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It’s crunch time for impact private equity fund managers as they face restive limited partners, volatile economic conditions and few ways to exit their current portfolio investments.
Add to that the uncertainties accompanying the new administration in Washington DC, which among many other unknowns could unlock mergers and acquisitions and even IPOs – and could also tank many promising, but capital-intensive, climate solutions and decarbonization plays.
With many early 10-year funds reaching their term ends, managers are scrambling to deliver on their touted potential to achieve alpha in both returns and impact. At stake: the proposition that sustainability tailwinds in the economy can enable impactful companies to outperform less impactful sectors in valuations and cash returns.
And with many institutional investors already over-allocated to private equity, smaller or niche impact strategies may be competing with bigger and more traditional PE strategies for a limited pool of capital – and also with software, healthcare, AI and crypto and other specialized “alternatives” strategies.
Without the return of their capital, pension and insurance funds and wealthy family offices are constrained in their allocations to new funds – four out of five LPs in a recent survey said they had declined to reinvest with one of their current managers this year. “More re-up refusals can be expected,” according to Coller Capital’s latest PE barometer.
1. As 10-year funds wind up, impact managers are on the hook for performance.
It seems many private equity impact investors have been holding onto assets in an effort to wait out the exit drought. But that cannot go on indefinitely.
It has been nearly a decade since the launch of the first private equity impact strategies by institutional investment firms—Bain Capital Double Impact, TPG Rise and Summa Equity, for example, all launched in 2016. Some argued that when impact and value-creation are co-linear, such strategies could deliver large-scale impact.
Now, these funds are nearing the end of their term lives and are seeking to liquidate their assets. Tight M&A and IPO conditions could ease under a less restrictive Trump administration. But for now, the lack of returned impact capital is hampering investors from redeploying into new opportunities. Indeed, only a handful of exits by impact funds crossed our newsdesk this year (examples include Lightrock’s Ummeed Housing Finance, Leapfrog’s partial exit of Northern Arc via IPO and Palatine’s 6x exit of Anthesis to Carlyle).
The exit angst has led to a variety of strategies to keep LPs happy, from reduced fees to secondary transactions to co-investment opportunities. Many private equity firms will be obliged to take whatever liquidity options and haircuts they can get to return capital to their investors in the year or two ahead. These exits—more so than the self-reported asset valuations to date— will demonstrate whether the thesis that sustainable and impactful investments outperform is valid.
And they will demonstrate whether commercial, institutional-focused private equity firms can deliver the impact outcomes they had targeted. In a tough fundraising environment, If these GPs’ performance falls short on either point, future funds may be at risk.
2. With quality jobs and employee ownership, some managers shift from cost-cutting to value-creation
Human capital management is reshaping private equity. A raft of evidence suggests improving the quality of jobs can reduce turnover, boost engagement, and decrease burnout. Going beyond pay and benefits, a growing number of private equity firms have signed up to programs to share their profits with their workers. Nearly three dozen private equity firms with over $1 trillion in assets under management have joined the nonprofit Ownership Works, which KKR’s Pete Stavros launched in 2021. Blackstone launched its own shared ownership program this year.
The question for 2025: How much is enough? The PE firms in Ownership Works, for example, tend to share with workers only about 5% of acquired companies’ equity value at exit. Nearly two-dozen smaller funds are raising capital to financing employee-ownership transitions that provide at least 30% for workers, a threshold set by CertifiedEO.
More broadly, Impact Capital Managers and Tideline identified seven key impact value-creation levers, from positioning to risk management, commonly used by leading impact managers. “We are more convinced than ever that impact investors are better owners of impact-aligned companies than traditional investors might be,” say Tideline’s Ben Thornley and Alok Patel.
- “As private equity firms start to share the wealth, low-income workers get just a little bit,” by Roodgally Senatus
- “Impact value-creation playbooks provide X’s and O’s for generating alpha,” by Ben Thornley and Alok Patel
- “The next frontier of private equity value creation: Better jobs for frontline workers,” by Dennis Price.
3. In raising funds, the big get bigger
How high can they go? Private equity funds capitalizing on sustainable infrastructure and energy transition opportunities are big and getting bigger.
Brookfield Asset Management, for example, has raised $10.5 billion towards its targeted $17 billion Global Transition Fund II, which it expects to wrap up early next year. “We have complete confidence we’re going to hit the target in the fund,” Brookfield’s Connor Teskey said on the firm’s quarterly earnings call last week. TPG has raised $6 billion out of a combined $10 billion target for two climate impact funds: the global TPG Rise Climate Fund II, and emerging markets-focused TPG Rise Climate Global South Initiative.
The mega-funds are helped by a flight to quality by institutional investors amid the choppy economic outlook. The top 10 infrastructure funds gobbled up 55% of the $104 billion raised for global infrastructure through late November, according to Schroders.
Impact investing at the institutional, multi-billion level may prove itself in 2025 as either a fleeting trend or sustained fixture within private markets that can survive the economic and fiscal uncertainty ahead. Affordable housing counts as a bright spot as a core portfolio asset for institutional investors, “something that is low risk, that doesn’t provide outsized returns, but matches up well against their assets and provides predictable income,” says Jeff Brenner of Impact Community Capital. Vacancy rates tend to remain low through both up and down economic cycles; when families have a home they can afford, they don’t want to leave.
- “Private equity megafirms scoop up fresh billions for climate impact,” by Snehal Shah
- “Building institutional-grade strategies to create and preserve affordable housing (podcast),” by David Bank
4. Managers scout for opportunities in private credit, impact debt and natural capital
As private equity assets were marked down over the past two years, PE firms sought to diversify. They launched private debt funds to capitalize on higher interest rates and infrastructure funds to capture steady, low-risk returns. Kartesia launched an impact debt fund in 2022 (still fundraising). AllianzGI brought a climate infrastructure debt fund to market in 2023 (also still fundraising).
Some managers are getting downright tree-huggy, scooping up forestry and other natural capital assets. The strategies typically involve acquiring forestry, farmland and other natural assets, with the aim of increasing their capacity to absorb carbon and selling the resulting credits on voluntary carbon markets. Fund managers pursuing natural capital strategies include Climate Asset Management, a joint venture between HSBC Asset Management and climate investor Pollination, BNP Paribas, Gresham House, Stafford Capital Partners, Ardian, Brazil’s Patria and insurance firm Manulife.
The firms are buoyed by institutional and corporate interest in natural assets and protecting biodiversity. Pension funds and insurers backed Climate Asset Management. European insurance giant AXA Group has allocated close to $2 billion for sustainable forestry. And tech companies such as Apple have committed to preserving forests. It is not yet clear whether institutional investors are willing to bet on this new asset class: of these fund managers, only Climate Asset Management and Gresham House have closed their funds.
- “How Big Tech can restore forests – and credibility in voluntary carbon markets,” by Shaun Paul
- “Carbon markets fall short as a climate solution, but go far in financing sustainable development,” by Amy Cortese
5. Climate’s coming shakeout tests companies in the “missing middle”
Capital is relatively plentiful for early stage cleantech startups, and after they’ve gained commercial traction and revenues. It’s the middle part that is missing. The leap from cool idea in the lab, to first, second and third commercial plants or customer deployments is often referred to as the “Valley of Death.”
More investors have been willing to play in that risky space to help scale climate solutions. There is also financial appeal: such projects are often buoyed by government policies and private catalytic capital. The EU’s Green Deal and the US’s Inflation Reduction Act and infrastructure bill have showered financial incentives on emissions-reducing projects and technologies. Catalytic investors such as foundations, family offices and development finance agencies, keen to crowd in commercial capital to impact strategies, may offer guarantees, incentives and more favorable terms to de-risk deals.
Numerous private markets strategies have bubbled up to direct institutional capital to such opportunities: Brookfield’s Global Transition Funds, Mirova’s latest climate infrastructure fund and Generation Investment Management’s Just Climate are examples. All three closed above target in 2022 and 2023. Brookfield, TPG and BlackRock have each received multi-billion dollar commitments from the UAE’s $30 billion Altérra fund, including from its $5 billion catalytic tranche. KKR is still fundraising for the “middle market” climate infrastructure fund it brought to market last year.
The immense risks and uncertainties that remain for first-of-a-kind projects and early-stage, asset-heavy companies were highlighted by the recent collapse of Stockholm-based battery maker Northvolt sent shudders through the industry. Northvolt had received grants and investments from the Swedish government, the European Investment Bank, several other governments and a number of institutional investors to scale up its battery production. In January, nearly two-dozen commercial banks extended a $5 billion loan to help Northvolt expand its battery recycling capacity.
In the US, President-elect Trump has signaled he will claw back unspent IRA funds for climate action. One likely target: lending authority not yet obligated by the Department of Energy’s Loan Programs Office, a key “scaling partner” for promising climate tech companies building their first plants.
