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LP stakeholder pressure for PE, VC impact investing means demand is outstripping supply

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Growing LP demand for institutional quality impact investing is outstripping supply amid pressure from stakeholders to allocate more to the strategy, new research shows.

Private equity, sustainable infrastructure and venture capital were the top picks for LPs looking to expand their exposure to impact investing according to Rede Partners, a private markets fundraising advisory business.

The survey finds that investors feel the days of impact investment inevitably leading to below-market financial returns are over, with 98 per cent of LPs and 100 per cent of GPs surveyed expecting market-rate or better financial returns from impact investment.

Rede based its research on more than 100 hours of in-depth interviews with GPs, LPs and industry experts, almost entirely from the US and Europe.

The report said 95 per cent of LPs interviews believe impact will become more important for them and their clients, with none expecting the importance of the investment segment to fall.

US LPs were generally not as engaged as their European counterparts, however.

Underlying stakeholder appetite was cited by LPs as the primary driver for impact allocations – university endowments from students, corporate pension funds from employees and family offices from millennials.

Rede underlined how unusual it is to have such bottom-up client pressure driving allocations – making the theme well-rooted, but potentially increasing the risk of opportunistic ‘asset-gathering’ without well defined investment strategies.

It said the relative nascency of LP impact investment programmes provided further evidence of momentum, with about alf of LPs interviews having allocated to impact for the first time in the last three years.

Just 11 per cent of LP respondents invested into the first impact investment boom in the 2000s, in the cleantech sector, Rede added.

The survey suggests GPs and LPs agree that converging macro-economic drivers are creating sustainability megatrends that appear likely to influence investment activity for the foreseeable future, both for impact focused and generalist investors.

About 87 per cent of LPs expect to increase their allocation to impact strategies, and 91 per cent of GPs expect to increase deployment into impact investments, according to the report.

In terms of strategy, investor interest in sustainability continues to prioritise energy and protection of the environment, but now also incorporates a much wider range of issues such as health, education and gender diversity, increasing the investable universe across sectors and geographies.

LPs see private equity as a key allocation strategy, with 45 per cent listing it as their preferred asset class for allocation to impact, followed by clean infrastructure (32 per cent) and venture capital (18 per cent).

Few of the survey respondents mentioned private debt as an impact opportunity, which Rede puts down to a lack of funds, but numerous LPs mentioned the relatively small number of sizeable growth and buyout opportunities and expressed their preference to deploy greater sums of capital.

Preferred regions were balanced across Europe, Africa, Latin America and North America.

Jeremy Smith, senior adviser for sustainability at Rede Partners, said, “The evolution in interest in sustainability in recent years is exciting and showing real traction.

“Between 2000-2015 sustainability was characterised by relatively low awareness and high cost solutions such as cleantech.

“A generation later we are seeing a much higher awareness of sustainability issues combined with low cost commercial solutions.

“LPs and GPs are looking to invest into businesses benefiting from the sustainability megatrends, characterised by superior growth and downside protection, and concessionary financial return strategies are now the exception and not the rule.

“We are closer than ever to the ‘holy grail’ of impact investing – impact at scale.”

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