When Apollo Global launched its impact strategy five years ago, it brought in impact investing industry veteran Lisa Hall to help shape the investment giant’s approach to impact.
“There is an expectation, more and more, that impact approaches will infiltrate the firm,” Hall told ImpactAlpha at the time.
Apollo’s latest impact report opens with a tribute to Hall, who passed away earlier this year.
There are signs that the seeds she planted are taking root. Apollo in 2022 launched its Sustainable Investing Platform, a cross-asset class strategy that has pledged to invest $100 billion for clean energy and sustainable investments by 2030, and $50 billion by 2027. The alternative asset manager has invested more than $30 billion towards those goals to date, including in community solar and wind power.
Apollo was also a founding partner of Ownership Works, a consortium of investment firms that have committed to creating ownership opportunities for their portfolio companies’ workers. Apollo’s Empower program offers financial wellness, retirement programs and upskilling opportunities for workers at its portfolio companies to promote long-term financial security.
“We believe expanding opportunity for workers across our funds’ portfolio is fundamental to value creation,” says Joanna Reiss, who has co-headed Apollo Impact Mission, as the impact strategy is called, since its launch.
Of course, Apollo’s $1 billion impact fund, and even its sustainable investing platform, are a small slice of its $785 billion in assets under management. The firm has often been in the hot seat for the PE industry. Apollo was called out in a Congressional report earlier this year for prioritizing “profits over patients” at a hospital owned by its portfolio company, Lifepoint Health. The deal also features in journalist Megan Greenwell’s new book about the PE industry, Bad Company.
But the foundation that Hall helped to lay for the impact platform is proving durable even amid a shifting of political winds, says Reiss, who spoke to ImpactAlpha about the AIM’s progress.
AIM screens prospective investees using Impact Management Project’s “Five Dimensions” framework, and then applies a further impact underwriting process, in addition to Apollo’s standard PE due diligence. Three to five key performance metrics are identified for each portfolio company, and 10% of Apollo’s carried interest as well as a portion of portfolio company management’s equity compensation is tied to their progress.
The fund is focused on mature, middle market opportunities across education, economic opportunity, health, safety and wellness, climate and sustainability, and industry transformation. AIM has made seven investments to date, including in Reno De Medici, a producer of recycled cardboard in Europe, Smart Start, which sells alcohol monitoring programs that can lock ignitions if a driver has been drinking, and Supplemental Health Care, which helps place health professionals in hard-to-staff locations.
For its most recent investment last November, Apollo’s impact fund teamed up with the firm’s climate group to buy a majority stake in The State Group, a renewable energy and industrial services contractor based in Franklin, Tennessee.
“We made sure to avoid companies that were reliant on changes in government regulations, the subsidies that struck us as unsustainable, or in consumer behavior changing materially,” says Reiss. “It’s a ‘bring your umbrella’ type approach to investing.”
Of Hall, she says, “When we launched this platform five years ago, Apollo was new to the impact space, and so having someone of Lisa’s caliber, stature and wisdom there to design everything that we do, to help us think through what it meant to bring impact into later stage businesses… her fingerprints are all over everything I do every single day.”
Collinearity
One of the first questions AIM asks when considering a new investment, says Reiss, is, “what is the impact this company has through its goods and services, its source of revenue, its reason for existing? And if we’re going to get more of what we want from an impact perspective, is the company going to be bigger, more valuable, more profitable, or not?”
Collinearity means that impact is intrinsic to a business model and drives financial performance. “We’re setting out to grow the company’s impact and grow the investors’ capital, and so finding companies where that is mutually reinforcing is absolutely essential,” she says.
One example: Heritage Grocers Group, which operates grocery stores in underserved communities. Apollo acquired Heritage in 2022 and then added two other ethnic-serving grocery chains — Cardenas Markets and El Rancho Supermercado — to the mix. More than three-quarters of Heritage’s 115 stores are in low-income communities.
“The better we’re doing at selling fruits and vegetables, which is one of our KPIs for that company, the more profitable we’ll be, the more differentiated will be, the more valuable the company will be. At the same time, that community is eating healthier foods that are true to their culture, served in an environment that is deeply respectful of their traditions, that has that specialty item that you won’t get at a Kroger. That’s a perfect example of that alignment where we look to have.”
The investment in Heritage drew on Apollo’s long track record with grocery investments. “We developed a thesis around food deserts and around underserved ethnic communities who have their own food cultures, their own traditions, and might not be well served by your typical conventional grocer, and certainly aren’t well served by a corner bodega selling mostly processed food,” Reiss says.
“So how do you create that cultural access and that more healthful product? We built Heritage Grocers around that.”
Embedding impact
A key part of Apollo’s process is instilling an impact mindset at its portfolio companies that may not see themselves that way. “We’ve never bought a company that had thought of itself as impactful, that had any sort of impact practices instilled in it, and now we have seven companies who get it that focusing on impact can help them to be more successful,” says Reiss.
Take Texas-based Accent, a maker of baling wire, an overlooked but integral part of the recycling value chain. The company’s baling wire and strapping machines compress and hold crushed plastic, cardboard, aluminum and other recyclables, enabling the materials to be transported more cost effectively. But the company, says Reiss, had never articulated its value-add to its 5,000 customers, mainly large retailers and recyclers.
Nor, she says, did management explain to employees “why what they’re doing matters, why it’s important to improve the scrap rate at the factories” and reduce the amount of energy intensive bailing wire that needs to be produced. When employees understand the bigger picture behind their work, they are more motivated to engage and recommend improvement, she said.
AIM has rolled out an employee ownership program at Accent. “It’s something that we’re looking to do across the platform, wherever it can make sense,” she says.
For portfolio companies, the process of quantifying their emissions, setting targets and working to improve them is improving their bottom lines as well as their standing with customers, says Reiss. “I believe the practices will continue after our ownership, because they’re collinear businesses, but also now they’ve learned a new muscle.”
Dry powder
When Apollo Global launched its impact strategy five years ago, the murder of George Floyd was still reverberating and the Covid pandemic was spotlighting social and economic vulnerabilities. Today, many of the initiatives unleashed during that period are being turned back under hostile political winds.
“To say there has been an enormous amount of change in the five years since we launched the Apollo Impact Mission would be an understatement,” Reiss and her impact co-head Steve Martinez write in the impact report’s introduction. “We cannot control the macro any more than we can control the weather, but we can be — and are — prepared for any storm.”
And with those shifting winds comes opportunity. “We as a firm really lean in when others are leaning out,” says Reiss. “These moments of dislocation are wonderful opportunities for the prepared.”
The opportunities include private equity peers looking to sell long-held portfolio companies to mollify their limited partners. “Sellers are finally accepting that rates are not going to go back to zero, and maybe it’s time to start thinking more seriously about selling. So it’s an interesting time to have dry powder and to be deploying.”
