Commitments to impact funds up 37% in two years, with a further 24% increase expected over the next year
(Update: This story has been updated in paragraph 2 to include a link to the Rede Partners report, which has now been published.)
October 11, 2024 (Preqin News) – Investors have increased their commitments to impact funds over the past two years. They are expected to continue shifting capital into the strategy, according to a survey by placement agent Rede Partners.
Rede surveyed around 80 institutional investors with a combined $55bn allocated to impact and sustainability in private markets for its new Private Markets Sustainability and Impact Report 2024. Collectively, the LPs had increased their impact allocations by 37% over the past two years and expected them to increase by 24% over the next 12 months. The firm said that even LPs that are unable to increase allocations due to portfolio constraints have chosen to prioritize impact investments over traditional funds.
The increase in allocations comes despite the slower fundraising market. Rede also publishes a bi-annual Rede Liquidity Index (RLI) of private equity LPs. The RLI hit an all-time low of 41 in H2 2022, down from a record high of 70 in H2 2021, and has since recovered gradually to 54 for H1 2024. A score below 50 means that LPs expect to deploy less capital over the coming 12 months than they did over the past year, while a score of 50 or over means LPs expect to allocate more capital.
The single largest driver of increased investments in sustainability/impact programs was the attractiveness of the risk-return opportunity, cited by 26% of respondents.
While non-financial drivers, including stakeholder alignment/requests (24%), organization’s values (21%), and organization’s net-zero commitments (16%) were collectively cited more often as the primary driver, Rede said the findings showed that impact was ‘taking its place in investors’ allocations as an alpha-driver, rather than a diversification strategy or a philanthropic venture.’
The view that impact investments are financially motivated is supported by an analysis of commitments to impact funds advised by Rede, where 74% of 176 individual LP commitments, representing 62% of the capital raised, came from ‘generalist’ pools of capital over the past 18 months.
Similarly, 56% of surveyed LPs said there was no difference in their investment mandate for sustainability/impact funds to typical mandates. The only significant difference was a willingness to invest in less mature asset classes such as venture capital and growth, cited by 30% of respondents, reflecting the emerging nature of the market.
‘Investors’ growing allocations to sustainability-focused funds are being driven by their conviction that the sector offers opportunity for outsized returns,’ said Etiene Ekpo-Utip, Head of Climate & Impact at Rede Partners. ‘This conviction is particularly strong within the climate space, which they recognize as benefiting from strong structural tailwinds, a significant demand-supply gap for investments to grow into, and a relative abundance of investible opportunities.’
While total capital raised by impact funds halved in 2023, down from $50.1bn in 2022 to $23.8bn, it was still the third largest total on record and three times higher than the $7.7bn raised in 2019, according to Preqin data. So far this year, 90 impact funds have closed raising an aggregate $15.1bn.
Making an impact
Number and value of private impact funds, 2015–2024 YTD
Source: Preqin Pro. Data as of October 2024
Preqin is currently tracking 356 impact-labeled funds open for investment, seeking to raise a total of $94.6bn. They span the full range of private capital strategies, with the most numerous being Venture (General), where 48 impact funds are in market, followed by Growth (47), Early Stage (30), and Fund-of-Funds (30). In terms of capital sought, the largest strategy is Infrastructure Core Plus where funds with a combined target of $21.2bn are in market, followed by Growth ($10.1bn), Natural Resources ($5.3bn), and Real Estate Value Added ($5.1bn).
‘Impact funds are the most clearly defined in the ESG space, with their stated goal of delivering financial and environmental or social returns, so LPs know what they are committing to,’ said Andrea Ramirez, VP and Head of ESG Commercial Strategy at Preqin. ‘As the evidence grows that there is no financial penalty for investing in impact funds – and there may even be extra return – we expect continued growth in the sector.’
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.