ImpactAlpha, February 14 – Private-equity giant KKR hasn’t yet closed its planned $1 billion Global Impact Fund, but it has been busy warehousing deals (See, “KKR makes first ‘global impact” investment’ in Singapore’s Barghest Building Performance).
In August came word that KKR’s $9 billion Asia Fund III had taken a majority stake in Indian waste management company Ramky Enviro Engineers. This week’s close of the $510 million deal brought an additional detail: KKR’s Global Impact Fund also got a piece of Ramky.
The entrance into impact investing of multifarious private-equity firms like KKR, TPG and Bain Capital brings to the surface a long-simmering question: what difference does impact capital make in investments that purely commercial investors would have made anyway?
A trio of TPG funds, including its $2 billion Rise Fund, together invested $1 billion in Chinese internet giant Baidu’s spinout of its financial services unit last year.
Ken Mehlman, co-head of KKR Global Impact, told ImpactAlpha that Ramky fit the Global Impact fund’s profile. Co-investing with the larger Asia Fund gave Global Impact investors exposure to the firm’s growth potential. Ramky is trying to tackle the enormous issue of municipal waste in India. Less than 70% of solid waste is collected; less than 20% is treated or processed.
“Ramky is the answer to the challenge of India’s municipal solid waste, and its industrial waste,” Mehlman said. “Amid policy imperatives, a growing population and rising middle class, it’s well positioned as a strong commercial opportunity.”
Ramky has 55 facilities in India, which collectively have the capacity to handle 4.5 million tons of municipal and industrial waste. Its services range from municipal, hazardous, and biomedical waste management, waste to energy generation, recycling, and street sweeping.
Impact investors have long co-invested with commercial investors, of course. What is new is deals that include impact and conventional funds from the same firm. The Securities and Exchange Commission enforces “cherry picking” rules that govern how managers can allocate deals within firms.
Some impact investors have cited their ongoing strategic and governance influence as an added value of having mission-aligned capital. Mehlman said the Global Impact fund, as a minority partner, would instead support the Asia fund’s environmental, social and governance-focused (ESG) approach.
“One of the most important theses in ESG work to not only help [companies] grow but make sure they’re continuing to grow in the most responsible way,” he said. “The Asia fund would also do this—this is obviously something we do across KKR.”
The Global Impact Fund will report on metrics around Ramky’s environmental practices, worker safety, community engagement, governance and transparency, and a zero tolerance policy on corruption.
He said the Global Impact Fund, which has pledged alignment with the U.N. Sustainable Development Goals, is “still finalizing” its impact methodology, which will be aligned to standards of the Sustainability Accounting Standards Board (see, “Y Analytics: The Rise Fund’s new impact measurement business gets a mixed welcome).
“There are great examples of companies where, the more services they sell, the more customers they have, the more they will contribute to the U.N. SDGs, and the more investors are likely to be rewarded,” Mehlman said. “What we’re looking for is direct alignment between commercial outcomes and impact outcomes.”
He said the Global Impact fund would benefit from KKR’s expertise in sectors such as the circular economy, clean water, energy efficiency and education. The Global Impact fund will generally pursue deals of less than $100 million, too small for most of KKR’s multi-billion dollar funds. Global Impact is looking to make 12 to 15 such investments.
“It’s a reflection of the fact that, in emerging trends, the size of the companies are smaller,” Ken Mehlman, co-head of KKR Global Impact, told ImpactAlpha. “We were missing opportunities where the investment check was under $100 million. Rather than saying no, we created a vehicle to take advantage of those.”
KKR launched fundraising for the planned $1 billion fund fund last April. KKR’s spokesperson declined to comment on how much capital has been raised to date.