The Brief: Private equity’s role in managing impact

Greetings Agents of Impact!

In today’s Brief:

• Private equity’s role in managing impact
• Investing in Africa’s small businesses
• Banking Brazil’s gig workers
• Impact-linked compensation in the IA50

⚡ Tomorrow’s Plugged In: Tech equity in action. Google-backed Tech Equity Collective is working to double the number of Black developers in tech by 2030. Tech Equity Collective’s Rachelle Olden joins ImpactAlpha’s Sherrell Dorsey on the next Plugged In, tomorrow, March 13 at 10am PT / 1pm ET / 5pm London. RSVP today.

👋 Next Week’s Call: The Great Deployment runs through the muni bond market. Join Calvert Impact Capital’s Beth Bafford, Growth Opps’ Michael Jeans, and other Agents of Impact on the next Call, Wednesday, March 20 at 10am PT / 1pm ET / 5pm London. RSVP today. Catch up on ImpactAlpha’s Muni Impact coverage, made possible with support from the Robert Wood Johnson Foundation.

Featured: Impact Management

A case study in private equity’s role in realizing impact. When Bridges Fund Management in January sold its stake in UK-based AgilityEco, which helps low-income households install heat pumps and other energy-saving upgrades, the deal generated a handsome internal rate of return for the London-based impact investor. The transaction also demonstrates “how private equity can enhance value and ensure the integration of environmental and social objectives,” argues Laurie Spengler of Courageous Capital Advisors in a guest post on ImpactAlpha. Bridges bolstered the company’s ability to deliver more and better services, says Spengler, and in the four years it held the company, it also helped AgilityEco adopt impact management practices such as listening to community voices and embracing employee ownership. The successful exit shows how private equity can sometimes serve “as a transformative force for societal wellbeing and environmental health,” says Spengler, who was not involved in the deal (for context, see “After the investment and before the exit, how fund managers drive alpha through impact”).

• Managing towards impact. Private equity firms are adopting impact strategies, but questions linger about their role in fostering resilient, inclusive and sustainable economies. Amid scrutiny, the concept of responsible exits by impact-committed private equity players has challenged the notion that only long-term capital can be impactful. Bridges helped AgilityEco implement an Employee Benefit Trust and reach B Corp status. “We must challenge ourselves to look beyond near-term financial returns and ask deeper questions,” says Spengler. What substantial changes have been spurred by these investments? Have they led to meaningful improvements in the business, in the lives of people, and in the health of our planet? “The absence of at least three identifiable, positive outcomes signals a need to recalibrate our approach,” she writes.

• Impact exit activity. Impact Capital Managers last year analyzed 230 exits from 30 impact funds, including TPG Rise’s exit from EverFi and SJF Ventures’ exit from Vital Farms. Nearly two-thirds of the deals met or exceeded financial performance targets, while eight in 10 met investor goals for impact. India-based agtech investor Omnivore notched two exits last year, in Barrix Agro and Ecozen. Also in India, Acumen has seen a trio of recent exits in moderate-growth, high impact “zebras” (Ziqitza Healthcare, Greenway Grameen and Sitara). British International Investment, in an effort to seed a secondary market for impact funds, recently sold its long-held stakes in funds run by Aavishkaar, Novastar Ventures and Adenia Capital. 

• Keep reading, “A case study in private equity’s role in realizing impact,” by Courageous Capital Advisors’ Laurie Spengler on ImpactAlpha.

Dealflow: Small Business Finance

XSML raises nearly $100 million to invest in African small and mid-sized businesses. The Amsterdam-based investment firm invests in growing African businesses providing basic consumer goods and services in less-invested markets like Uganda and the Democratic Republic of the Congo. For its fourth African Rivers Fund, it inked $98.7 million from the International Finance Corp., development finance institutions FMO, BII, Nordfund and Swedfund, as well as a fund managed by ResponsAbility. The fund will cut checks of up to $3 million in 50 growth-stage businesses. XSML has a target of $135 million for the fund.

• Track record. XSML was started 15 years ago by former executives of Dutch development bank FMO. Through three funds, it has invested $145 million in more than 70 African businesses through a mix of debt, equity and mezzanine finance. Portfolio companies include Kinshasa-based printing company Quick Print, Congolese hair and beauty brand Zuri Luxury, and Ugandan healthcare provider TMR Hospital. With its fourth fund, XSML is planning to open a new office in Zambia.
  
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Potencia Ventures backs Trampay to bank gig economy workers in Brazil (video). On-demand delivery of food, packages and other products provides much-need income for millions of gig workers in Brazil. Their schedules and pay are often inconsistent, and employee benefits such as health insurance are rare. Brasília-based Trampay provides a “safety net” of financial services, including access to credit for day-to-day expenses, to more than 20,000 gig workers, as well as physical spaces with restrooms, kitchens and meeting rooms. Demand has led to a seven-fold increase in Trampay’s revenues over the last year. Potencia invested $1.9 million Brazilian reais ($250,000) in the pre-seed round, following Trampay’s participation in Potencia’s fellowship program. “The future of work involves generating solutions for social problems,” Potencia’s Itali Collini told ImpactAlpha.

• Doubling down. Potencia has backed 40 venture capital funds, including Brazil’s Vox Capital, and more than two dozen impact startups in Latin America, Africa and India. Going forward, the firm will exclusively focus on Latin America, said Collini. “We’re doubling down in Latin America because we believe that this is a region that can bring a lot of impact and returns,” she told ImpactAlpha in a video interview. “It is a region full of creative, resourceful founders that can do a lot with little input.”
  
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Dealflow overflow. Investment news crossing our desks:

• MPower Ventures secured a $2 million loan from the Trade and Development Bank for Eastern and Southern Africa to deliver off-grid solar kits to Zambia’s rural households. (Afrik21)
  
• UK-based Greenlyte Carbon Technologies raised $11 million from Carbon Removal Partners, Earlybird Venture Capital and Green Generation Fund for its direct air capture technology. (TechEU)
  
• Brazil’s Nextron inked $5.2 million from Vox Capital, Copel Ventures, Valor Capital and other investors to connect energy users to renewable power on a subscription basis. (LatamList)

Signals: Impact Incentives

ImpactAssets 50: Fund managers are raising the bar by tying compensation to impact. A focus on climate and impact-linked compensation are among the trends in this year’s ImpactAssets 50 list. Some 155 impact funds representing $97 billion in assets under management made it onto the hotly anticipated list, culled this year from a record 343 submissions. “The growth and the number of funds that are applying, the diversity of strategies that people are advancing, and the increase in the emerging manager roster all speak to continued uptake and appetite for this type of investment approach,” AlTi Global’s Jed Emerson, who chairs the IA50 review committee, told ImpactAlpha. Some 43% of the IA50 managers target market-rate returns and 31% seek above-market returns. More than three-quarters report meeting their financial return targets and 21% report surpassing them. 

• Impact-linked pay. Almost one-quarter of managers report that they integrate impact results into their compensation strategies, up from 16% last year (for background see, “Moving from the ‘why’ to the ‘how’ of impact incentives”). Some of the more comprehensive approaches, said Sandra Osborne Kartt with ImpactAssets Capital Partners, involve setting impact targets at the outset of an investment with specific impact objectives and quantifiable targets to be achieved over the lifetime of an investment. A portion of the firms’ carried interest is then tied to the pre-set impact targets.

• Nature rising. Clean energy and climate tech are the dominant targets for climate-focused funds. But nature-based solutions are making a showing. Superorganism Ventures bills itself as a biodiversity investor. Emerging manager Trailhead Capital backs regenerative food and agriculture ventures. And BTG Pactual Timberland Investment Group focuses on sustainable forestry.
  
• Newcomers. More than a dozen impact funds made their first appearance on the IA50, now in its 13th year. They include South African clean energy investor Inspired Evolution Investment Management, Vancouver-based cleantech investor Active Impact Investments Management, Atlanta-based Collab Capital, which invests in Black-led businesses, and community lenders Blue Hub Loan Fund and Century Housing Corp.

• More. 

Agents of Impact: Follow the Talent

Temasek is recruiting a sustainability and climate change strategy consultant for a 12-month contract in Singapore… VisionFund International seeks a global impact director in London… Also in London, consulting firm APCO Impact is looking for a director for its climate team… MSCI is recruiting a climate data collection associate and an ESG data operations senior associate in Mumbai.

Biomimicry Institute is accepting applications until Friday, May 3 from startups addressing climate and nature-related issues for its 2024 Ray of Hope accelerator… Global Impact Investing Network is hosting its West Coast Impact Forum and Training in San Francisco, June 3-4.

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

Thank you for your impact!

– March 12, 2024