The Brief: Incentivizing impact

The team at

ImpactAlpha

Greetings, Agents of Impact! 

In today’s Brief:

  • Incentivizing impact fund managers
  • Project Equity’s employee ownership
  • TPG and Black-led private equity
  • Pricing climate risk in muni bonds

Featured: Incentivizing Impact

From funds to managers to enterprises, some investors are aligning incentives for impact. Nearly all of the actual impact in impact investments comes from the ground up. If it makes sense to incentivize enterprises on the ground to deliver on their impact objectives, it could logically follow that compensation for the fund managers who invest in them should be tied to such outcomes. In search of such alignment, the European Investment Bank, a financing arm of the European Union, requires the private equity and venture capital fund managers in its fund of funds to link their carried interest, or share of profits, to impact objectives. Netherlands-based Wire Group invests in funds that link their returns to impact – and does the same for its own fund of funds. “There needs to be incentives at all levels,” says Bjoern Struewer of Roots of Impact, which has structured impact bonus payments for social enterprises and is now turning its attention to help fund managers embed such incentives.  

  • Top-down influence. An increasing number of investors and fund managers are raising the impact stakes with financial incentives that tie their success to the impact of others farther down the investment food chain. The European Investment Fund’s managers must use the fund’s impact performance methodology to show “how successful a fund manager is in selecting portfolio companies that are capable of implementing their impact agenda and delivering on their theory of change,” says EIF’s Uli Grabenwarter. Wire Group links 100% of its share of carried interest to impact outcomes from its portfolio. “Our work exposes us to new innovations that may contribute to a more conscious economy, and challenges us to implement such mechanisms and best practices ourselves,” Wire Group’s Ronald Janse writes in a guest post on ImpactAlpha. Read his full piece.
  • Walking the talk. The push for fund managers to adopt such impact accountability measures often comes from the general partners themselves, rather than their investors. “It’s about walking the talk,” says Gilberto Ribeiro of Brazil-based Vox Capital, which was one of the earliest adopters of impact-linked carried interest. Africa and India-focused Beyond Capital Ventures shares its portion of carry with its portfolio businesses. “We want a partnership with our investees where we’re bonded with our portfolio companies in the success of our fund,” says Beyond Capital’s Eva Yazhari.
  • Adaptability matters. Impact incentives are still in the early days of design and adoption (for background see, “Navigating the metrics and management of impact incentives“). Africa-focused lender Balloon Ventures tinkered with its loan terms to incentivize borrowers to create formal, fair-pay jobs. Another private lender, Beneficial Returns, forgives social enterprises’ final loan payment if they achieve their impact targets. “We need to reform the mindset of doing business in the financial markets,” says Vox’s Ribeiro. “Otherwise, we will only reproduce the kind of externalities, inequality and problems that we are seeking to solve.”
  • Keep reading, “From funds to managers to enterprises, some investors are aligning incentives for impact,” by Jessica Pothering on ImpactAlpha.
  • The Call: Last chance to RSVP. To explore the hows and whys (and why-nots) of “impact carry” and other incentives, join Aunnie Patton Power of The Impact, Uli Grabenwarter of European Investment Fund, Gilberto Ribeiro of Vox Capital, Santiago Alvarez of ALIVE Ventures, Bjoern Struewer of Roots of Impact, and other Agents of Impact on a subscribers-only Call, Wednesday, Jan. 17 at 10am PT / 1pm ET / 6pm London. RSVP today.

Dealflow: Ownership Economy

A to Z Impact backs Project Equity’s Employee Ownership Catalyst Fund. Oakland-based nonprofit Project Equity launched the Employee Ownership Catalyst Fund in 2021 to raise $20 million for retiring small and mid-sized business owners seeking to sell to their employees. The evergreen fund, co-managed with Mission Driven Finance, has built a portfolio of employee-owned businesses via structures like employee stock ownership plans, employee ownership trusts, and worker cooperatives. “We’ve financed six transactions to date, with a strong pipeline coming behind,” Project Equity’s Alison Lingane told ImpactAlpha (listen to “How Project Equity is surfing the ‘silver tsunami’ to help turn employees into owners”). A to Z Impact, an impact-first family office, provided the Project Equity fund with $400,000 in debt capital.

  • Impact-first capital. The investment from A to Z Impact offers Project Equity more flexibility to provide low-cost financing, such as low-interest revenue-based financing, to business owners for employee ownership-conversion deals. That will lead “to more wealth creation for the employee owners,” A to Z Impact’s Alex Evangelides wrote on Medium. The majority of the worker-owned companies in the Employee Ownership Catalyst Fund’s portfolio are low-income workers. Half of them are women and people of color.
  • Working capital. Among Project Equity’s portfolio companies is The Local Butcher Shop in Berkeley, Calif., whose original owners secured low-cost financing from the fund in October 2021 to convert the shop to a worker-owned co-op. The Employee Ownership Catalyst Fund recently extended a forgivable working capital loan to The Local Butcher Shop’s worker-owners. Other backers in the fund include Living Cities and foundations, high-net-worth individuals and a donor-advised fund.
  • Check it out.

TPG NEXT anchors Black-led private equity strategy. TPG NEXT, backed by a $500 million allocation from the California Public Employees’ Retirement System, has lined up a pipeline of 150 diverse alternative asset managers. The latest: The Visualize Group, which hunts for middle-market public and private market investment opportunities in “under-followed, under-researched and under-invested” companies offering business and industrial services, said Visualize’s Melvin Ike. “We are focused on making strategic, long-term investments in high-quality companies and serving as a partner to these teams in navigating their growth.” Ike left Blackstone last year to launch Visualize.

  • Return on inclusion. TPG NEXT joins the Visualize private equity strategy alongside a roster of LPs that include university endowments, foundations and family offices. “We are looking to back investor entrepreneurs who have developed a differentiated strategy and have the entrepreneurial drive required to build an innovative investment firm,” said TPG NEXT’s Pamela Pavkov. Through its investor-in-residence program, TPG NEXT has backed Latino-led Vamos Ventures and Black-led Harlem Capital and LandSpire Group.
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Dealflow overflow. Investment news crossing our desks:

  • BlackRock is acquiring Global Infrastructure Partners, an infrastructure investor in energy, transport, digital infrastructure and waste management. The deal is valued at $12.5 billion. (Bloomberg)
  • NineDot Energy raked in $225 million in equity financing, led by $135 million from Manulife Investment Management, for its pipeline of community-scale energy storage projects in New York. (NineDot)
  • Norwegian impact fund manager Sandwater raised 1.4 billion Norwegian kroner ($135 million) to invest in early-stage climate, energy and health ventures in the Nordics and Northern Europe. (Sandwater)
  • Côte d’Ivoire-based Lapaire, which offers free vision tests and low-cost eyeglasses, snagged $3 million in equity led by Investisseurs & Partenaires. (Techpoint Africa)

Signals: Muni Impact

As climate risk heats up, state and local governments may be on the hook. Americans have been moving in droves to low-tax states like Florida, Texas and Arizona. Those same places are among the most vulnerable to extreme heat, droughts, storms and flooding, putting more people in the path of climate-driven disasters. The population magnets are able to issue tax-exempt bonds due to stellar credit ratings and positive revenue outlooks – and because climate risk is not factored in. “Climate change risks and preparedness may become the pension issue for the 2020s,” Tom Doe of Concord, Mass.-based Municipal Market Analytics, told the Senate Budget Committee last week. Some private insurers are pulling out of risky locations. Tight budgets constrain the ability of the federal government to act as a “credit stabilizer” by backstopping increasingly frequent disasters. Unlike pension restructurings, Doe says, climate-related disasters “have the potential to cause a sustained, non-reversible erosion of the tax base, or devastate it immediately.”

  • Mispriced risk. It’s been easy for municipal bond issuers and investors to ignore climate risks because the federal government often steps in after weather-related catastrophes. A record 28 weather-related disasters cost $1 billion or more last year. Another factor: the short-term outlook of credit rating agencies for what are often decade-plus municipal bonds. The absence of a climate risk penalty provides an opportunity for issuers to invest in climate resilience before greater investor scrutiny arrives. State and local governments can and should start to take the costs of adapting to a changing climate away from Washington, Doe told ImpactAlpha. “Adaptation responsibility is coming to state and local governments.”
  • Keep reading, “As climate risk heats up, state and local governments may be on the hook,” by Andrea Riquier on ImpactAlpha. 

Agents of Impact: Follow the Talent

Changing of the climate guards: John Kerry will step down as President Biden’s special climate envoy this spring. The news follows the retirement last week of his Chinese counterpart, Xie Zhenhua. Their close relationship was a stabilizing force in global climate negotiations, including COP28. Also departing: the UK’s chief climate advisor, Chris Stark, who will join advisory group Carbon Trust in April. Stark is a critic of his government’s recent climate rollbacks.

Joohee Rand, former associate partner at Tideline, succeeds Diane Damskey as head of secretariat for the Impact Principles at the Global Impact Investing Network… Reinvestment Fund promotes Emily Dowdall to president of policy solutions and Tiffany Patterson to chief communications and mission officer. The organization is recruiting a senior loan officer in Philadelphia.

The Rockefeller Foundation seeks a regenerative agriculture manager in New York… Also in New York, Ford Foundation has an opening for an impact investing fellow… MCE Social Capital is on the hunt for a chief financial officer… Boundary Stone Partners is hiring an associate in the Washington-Baltimore area… Generate is looking for a portfolio finance associate in San Francisco… Oikocredit seeks a sustainable impact analyst in the Netherlands… The Bezos Earth Fund is soliciting proposals for its $1 million Greenhouse Gas Removal Ideation Prize.

👉 View (or post) impact investing jobs on ImpactAlpha’s new Career Hub.

Thank you for your impact!

– Jan. 16, 2024