Distinct LP roles drive scale in impact investing market

Large allocators favour established managers in impact investing for their proven track record, but foundations and insurers play a vital role in backing emerging managers and fostering a more mature impact market, according to a new report.  

The study, released today, was jointly conducted by Institutional Limited Partners Association alongside consultancies Tideline and Campbell Lutyens, and includes interviews with more than 40 global LPs. 

Already limited by risk tolerance and minimum mandate sizes, larger institutions tend to be hesitant about working with emerging managers as they require more time and internal resources for due diligence. They may also have to resort to proxies when financial and impact data is not readily available. 

Ben Thornley, managing director of Tideline, which co-authored the report, said that it’s not always fair to expect large institutions to pour money into nascent strategies or managers despite their potential high impact.  

“One of the things that I’ve seen a lot recently in the press is a consternation about impact, in the sense that people want to have their cake and eat it too,” he told Top1000funds.com.  

“My response to that would be that the investors we’re talking about here are not trying to solve the world’s problems. They’re trying to contribute in positive ways and recognise that that may be at a system level, or it may be at the margins, or it may be a focus on a particular part of the market that is itself more mature.” 

The report also found that early-stage funds dominate by number but not by assets under management, indicating the market’s youth. This is where what the Thornley calls “bridging capital” – which includes foundations, insurers, public sector funds and increasingly, high-net-worth individuals – can fill a gap. 

These investors can support earlier stage funds because they have less constrained mandates, until managers develop a track record and mature to a point where they become a viable solution for larger allocators, said Thornley. 

Their presence could also address a thematic imbalance; nearly 25 per cent of the report’s LP respondents exclusively focus on climate in their impact allocation and all respondents have at least some focus on the theme. “We’re seeing in Australia some movement among foundations to consolidate their focus on impact in a way to help build the market,” Thornley said.  

“If we can start to segment a little more and recognise the different roles for different investor types, I think that will enable a more efficient matching of the demand for these kinds of investments with the supply.” 

Some large asset owners have used creative allocation methods access subscale impact fund or strategies. One instance is Temasek’s $500 million commitment to LeapFrog, with the Singaporean sovereign wealth fund set to invest in multiple future funds from the impact private equity firm.  

“It’s a single underwriting effort and diligence effort, but they’re able to deploy much more capital,” Thornley said. 

“That’s a really unique and powerful market-building signal because, of course, it then enabled Leapfrog to have the certainty of that investment as they continue to develop their platforms.” 

Fund of funds structures are another option but a less common one at this stage, Thornley said. 

But there are many other actions large asset owners can take to catalyse the impact’s market institutionalisation, including signalling clear demand to the market.  

For example, Japan’s $1.5 trillion Government Pension Investment Fund (GPIF)’s pivot to impact investing, formalised last May after the government instructed it to consider investing in social and environmental welfare in the domestic society, has sparked more impact integration in managers’ pitch for mandates.  

Dutch pension fund ABP also flagged its goal to invest €30 billion in impact by 2030 with a primary focus on private markets, which Thornley sees as an “activation” to the market. 

“In some sense, it’s clear that for folks who are really talented managers, who have been wanting to do this, can see that there’s a viable path to growing their businesses and ultimately attracting that kind of capital,” he said.  

“They may fund an initiative from a market building organisation, an example of that would be Temasek helping fund the creation of Impact Labs at the Global Impact Investing Network… But it’s certainly not the expectation that every institution can or should be doing that.” 

Other challenges identified by the report include data (with an abundance of information but little uniformity across standards) and infrastructure (a lack of secondaries markets and liquidity) in the impact market.