The Brief: The key to the surprising health of the US economy

The team at

ImpactAlpha

Greetings, Agents of Impact! 

In today’s Brief:

  • Workers and economic growth in ‘Macro Impact’
  • Impact incentives for fund managers
  • Carbon sequestration dealmaking in Canada
  • $200 billion in dry impact powder

👋 The Call: Compensating impact fund managers for… impact. Fund managers are accustomed to receiving most of their compensation in the form of carried interest, or “carry,” in the profits of their investments. A growing number of impact fund managers are linking their carry to impact outcomes as well, and awarding bonuses and promotions based on impact performance (see Impact Voices, below). Practitioners say impact-linked compensation can deepen impact, improve accountability and differentiate funds – but it’s complicated. To explore the hows and whys (and why-nots) of “impact carry” and other incentives, join Aunnie Patton Power of The Impact, Bjoern Struewer of Roots of Impact and other Agents of Impact, Wednesday, Jan. 17 at 10am PT / 1pm ET / 6pm London. RSVP today

Featured: Macro Impact

Key to the surprising health of the US economy: Small but steady gains for workers. What’s good for workers appears to be good for the economy, and even for corporate profits. As the Federal Reserve looks closer to taming inflation without a recession, “the key to the happy outcome is the surprising resilience and strength of the labor market, which is driving increases in real wages, including for low-income workers,” ImpactAlpha contributing editor Robert Brown writes in his Macro Impact column. Rising incomes, which are growing even faster than spending, mean consumers appear positioned to support the economy even as high interest rates remain a drag on infrastructure spending and capital investment. At the same time, the services sector, with a workforce heavy on low-wage workers, is recording record profits. “The tenuous and nascent dynamic provides a basis for at least faint optimism,” Brown says. 

  • Real incomes. Real disposable personal income growth is consistently exceeding real spending – a favorable and unusual dynamic, Brown writes. “While those who have the most continue to out-earn by a wide margin those who have the least, it does appear that the lowest-income earners are gaining ground.” As of January 2022 (the latest available data), the lowest-income quintile of the US population earned 4% of total earned income, up from 3.2% a decade earlier. The highest-income cohort earned 47% of all income – “an unsettlingly high share, but still lower than where it was a decade earlier, at 50%,” writes Brown.
  • Profit motive. “A strong labor market appears to be thriving alongside record corporate profits,” says Brown, who has headed research at Atlas Impact Partners, JUST Capital, AllianceBernstein, Morgan Stanley and other firms. Third-quarter corporate profits last year were $3.3 trillion (annualized), more than 30% higher than the pre-Covid level of $2.5 trillion in 2019. Driving profits growth is the services sector, which employs more than 80% of America’s 134 million workers. “This dynamic between income, consumption and profitability provides a hopeful signal for workers, as it supports a tighter labor market,” writes Brown, “particularly in those segments of the workforce where real wages had remained stagnant for too long.”

Impact Voices: Impact Incentives

More impact fund managers tie their compensation to impact along with financial performance. The sustainable forestry fund manager New Forests pegs 20% of its portion of profits, or carry, to its impact outcomes for its Africa fund. Impact Partners links 100% of its carry to impact performance. British International Investment, the UK development finance institution, factors impact performance into bonuses for its investment teams. About 30% of impact fund managers and general partners use such impact-linked compensation approaches to align financial incentives and impact performance. “As interest grows, fund managers are looking for – and sharing – ways to make it easier to design funds and portfolios that account for impact achievements,” writes The ImPact fellow Aunnie Patton Power in a guest post on ImpactAlpha. “First-generation impact incentive models,” she says, “will fuel the progression of second-generation approaches.”

  • Incentive models. As a basis for establishing frameworks and best practices, Patton Power and the Impact Linked Compensation Project surveyed more than 200 impact fund managers, limited partners and intermediaries on impact-linked compensation. The most common approach is impact-linked carry, which ties a portion of funds’ profits to impact outcomes. Other approaches include impact-linked bonus structures and performance reviews. “There is no one-size-fits-all approach. Impact-linked compensation is a dynamic process that needs a tailored approach for each fund,” Patton Power writes.
  • Costs and complexities. Widespread adoption of impact-linked incentives has been hampered by challenges in impact measurement, timing mismatches, and accounting and tax considerations. “If impact carry is to move beyond the realm of a widely supported but largely theoretical concept, we must reckon with these practical challenges and devise solutions that fairly allocate risk, reward and cost between investors and impact fund managers,” Chintan Panchal and Aaron Bourke of the law firm RPCK Rastegar Panchal previously wrote on ImpactAlpha. Ceniarth’s Diane Isenberg and Greg Neichin included impact-aligned compensation among the “well-intentioned concepts” that have not “moved beyond interesting, yet small, niche vehicles.”
  • Read the full post. And join The Call, “Compensating impact fund managers for… impact,” Wednesday, Jan. 17. RSVP.

Dealflow: The Transition

Canada Growth Fund invests in Entropy and contracts for carbon storage. In one of the first deals of its kind, the government-backed Canada Growth Fund entered into a long-term offtake agreement for stored carbon alongside its $200 million investment Calgary-based Entropy’s carbon capture and storage technology. CCS, which captures direct emissions from fossil fuel and other polluting plants and buries it underground, got a boost at last month’s COP28 climate summit in Dubai; critics say investment in the technology will divert resources away from green projects and give cover to fossil fuel expansion.

  • Home grown. Entropy uses advanced CCS technology developed at the University of Regina in Saskatchewan. Brookfield’s Global Transition Fund in 2022 invested $300 million to help Entropy scale up. “With its abundance of natural resources, access to high-quality geological storage, and sophisticated engineering know-how, Canada is the best place in the world to build a CCS industry,” said Canada Growth Fund’s Patrick Charbonneau
  • Carbon offtakes. Canada Growth Fund, a $15 billion investment vehicle of the Canadian government, will buy up at least 2.8 million tons of carbon credits over 15 years at a fixed rate of $86.50 per ton. Entropy’s Mike Belenkie said the large-scale carbon credit offtake agreement and long-term pricing gives the company’s Glacier Phase 2 natural gas CCS project “a clear path to accelerating growth and reducing emissions, right here at home.”
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Dealflow overflow. Investment news crossing our desks:

  • French energy giant TotalEnergies invested $300 million for a 50% stake in a one-gigawatt portfolio of solar and wind projects in India. (ESG Today)
  • Netherlands-based SolarDuck raised €15 million ($16.4 million) from Katapult Ocean, Energy Transition Fund Rotterdam and Invest-NL to deploy offshore floating solar projects. (EU-Startups)
  • Larkai Healthcare, an Indian health tech startup, snagged $500,000 in seed financing for AI-based early-stage heart disease detection. (Startup Story)

Short Signals: What We’re Reading

💲 Dry impact powder. Pitchbook data shows that private market impact funds have $741 billion in assets under management (the GIIN’s $1.2 trillion figure includes investments not found in private fund structures). Of that total, $200 billion is in dry powder waiting to be allocated. (Pitchbook)

🚢 Investing in maritime decarbonization. The Poseidon Principles, a banking coalition for shipping finance, is targeting net-zero emissions by 2050, in line with the International Maritime Organization’s target. The strategy calls for a 5% uptake by 2030 of near-zero emissions tech, fuels and energy sources. (Environmental Defense Fund)

🌍African climate tech. Catalyst Fund received more than 3,000 pitch decks from climate tech innovators in Africa last year. Among the 300 that exclusively focus on climate solutions in Africa, agriculture and energy startups make up the bulk of startup activity. (Catalyst Fund)

🗺️ Treasure map to progress. Too many startups are focused on a few familiar industries. The VC firm 50 Years mapped massive market opportunities in the US with little startup investment. The top industries to build in are paper, plastics and rubber, housing construction, chemical products and education. (50 Years)

🇺🇸 Uptick in American dynamism. A surge in pandemic-era startup activity boosted the economic dynamism (measured by startup rate, movement of workers, and pace of innovation) of the average US state to a 13-year high. Despite the uptick, American dynamism still lags the peak levels of the 1990s. (Economic Innovation Group)

🎓 Responsible investing 101. The ‘ESG Explainer’ educates people about responsible investing, dispels myths about ESG, and explores the political agendas around money and financial futures. (Americans for Financial Reform Education Fund and Take On Wall Street)

Agents of Impact: Follow the Talent

Impact Capital Managers will honor DBL Partners’ Nancy Pfund, Caprock’s Mark Berryman and Adrianna Alterman of Salesforce Ventures Impact Fund at its second annual Evening of Impact on Thursday, Feb. 1 in New York… Fernando Fabre, former president of Endeavor Global, becomes CEO of Kauffman Fellows, replacing Jeffrey Harbach… WAVE Equity Partners names Kelly Moulton, ex- of North Sea Electronics, as head of capital formation.

National Philanthropic Trust, a public charity that manages donor-advised funds, appoints Jeffrey Armbrister of Hamilton Lane, and Connie Collingsworth, ex- of Bill & Melinda Gates Foundation, to its board of trustees… PSP Investments is hiring a director of active ownership for its sustainable investments team in Montreal… Abt Associates is recruiting a private capital intern. 

Accion seeks an investment officer in Bogotá, Colombia… Symbiotics is on the hunt for an intern… Mana Impact Group has an opening for an impact investment intern in Singapore… Rockefeller Foundation is looking for an innovative finance summer associate and a finance intern in New York… Temasek is accepting applications from undergraduate or postgraduate students for its 2025 associate internship program in New York.

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

Thank you for your impact!

– Jan. 4, 2024