Impact investing has matured from its early days to encompass a range of strategies offering the potential for measurable impact and competitive returns.

A decade ago, the typical impact investing fund was small, run by a first-time manager, and invested in companies that required government subsidies for survival. These “Impact version 1.0” funds usually operated in the higher-risk venture capital space and were focused on addressing environmental concerns. The performance of these funds was often underwhelming.
 
Since then, impact investing has reached an inflection point in which many of the issues that made early funds unsuitable for high-net-worth investors have receded. Today larger, established managers are offering a variety of funds across investment approaches and sectors that provide investors with an opportunity to participate at lower risk levels and with better return potential. Several factors have helped drive the evolution of “Impact version 2.0”:
 

Reduced costs

Innovative, tech-focused companies in the impact space initially faced challenges achieving wide adoption of their products because of their cost. Early renewable energy companies, for example, spent considerable time and resources to develop alternatives to fossil fuel that, in the beginning, were significantly more expensive than traditional energy sources. Today, the cost of renewable energy has declined significantly, enabling these companies to achieve commercial viability. In fact, new wind and solar energy is now cheaper than most existing fossil fuels in the U.S., making it competitive with traditional energy sources.1

Increasing number of impact companies

As the pioneering companies of the early impact days have achieved commercial viability, many others have cropped up, seeing opportunity in developing solutions to environmental and social challenges. Existing companies are also leveraging technology to improve their impact potential. These companies are attracting investors seeking to capitalize on long-term sustainability trends. One example is Techem, a 67-year-old European company that provides water and heat sub-metering services. In recent years, the company has developed technology solutions to help consumers reduce their energy use, saving 6.9 million tons of CO2 emissions annually, making it a viable impact investment.2

Broader penetration of sectors and investment categories

Compared to Impact v.1.0 funds, which largely focused on green technology, Impact v.2.0 funds boast a wider variety of investment opportunities across sectors, including healthcare, education, financial services, and others. Additionally, the issues addressed by v.2.0 impact funds have broadened beyond the environment to include social and governance concerns, and fund managers are introducing private credit, growth equity, and buyout models. We’ve even seen the introduction of a secondary impact strategy, which offers an indication of the degree to which the impact investing space has matured.

Participation by larger, established managers

Finally, a wider variety of private equity managers are entering the category and raising capital at scale. Many of these managers are larger and more experienced than the typical v.1.0 manager. We are finding that these managers are more focused on developing impact measurement frameworks and reporting capabilities, which we believe is critical to the wider adoption of the category by investors. The entrance of these managers demonstrates the growth of the impact space.

Today’s impact funds combine attractive returns and positive change

Significant improvements in the last decade have revolutionized the impact investment space, making it an attractive investment option for a broader audience. With a larger number of potential investment opportunities in maturing sectors, seasoned fund managers entering the space, and improving frameworks for quantifying and monitoring impact, investors today can achieve private market-like returns alongside a measurable impact.

Read Part 1 of our Impact Investing series to learn why private markets are well-suited for impact, or download our white paper, Impact Investing in Focus.

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1) Energy Innovation Policy and Technology, The Coal Crossover: Economic Viability of Existing Coal Compared to New Local and Solar Resources, March 2019.

2) Global Impact Investing Network, Financing the Sustainable Development Goals: Impact Investing in Action, September 2018.

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Kunal Shah

Kunal Shah

Kunal is Managing Director and Head of Private Equity Solutions at iCapital, focused on the identification, selection and due diligence of private equity funds to be offered on the Flagship Platform. Previously, Kunal was a Principal in the private markets group at Meketa Investment Group, a leading global investment consultant serving pensions funds, endowments and foundations, and family offices. He received a BS in Business Administration with a concentration in Finance from Drexel University. See Full Bio.

Tatiana Esipovich

Tatiana Esipovich

Tatiana Esipovich is part of the Research & Due Diligence team. Prior to joining iCapital in 2017, Tatiana worked at DB Private Equity (part of Deutsche Asset Management) in New York. Tatiana started her career at Deutsche Bank in London. Ms. Esipovich received an MA in Modern Languages from Oxford University.