Impact secondaries’ GP-led testing ground

While impact secondaries transactions remain a relatively small part of overall secondaries volume, these vehicles can offer more certainty around impact-linked growth stories compared with their blind-pool counterparts.

The impact market is still grappling with a uniformed benchmarking strategy. The GP-led secondaries market can offer a good testing ground for setting KPIs compared with blindpool strategies.  

Impact secondaries transactions remain a relatively small part of overall secondaries volume given the maturity of the impact market. In the world of GP-led secondaries, only a few of the larger impact managers are likely to attract capital from traditional secondaries buyers that remain focused on developed markets and buyouts, Nicolas Muller, head of private equity partnerships at impact manager and secondaries buyer Blue Earth Capital told attendees at PEI Group’s Impact Investor Global Summit this week in London.  

An example of one of the few was Sweden’s Summa Equity, which has SKr50 billion ($4.68 billion; €4.3 billion) of AUM, according to PEI data. Last year the impact manager completed a €550 million Article 9 single-asset continuation fund for waste management company NG Group.  

One of the general concerns within the wider impact investing space is the definition of impact investing. “There are different frameworks,” said Marta Hervás Melgarejo, Arcano Partners’ head of impact investments. “Everybody looks at it in a different way.” 

Compared with blindpool funds, which aim to back companies with an impact thesis, the conversation around a GP-led transaction, which is focused on assets already owned by a manager, can be more of a straightforward one.  

Both the manager as well as the company have a history, and there’s a track record on companies’ impact evolution. Buyers can look over metrics that have been reported on previously, and there are tangible examples around how impact has been measured. It can therefore be easier to see a path for further impact improvements should that asset be moved into a new vehicle.  

Furthermore, it can be easier for players to link carry to a few specific KPIs in these continuation funds given the concentrated nature of these portfolios, Muller said. 

For the fund managers themselves, continuation funds can offer a way to overcome any barriers in taking a company through its impact transition. A five-year hold is not always enough, Summa’s impact director Emelie Norling said. To have vehicles that can allow firms to hold assets over a longer term gives managers a lot more opportunities to think about positive impact. 

While buyers do not necessarily have a higher bar for impact GP-led transactions, that bar is extended to ensure the portfolio companies meet both financial goals as well as impact goals laid out by investors. And while an Article 9 continuation fund is a nice to have and is not strictly necessary, secondaries buyers first and foremost want to see evidence that managers are aiming for outcomes that will generate positive social and environmental impacts across its next phase of growth, Hervás Melgarejo explained.  

While the impact secondaries market will remain a small pocket of the more than $100 billion of annual secondaries volume seen over recent years, expect more impact managers to come forth with assets that could benefit from a little more time to make more of a change as this asset class continues to mature.