While the impact investing sector has undergone rapid growth, bfinance said it is not without its pitfalls, with concerns around “impact washing” and “SDG washing”.
Frithjof van Zyp, senior director at bfinance, said: “Growing client interest in relatively nascent impact private equity strategies has resulted in bfinance conducting multiple searches across this space over the last 12 months.
“Interestingly, these searches have uncovered a wide spectrum of available strategies which can vary greatly by impact type and philosophy. This has helped bfinance develop practical assessment criteria at a firm, fund, and deal level as outlined in the paper.”
The firm said that investors are able to enter private equity strategies that have an explicit mission to deliver impact with a reasonable expectation of non-concessionary returns alongside intentional, measurable impact, with target internal return rates (IRRs) ranging from 10 per cent to 25 per cent.
The research also found that recent launches have moved away from a venture capital or growth focus and looked to buyout funds — some of them over a billion US dollars in size.
There has been an emergence of dedicated impact fund-of-funds, custom separately managed accounts (SMAs), specialist secondaries funds, and co-investment funds, which bfinance said are “hallmarks of an increasingly mature asset class”.
Most investment managers, according to the research, focus on multiple environmental and social impact themes, though almost a third focus solely on environmental impact considerations, particularly climate. Nearly a third of managers use a methodology relating to the UN Sustainable Development Goals.
The company said that it is difficult to assess the credibility of impact private equity strategies, in part because idealised impact investing best practice does not yet translate into real life.
Based on recent manager research, bfinance said there are significant attributes that investors can now look out for when weighing up today’s impact private equity fund offerings. These “best practice signals” and “potential red flags” can be broken down as: those that relate to the deals, those that relate to the fund, and those that relate to the asset management firm.
Anna Morrison, senior director, private markets at bfinance, said: “In the last couple of years, we have seen an exceptional increase in interest and demand for ‘impact’ strategies among our institutional investor client base.
“Although this is evident in many asset classes, including public equities and real assets, activity has been particularly strong in private equity.
“Yet when it comes to implementation, investors can find it extremely difficult to assess and compare strategies from an ‘impact’ perspective: it is a challenging subject, not least because managers’ practices are evolving.”
