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



ImpactAlpha, May 3 – The era of impact-washing is over.

That statement may seem premature, given the daily announcements from big banks and investment firms of green-finance commitments, sustainable and impact funds and change-the-world startups.

Yes, there will be a long tail of overinflated rhetoric, underdeveloped measurement and deals with questionable impact. Yes, there’s a continuing need for journalists and analysts, entrepreneurs and investors, to call out cases where the track-record doesn’t match the hype.

But as a stage of market-development, impact-washing no longer serves a purpose. If impact or, more broadly, environmental, social and governance factors, are indeed pointers to long-term outperformance and/or reduced risks, then it follows that you can’t just fake it through marketing. The opportunities and risks are what they are. You have to really reach those markets, deliver those products and services and improve those lives and ecosystems to grab the impact alpha.

That makes impact-washing not just bad marketing, but bad investing.

Driving that conceptual shift is particularly timely with the entry of the big private-equity firms into the impact investing space. The charge of impact-washing seems to be a reflexive reaction to the large impact fund raises by firms like Bain Capital, TPG and KKR that have made a lot of money on, let’s just call them ‘other strategies.’ That history has caused no small amount of skepticism from the impact faithful.

Measuring impact

Those Big Three private-equity firms, and fund managers at shops like Carlyle Group, Blackstone and Apollo Global Management that may follow them, will be on the hook for impact measurement, by choice. 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,” as ImpactAlpha reported this week. KKR will require portfolio companies to be aligned with specific UN Sustainable Development Goals and to measure and report on specific impact outcomes.

>>MORE What we know about KKR’s $1 billion Global Impact Fund

Bain Capital’s $390 million Double Impact fund has been on a dealmaking roll in the past few weeks, taking stakes in two “sustainable meals” restaurant chains and Penn Foster, an online, for-profit school that trains U.S. workers for jobs that require more than a high-school diploma but less than a four-year college degree. For the restaurant chains, Bain will track metrics such as “unsustainable meals displaced.” At Penn Foster, Bain will measure how education and training impacts earnings, Bain Capital Double Impact’s Warren Valdmanis told ImpactAlpha’s Jessica Pothering.

Bain has promised to report on the 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,” the head of the Double Impact fund, former Massachusetts Gov. Deval Patrick, told me last year.

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

TPG Growth’s Rise Fund has perhaps the most mature impact measurement framework, developed with the help of Bridgespan, the strategic consulting firm. TPG’s Bill McGlashan told me each Rise Fund investment is underwritten not only for financial targets, but for a specific “impact multiple of money,” – a dollar-value it expects to deliver in a quantifiable output that can be linked (i.e. by research) to a positive outcome.

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

For example, Dodla Dairy in Hyderabad, India, has committed to generating higher incomes to the 280,000 small farmers who produce milk for the dairy. The total, as audited by KPMG, is supposed to be some multiple of the Rise Fund’s $50 million investment, or hundreds of millions of dollars in improved livelihoods. “We’ve actually moved our forecast upwards, because we’re delivering even better than anticipated impact,” McGlashan told me.

Enterprise Additionality

The skeptics were particularly aroused by the Rise Fund’s latest deal, an investment in the spinoff of Chinese internet giant Baidu’s financial services arm. The Rise Fund was one of three TPG funds that put up $1 billion, with $900 million coming from Carlyle, Taikang Insurance, Agricultural Bank of China International and other investors.

“Seems hard to argue the deal would not have happened without TPG Rise #impinv capital,” tweeted the Nonprofit Finance Fund’s Antony Bugg-Levine. He raised the bar on impact reporting to not only include absolute improvement, but the “additionality” of the impact investment. There’s a long-running, generally good-natured debate (h/t Paul Brest) about whether an investment really has impact if a non-impact investor would have made it anyway.

“This investment would not pass that test,” Bugg-Levine’s tweet thread continued. “Which implies that TPG’s impact algorithm is ignoring a counterfactual standard (what would have happened if TPG Rise did not invest) or else would score a ‘0’ on the ‘Impact Multiple of Money.’”

I think that slices it too narrowly. The most important additionality is not just the additional capital. It’s not whether that venture or that sector or geography would not otherwise attract investment. Capital-market gaps should, and will over time, get filled by fungible, anonymous dollars from all kinds of investors.

The additionality we need is in the total volume of goodness in the world. That is delivered by the enterprises, not the investors (h/t Clara Miller). In the case of Baidu’s unit, that metric will be the social impact of lending to customers with limited access to credit and to education loans.

The Rise Fund cited Baidu FSG’s participation in the World Bank’s Universal Financial Access 2020 initiative. In 2015, the World Bank Group committed to enabling one billion people to gain access to transaction accounts; the next year Baidu pledged to open 10 million such accounts. That’s more than some other partners, but only one-tenth as many as the 100 million pledged by Chinese internet rival Ali Baba’s Ant Financial group, for example.

The point is that if financial inclusion – providing access to financial services for the approximately two billion “unbanked” adults worldwide – really is a recipe for growth as well as an intervention against poverty, the Rise Fund is the obvious champion among Baidu FSG’s new set of owners. Is the presence of the Rise Fund alongside other TPG funds and non-impact investors a signal of impact-washing? Or a way to put the whole deal on the hook for the research-based, audited measurement system McGlashan is touting?

Sure, there will be free-riders among legacy firms, including TPG’s other units, who get the impact alpha from all that hard work of thinking and managing. So be it. If Baidu FSG, now renamed Du Xiaoman, boosts its inclusive finance performance by 10X or 100X, or changes for the better the financial system altogether, that’s additionality for the impact fund manager who helps makes it happen.

Impact-washing has become self-limiting. Marketing may help bring in the limited partners to launch a fund, but impact outperformance will be what counts in the end.

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