Climate Finance | June 28, 2018

Billion-Dollar Babies: Can big private-equity funds point the way to impact-driven growth?

David Bank and Dennis Price
Guest Author

David Bank and Dennis Price

It’s not easy to put a billion dollars to work for impact.

So ImpactAlpha is taking a look at where big private equity firms are placing their bets, starting with our own dealflow and other coverage.

(To dig deeper, we invite you to join our Agents of Impact Call No. 2, today, Thursday June 28, at 1 pm ET / 10 am PT / 5 pm GMT. Call in details will be posted on ImpactAlpha’s Slack channel 30 minutes before the call.) 

One of the striking developments in impact investing in recent years is the growth of fund managers that have crossed the billion-dollar mark in assets under management. Some, such as Leapfrog Investments have grown up as impact funds. Others, such as TPG Growth’s Rise Fund (with $2 billion) were hatched inside “conventional” private-equity firms (which, we have argued, makes the parent firms “hybrids”). KKR is out raising for a $1 billion Global Impact Fund.

What we know about Bain Capital’s $390 million Double Impact Fund

The advent of such billion-dollar babies is so new that the largest category in the annual ImpactAssets 50 list of fund managers, for example, is $250 million or more. That’s even though a half-dozen firms on the list have more than $1 billion in AUM (though not all are in private equity). Members of a new network of about two-dozen “Impact Capital Managers” count more than $5 billion in assets.

“We are intentionally saying, ‘There is a high-impact, high-return category,’” said Dave Kirkpatrick, managing director of SJF Ventures, a $260 million fund based in Durham, NC, who is among the founders of the new network. “There is a category of return-maximizing strategies that also drive impact.”

Cambridge Associates’ private equity/venture capital benchmark tracked 71 firms managing $10.8 billion. “The con­ver­gence of impact and pri­vate invest­ments isn’t just a pre­dic­tion or a ‘weak sig­nal’ we’re sens­ing,” Cambridge wrote in a post last month. “It’s pal­pa­ble – here and now and, impor­tantly, in look­ing ahead.”

Sustainable food and agriculture. A trifecta of climate change, resource constraints and shifting consumer demand for healthy and sustainable food options is transforming the $7.8 trillion food and agriculture industry, which employs 40% of the world’s population.

TPG’s Rise Fund’s second investment was a $50 million jolt into Indian dairy company Dodla. The 22 year-old company works with 280,000 smallholder farmers across 7,000 southern Indian villages, many of them surviving on the brink of poverty. Rise Fund says it is ahead of plan for its impact goals of raising milk producers’ income.

“Dodla is delivering hundreds of millions of measurable economic value to those farmers, in the form of their living income,” the Rise Fund’s Bill McGlashan told ImpactAlpha. “We pay on the spot, with long-term contracts. It turns out that if you create reliable payment to small stakeholder farmers, they will improve yield and earnings by 50% on average, just by the exercise of saying, ‘We will take everything you make.’”

Rise Fund’s Impact Multiple of Money: A conversation with TPG’s Bill McGlashan

Consumer behavior. Bain, DBL Partners and Bridges Fund Management have all backed sustainable food companies. In April Bain’s Double Impact fund backed both Sustainable Restaurant Group, based in Portland, Oregon, which operates five seafood restaurants, and vegan restaurant chain by CHLOE. Both of the moves were co-investments with Kitchen Fund, an early-stage restaurant investor.

“We’re firm believers that Americans will eat healthier, more sustainable food in the future than they do today,” Bain’s Warren Valdmanis told ImpactAlpha. The Double Impact team “has spent significant time analyzing the potential of the sector in order to be [at the forefront] of what we believe will be an impactful trend,” he said.

What we know about Bain Capital’s $390 million Double Impact Fund

Healthy lunches. DBL and Bridges have both invested in healthy school-meal providers. Earlier this year Bridges backed U.K.-based Innovate Services, which caters healthy meals to 90,000 primary and secondary school students in 120 schools across England. Bridges “identified school catering as an attractive sector,” said Bridge’s Emma Thorne, and backed Innovate because it was a “high-performing business whose focus on impact underpins its competitive advantage.” In 2006, DBL made the founding investment in Revolution Foods, which has growth to serve more than 200 million healthy meals a year in more than 1,500 schools and out-of-school programs in 16 states and Washington D.C.

India’s solar electricity rollout. India’s aggressive shift to solar energy is attracting lots of dealmakers, including Japan’s SoftBank Group Corp, which is reportedly aiming to invest a staggering $60 billion and $100 billion in solar-power generation in India. India already is ahead of schedule to hit its official renewable energy target of 175 gigawatts of installed capacity by 2022.

The Rise Fund staked $70 million on Hyderabad rooftop-commercial solar developer, Fourth Partner Energy. Fourth Partner Energy claims its platform has the potential to avert more than 16 million metric tons of carbon from the atmosphere, as well as reduce water-use and emissions from diesel generators. “The more solar systems they deploy, the more they save their customers money and the greater the positive environmental impact,” said the Rise Fund’s Rick Needham.

Financial services for emerging consumers. Some two billion people in low- and middle-income countries have mobile phones but limited access to financial services, according to the World Bank. LeagFrog Investments has built its reputation serving this fast-growing market in Africa, Asia and Latin America. About 85% of the 130 million customers reached by LeapFrog companies are low-income, often accessing insurance, savings, pensions, credit and healthcare for the first time, according to the company.

LeapFrog Investments: Insuring Families’ Rise out of Poverty

LeapFrog has backed NeoGrowth, a digital lender to small businesses in Mumbai; Cignifi, an alternative credit-scoring platform serving 13 countries including Mexico, Ghana, and Brazil; and Ghana’s largest and first publicly-listed insurer, Enterprise Group. LeapFrog also backed, and then exited, BIMA, a provider of micro, mobile-based life insurance in 14 countries in Asia, Africa and Latin America. Three-quarters of BIMA’s 30 million customers are getting insurance for the first time.

“Mobile technologies have fundamentally reshaped the future of financial services, creating an infrastructure to reach billions of first-time consumers in emerging markets,” said LeapFrog’s Andrew Kuper.

Last week, the firm took a stake in Nigerian pension fund manager ARM Pensions, which has about $1.8 billion in funds under management and reaches 700,000 people. In February, LeapFrog exited another West African pension company, Petra Trust, after helping the firm become Ghana’s largest independent pension provider.

TPG’s Rise Fund also is interested in financial services for emerging consumers. In May, the Rise Fund joined other TPG funds as part of a billion dollar investment in Baidu’s fintech spinoff, Du Xiaoman. The Rise Fund told ImpactAlpha it was keen on the firm’s lending to Chinese customers with limited access to credit and to education loans.

The Rise Fund also backed Kenyan digital payments company Cellulant, one of Africa’s biggest mobile money companies, with operations in 11 countries. “Expanding easy-to-use and low-cost mobile banking offers immense potential for impact, and Cellulant is at the leading edge of that work,” The Rise Fund’s McGlashan said in a statement.

Impact measurement. Tracking positive impact is essential if firms are going to take advantage of such megatrends. KKR has told investors its planned $1 billion Global Impact Fund will invest in businesses that deliver “commercial solutions that solve global challenges in credible and measurable ways.” KKR will require portfolio companies to be aligned with specific UN Sustainable Development Goals and to measure and report on specific impact outcomes.

The Impact Alpha: Big new private-equity funds are on the hook to deliver impact outperformance

Bain has promised to report on the Double Impact Fund’s impact under the so-called GIIRS rating standards developed by the nonprofit B Lab. “There are big secular trends driving market opportunities around mission-driven brands and companies whose products and services really stand for something,” former Massachusetts Gov. Deval Patrick, the head of the Double Impact fund, told ImpactAlpha last year.

TPG Growth’s Rise Fund’s impact measurement framework, developed with the help of Bridgespan, underwrites a specific “impact multiple of money” for each deal – a dollar-value it expects to deliver in a quantifiable output that can be linked (i.e. by research) to a positive outcome.

“Our view is that (returns and impact) are absolutely co-linear,” McGlashan says. “And we have been able to convince these large capital sources that they are co-linear. If the output of a business is that which creates impact, by definition the more successful you are, the more impact you deliver.”