Rise in private market impact investing, yet be vigilant against 'impact-washing' practices
In the past two years, the universe of Impact Private Debt has grown significantly, with over 100 strategies now available for investors. This expansion presents a promising opportunity for investors to support positive environmental and social outcomes without compromising financial performance.
A Diverse Landscape Requires Careful Manager Selection
The wide variety of approaches and the emerging nature of many strategies make manager selection a more nuanced and resource-intensive process. According to a case study by bfinance, due diligence when selecting Impact Private Debt managers focuses on rigorous operational due diligence (ODD), alignment with the investment mandate and risk tolerance, and a comprehensive evaluation of each manager's methodology and outcomes framework.
Operational Due Diligence (ODD)
Assessing a manager's governance structures, infrastructure, internal controls, and valuation governance frameworks is crucial to mitigate operational risks and confirm robustness in valuation practices and controls. A robust ODD process is essential, given the illiquid and complex nature of private debt investments.
Manager’s Track Record and Investment Alignment
Evaluating a manager's historical performance, consistency of returns, and alignment with the investor's impact objectives is vital. It's also important to consider the manager's operational capabilities and experience in managing impact private debt, particularly in niche or emerging market sub-strategies.
Liquidity and Structural Considerations
Being aware of liquidity offerings and structural complexities, especially if the fund uses evergreen or semi-liquid structures, is essential. These structures can affect redemption terms, cash buffers, and transparency around returns.
Industry and Market Expertise
For impact private debt, sector-specific knowledge and networks are essential, such as experience in SME financing, infrastructure debt, or climate-related investments, to successfully execute on the impact thesis and risk management.
Sarita Gosrani, director of ESG and responsible investment at bfinance, emphasizes that a thorough due diligence process encompassing operational, financial, and impact considerations is critical to selecting resilient, capable impact private debt managers while safeguarding capital and meeting impact goals.
The Future of Impact Private Debt
As investor interest continues to grow, it will be important to maintain clear definitions, conduct robust due diligence, and work closely with managers to ensure that strategies deliver the outcomes that asset owners are seeking. Impact Private Debt is gaining ground, with nearly half of the investors surveyed by the Global Impact Investing Network now allocating to private debt as part of their impact strategies.
The development of Impact Private Debt offers investors an increasingly viable avenue for integrating impact into their private markets' portfolios. Despite the diversity in how impact is defined and implemented across strategies, there are similarities between Impact Direct Lending strategies and conventional direct lending funds, such as the very close average IRR targets (net of fees), suggesting that impact strategies do not imply concessionary returns. Return expectations from Impact Direct Lending strategies are broadly in line with those of conventional direct lending funds.
However, live fund-level track records are limited for many strategies, requiring investors to assess the representativeness of deals and the rigorous application of impact metrics. As the field matures, it is expected that more comprehensive and standardised impact reporting will become available, enhancing transparency and accountability for impact private debt managers.
[1] bfinance, (2021), Impact Private Debt: A Guide to Due Diligence and Selection, [Online] Available: https://www.bfinance.com/insights/impact-private-debt-a-guide-to-due-diligence-and-selection/
[2] Private Debt Investor, (2021), Impact private debt: The growing importance of ESG, [Online] Available: https://www.privatedebitinvestor.com/2021/09/15/impact-private-debt-the-growing-importance-of-esg/
[3] Preqin, (2021), Impact Investing: Private Debt, [Online] Available: https://www.preqin.com/research/private-equity/impact-investing/private-debt/
[4] Global Impact Investing Network, (2021), GIIN Impact Investor Survey 2021, [Online] Available: https://thegiin.org/resources/giin-impact-investor-survey-2021/
Managing investments in the growing Impact Private Debt sector requires careful consideration due to the variety of strategies and the illiquid nature of private markets. During the investment selection process, rigorous operational due diligence, alignment with investment mandate and risk tolerance, and a comprehensive evaluation of each manager's methodology and outcomes framework are essential.
As the impact private debt market matures, it is expected that more comprehensive and standardized impact reporting will become available, enhancing transparency and accountability for impact private debt managers, enabling investors to assess the effectiveness of their investments in terms of positive environmental and social outcomes within the realm of finance, business, and technology.
