and Markets Authority proposed that funds using impact in their names be required to demonstrate positive and measurable social or environmental impact alongside a financial return.

The roots of LPs seeking out impact investments and making sure they were done properly are in Europe, with the European Investment Fund being among the first movers in the space in 2008.

Church said impact-linked carry needs further clarification, but he’s seeing institutional growth in the impact space, including more people, teams and heads of the sector. GPs are also looking to bulk up in this burgeoning sector.

On a call with analysts in February, TPG CEO Jon Winkelreid said, “We expect competition, and we also expect to continue to grow against it.”

Featured image by Chloe Ladwig/PitchBook News

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