Buyout groups have bought into impact investing in a big way. Globally, the industry more than doubled the amount it raised for impact investing in 2019, reaching £5.4bn, according to data provider PitchBook. Major firms including KKR, Bain Capital and TPG have backed the trend.
But spending all that money hasn’t been so easy. Despite the flurry of capital raising, the number of impact investments from private equity funds has been falling since 2017. Impact investing funds spent £1.3bn on 29 deals in 2019, a drop from the previous year of 47% in terms of value and a fall of 43% in terms of the number of deals. In Europe, private equity groups spent just £65.5m on six impact investing deals last year, compared with £938m and 16 deals in 2017.
Why is investing impact funds proving to be such a challenge? One problem is the difficulty of finding the right targets.
Jonathan Dean, head of impact investing at Axa Investment Managers, says although he has seen hundreds of opportunities during the past seven years – when his company launched its impact dedicated strategy – this is not an easy task.
“Essentially what we are asking ourselves to do here is complex: delivering financial returns and an intentional impact. We are doing two things at the same time,” he argues.
Dean manages three of Axa’s impact funds, overseeing $600m in assets, and expects the market to continue growing globally.
In addition to the challenge of finding businesses that deliver both financial and social returns, finding them in developed markets like the US and Europe has proven to be difficult.
“There tends to be more opportunities for impact investments in developing and emerging markets, rather than developed markets,” notes Emily Woodland, co-head of sustainable investment at AMP Capital. “This is because far more capital is required in developed markets to achieve a real social impact, compared to developing markets.”
The size of a strategy can also affect its deployment.