The secondaries market will draw capital into impact

Secondaries transactions are typically used by LPs as a way to exit an otherwise illiquid investment. But for British International Investment, the UK’s development finance institution, it is a way of crowding new investors into impact.

BII and Blue Earth, a private markets impact firm, are breaking new ground in this area with a landmark secondaries transaction designed to do just that. Last week affiliate title New Private Markets broke the news that Blue Earth has a secondaries strategy in the works for its forthcoming third pooled fund. The first transaction from this is the acquisition of a portfolio of emerging markets impact fund stakes from BII.

For BII, the transaction was not driven by a desire for liquidity, John Owers, the DFI’s head of fund solutions told NPM. “We’re doing this… as a means of encouraging investors to commit to our markets.”

Nicolas Muller, who leads Blue Earth’s secondaries strategy as head of funds and co-investments, likened it to the role that blended finance plays in de-risking emerging markets impact opportunities to “crowd in” private capital. Investors – particular those new to impact investing – are “generally a bit bearish” on emerging markets impact, he said. BII’s portfolio sale offered the buyer visibility on the assets’ financial and impact performance and the prospect of distributions to investors over a shorter timeframe.

Impact secondaries in developed markets is niche and growing. A pioneer in this area has been North Sky Capital, which brought its first dedicated impact secondaries vehicle to market in 2013 and is now marketing its sixth Clean Growth fund within this strategy. Many of its clients and LPs are first time impact investors, Tom Jorgensen, North Sky’s co-head of impact secondaries, told NPM. Such investors “want to jump right in” and obtain “an instantly diversified impact portfolio with multiple managers, vintage years and impact sectors”.

As with many secondaries propositions, the Clean Growth Fund obtains assets at discounts and provides earlier distributions to LPs than a programme making primary fund commitments. This can be a useful model for an LP starting out its impact programme, said Jorgensen: they are often “strategically seeking to benefit from the reverse J-curve of a secondaries fund as they begin to make their next commitments to new private equity and infrastructure impact funds with normal J-curves”.

European impact manager Summa Equity ran a GP-led process on waste management company NG Group last year. Among the backers of the €550 million continuation fund was Quilvest Capital Partners, an investor new to Summa.

Impact secondaries is a nascent area; early indications suggest it will be a useful way to bring new investors to impact investing.