Impact Investing Insights: LP-GP Dynamics and Emerging Trends

Impact investingcontinues to evolve as GPs work hard to develop effective ways to measure impact potential in their portfolios and improve the quality of reporting. This is something that LPs are increasingly focused on as they screen deals to determine the strength of the impact thesis. Returns are still a priority but investors are becoming more forensic in understanding the tangible improvements to society.

Over the last two years, IPEM has made significant strides highlighting many of the key topics and challenges facing impact funds. During the Impact Summit, on Sept. 10th, at IPEM Paris 2024, supported by Astanor, Capricorn Investment Group, Indefi and Simpl, participants heard about what LPs are looking for in impact funds, opportunities in emerging markets, whether or not impact funds were now mainstream, and investing in education and social inclusion.

Some of the key investment themes that LPs are considering range from industrial decarbonization to food supply chain innovation – i.e. alternative protein, regenerative farming – and plastic waste.

LPs discussed the importance of achieving true alignment with GPs on how to measure impact. This requires impact funds to be highly visible in what they have achieved when reporting to LPs; for example, what did this company do to create healthier food? Or, what did this company do to restore planetary boundaries?

Speaking on the panel entitled “LP-GP discussion: Engaging about impact, what LPs want in an impact fund”, Leslie Kapin, Partner and Director of Impact at Astanor told IPEM Paris participants that since launching their first fund six years ago, “we’ve seen a huge change”. There was barely any question on impact, the focus was still centered on returns. “But when we launched Fund II a few years later, there was definitely a lot of appetite from pure impact LPs looking for impact creation…there’s been an increase of knowledge in this space,” said Kapin.

Credibility counts

She called for LPs to work together to find the best way to achieve a standardized approach to measure impact, to reduce the burden on portfolio companies as GPs face myriad reporting requests. Many investors are choosing to reference external standards such as IRIS+ (developed by the Global Impact Investing Network) and SFDR (from a legal perspective) when assessing impact fund opportunities. As Yohan Hill, Director of ESG and Responsible Investing at Adams Street Partners remarked in Paris: “I think what we are looking for, and all LPs in impact are looking for, is credibility.”

To do this, GPs are clearly setting out their KPIs so that LPs know what aspects of impact creation are being measured: i.e. greenhouse gas emissions, nature, water, social, health, and biodiversity. By doing so, the aim is to show LPs not only that the fund generated a 2x or 3x financial return but also a 5x return on impact.

LPs agree that further fine-tuning of the regulatory framework will make it easier for venture funds to show the impact they make, rather than shackle GPs too much. Naturally, it is unrealistic to prescribe a metric for every portfolio company. The overall objective should be to scale impact investing without being too prescriptive. LPs recognize that the faster a business can scale, the greater the pace of potential impact can be achieved.

One of the key messages to come out of the Impact Summit was for LPs to recognize that to drive change and drive impact, both revolution and evolution will be needed. Financing that revolution in venture capital will be key in the years ahead.

Specialism holds an edge

As to whether or not impact funds should become more mainstream remains unclear. Some are less enthusiastic than others. During the discussion “Mainstream impact funds: are we there yet? Mathieu Cornieti, CEO of Impact Partners, suggested that if everything were to become mainstream finance there will be no more impact funds per se. “When you invest in impact, you want to make a difference. If everything is impact, it does not make sense. Everything cannot be impact investing. And we should not imagine that this market should go mainstream,” he suggested.

While generalist funds are perfectly well placed to generate meaningful impact, there was a sense at IPEM Paris 2024 that specialist impact funds are more favored by investors. In such a broad field of investment options, the more niche the strategy, and the more specialised the team, the better. Investors like to train their sights on very specific investment strategies like the Plastic Circularity Fund, managed by Lombard Odier Investment Managers where the mandate is clear: to decarbonize plastics and end plastic waste.

Ultimately, investors want confidence from their GPs that they have the track record and the expertise to source the best businesses to get behind and help generate value.

“I think there’s room for both,” remarked Alexandre Ouimet-Storrs, Investment Director at LOIM. “I think generalists can also provide a lot of upside with their networks to help companies fundraise or potentially expand in other geographies. But you need to be very careful as a generalist because you can get caught in traps in specific fields where you don’t have expertise.”

🔴 Rural electrification in West Africa and the installation of mini grids.
🔴 Financing a solar farm for an indigenous tribe in Northern Colombia.
🔴 Investing in a solar powered irrigation pump company to give smallholder farmers across India access to fresh water to raise crops.
🔴 Investing in digital applications that enable restaurant owners to order fresh products directly from farmers, reducing the burden on women having to travel large distances to market in Abidjan, Cote D’Ivoire.

 Impact in Emerging Markets