Impact dollars

Blue Earth Capital is building a secondaries strategy that will focus on private equity, private debt, co-investments, secondaries and other financial structures, affiliate title New Private Markets has learned.

The fund is due to launch later this year, according to two sources with knowledge of the matter.

Blue Earth declined to comment on fundraising plans.

The firm has acquired a portfolio of impact fund stakes from the UK’s DFI British International Investment, in a deal described in a statement as a “landmark transaction” and “an innovative approach for blended finance”.

This is Blue Earth’s first LP-led portfolio acquisition, sources told NPM. The firm, initially established by the founders of Partners Group, previously led a continuation fund transaction for two climate VC assets last year.

The BII deal will be funded by a Swiss foundation, with which Blue Earth has a mandate, and Blue Earth’s forthcoming multi-strategy fund.

The portfolio includes portions of BII’s stakes in Aavishkaar Goodwell India Microfinance Development Company II, Novastar Ventures Africa Fund II and Africa-focused Adenia Capital Fund IV.

This is BII’s first secondaries portfolio sale, according to John Owers, BII’s head of fund solutions, who told NPM that the DFI will retain part of its stakes and its LPAC seat in each of these funds.

Blue Earth and BII both declined to comment on financial terms for the transaction.

The secondaries strategy provides a new and more attractive proposition for investors, who are “generally a bit bearish on getting exposed to emerging markets” for impact, said Nicolas Muller, who leads the Blue Earth strategy as head of funds and co-investments.

Primary fund strategies involve blind pool risk (LPs cannot see the assets before they commit) and a longer timeline before distributions. “Secondaries can be used as a blended finance tool,” Muller told NPM. “Blended finance in the past 20 years has only removed one of the risks, which is the risk of losing capital. With this novel approach, we can remove the other risks. [This transaction] provides distributions and returns of capital to investors in emerging markets faster.”

Emerging market secondaries

The secondaries market in emerging markets “is very underdeveloped”, says Owers. “That means there are fewer opportunities for LPs to seek liquidity.” His fund solutions department’s function serves “where you see a fund underperforming and try to intervene to help reduce the impact of distress”, he told NPM. His team will pursue solutions such as “renegotiation of fund terms… look[ing] for a replacement fund manager, or trying to find a way to accelerate liquidity and wind up the fund.” The team has conducted a handful of individual LP stake sales previously.

Owers stressed that BII was not motivated to sell this portfolio “to seek liquidity”. “We’re doing this because we think it’s an important part of the development of the ecosystem, and as a means of encouraging investors to commit to our [emerging] markets. A secondaries transaction removes the blind pool risk. It’s a great way of getting visibility as to what a GP is actually achieving on the ground. They are investing in a fund where they know what the underlying investments are. It’s creating a known portfolio for the incoming investor.”

The funds* 

Aavishkaar Goodwell India Microfinance Development Company II

  • Closed in 2012 on $30.18 million
  • BII committed $15 million
  • Status: six investments; two exits

Adenia Capital Fund IV

  • Closed in 2017 on €230 million
  • BII committed $16.44 million
  • Status: nine investments across Africa; no exits.

Novastar Ventures Africa Fund II

  • Closed in 2018 on $108 million
  • BII committed $15 million
  • Status: 11 investments across Africa; no exits.

*According to BII’s database

Both Owers and Muller declined to comment on individual fund performance or the pricing of the secondaries transaction. “For us, the most important factor is to get access to high-quality companies,” said Muller. “What these funds have achieved is to target companies that address some of the key issues in these geographies – financial inclusion.

“What we liked about these assets was their scale of reach and how effective they’ve been in solving these structural issues in Africa and South Asia.”

Secondaries market transactions have been accelerating in the impact and sustainability sectors. The pioneer in this space has been North Sky Capital, a Minnesota-based firm that launched its first dedicated impact secondaries vehicle in 2013. It is now raising its sixth Clean Growth fund within this strategy, targeting $350 million.

A handful of other impact firms are now exploring or have sealed secondaries transactions: Summa Equity, for example, closed a single-asset continuation fund with €550 million last year and explored a continuation fund for another asset; Stafford is particularly interested in GP-led opportunities for its $200 million mandate for SDG-aligned investments from Hesta.