Veteran impact investors expressed interest in the ‘missing middle’ of climate finance to maximise their impact and scale climate solutions at PEI Group’s Responsible Investment Forum: West earlier this month.
“We’re noticing a funding gap in the ‘missing middle’ – specifically at the pre-commercial demonstration, first-of-a-kind projects and early commercial deployment stage,” said Kunal Doshi, chief investment officer and partner at Accelerate Investment Group, an investment manager for family offices and foundations. “It’s the gap where venture capital runs out of steam and infrastructure and private equity feel comfortable investing. We [at Accelerate] are focusing a lot more of our attention on this.”
“The missing middle is something that we’ve found, too,” said Katherine Fackler, associate portfolio manager for sustainable investments at the California State Teachers’ Retirement System. “We think a big part of addressing this challenge is in how investors are structuring their portfolios and investment policies. At CalSTRS, we’ve intentionally structured our sustainable investments private portfolio to have the flexibility to invest in the growing set of opportunities that bridge traditional asset class boundaries.”
Building out markets beyond the traditional asset classes was an ambition shared by all the panellists, who each represented organisations that have been at the forefront of developing and scaling the impact investing industry for many years. The private markets portion of CalSTRS’ 5 percent target allocation for sustainable investment and stewardship strategies “spans the risk-return spectrum”, said Fackler, and can bridge credit, infrastructure, venture, growth and buyout opportunities.
“Impact has been part of our DNA since day one,” said Bruce Hao, managing director in the asset management division of Builders Vision, an impact investing platform established in 2014 by Walmart heir Lukas Walton. “We have catalytic pools of capital for which we look at niche, risk-on opportunities that could really help make markets, and the larger portfolios are focused on finding more established, market rate impact-oriented investors that can help mobilise markets.”
Lara Banks, managing director and co-head of private equity at investment consultant Makena Capital, sees opportunities in a similar sector of the market. “The growth equity component is where we’re most excited and looking to find managers because we’ve seen that area as really catalytic to get [technologies] out of venture firms into core production and infrastructure,” Banks told New Private Markets on the panel.
Working across teams
The ability for investors to bridge asset classes and collaborate across different investment teams is key to identifying these opportunities, as the panellists illustrated. “We’re seeing more investments in areas that fall outside of those traditional [asset class] boundaries, such as innovations in ‘sustainable infrastructure’ that blend real assets’ downside protection and private equity upside returns or growth investments in climate hardware companies that require more real assets exposure,” said CalSTRS’ Fackler. “The flexibility and capacity in both our mandate and team backgrounds have been helpful to tap into these and other types of opportunities across the risk-return spectrum.”
Working across asset classes is also a key aspect of investment consultant Makena Capital’s impact investing services. “Energy transition is an area where we work across our public equity, private equity and real assets teams to diligence and source new ideas,” said Banks.
Other ways to scale impact investing
Capricorn Investment Group, an impact-focused outsourced chief investment officer and asset manager founded by former eBay president Jeff Skoll, is going further in scaling the impact investing industry in two ways. First, it is supporting foundations to allocate their entire portfolios to impact-themed opportunities, as the Skoll Foundation has done.
“We surveyed foundations to check what percentage of their portfolio is allocated to impact investing,” Mandira Reddy, a director at Capricorn, told NPM. “These entities are in place with a certain mission, and the IRS requires them to spend 5 percent of their endowment in support of their mission. We wanted to see what the other 95 percent of the assets were doing, and we found that the numbers are pretty low. The median foundation invests only 5 percent of its assets for impact.
“The case we were trying to make was to see what if the other 90 percent were also invested in a way that supports the mission,” Reddy continued. “Let’s try to unlock the other 90 percent as well and do it in a way that is financially lucrative as well.”
Capricorn is also helping new impact-focused fund managers across asset classes to scale up through a GP stakes strategy, the Sustainable Investors Fund, which closed on $365 million in 2020.
“At Capricorn, we want to make impact investing more accessible to institutional investors,” Reddy told NPM. “The challenge is that many purpose-driven managers aren’t large enough to be considered investible by institutional investors. To bridge this gap, we stepped in with a GP stakes strategy to provide these firms with the capital and resources they need to grow. Over the years, we’ve completed over 20 such deals, and some managers have scaled to manage nine- and 10-figure AUMs.”
