ESG considerations grow as LPs assess impacts of private equity

A growing number of LPs are considering the environmental, social and governmental impacts of their private equity investments when they consider committing to new PE and venture funds, panelists at SuperReturn US West said.

Public pensions, university endowments and corporations have started to dedicate some of their investment strategies to those that meet philanthropic, in addition to financial, ends.

LP interest has given traction to impact-investment strategies, which seek to effect social or environmental change in addition to generating a financial return.

While traditional philanthropy has its benefits, measuring the effects of a large donation can be challenging. Impact investing offers the “discipline of it being a business,” said Thomas Wisniewski, founding partner of impact fund Newark Venture Partners, speaking on the panel Feb. 14.

Some LPs have been wary of impact funds because of performance uncertainty. That’s changing, however. According to Hamilton Lane Principal Miguel Luiña, LPs are starting to consider the ESG effects of firms that don’t brand themselves as impact funds.

“A lot of people who rushed into this segment were organizations that struggled to fundraise for one reason or another,” Luiña said, while speaking on the panel.

“What ended up happening is a lot of the underperformers were attracted to the segment [and] put the name ‘impact’ on it.”

Those considerations may expand as more established firms, such as TPG and Bain Capital, explicitly incorporate environmental and social concepts into their long-term strategies.

“We’ve had a lot of legitimate players in the industry, and as those players generate returns, and as LPs see how those portfolios have developed, that’s going to create some momentum within the space,” he said.

TPG recently invested $20 million from its $2 billion Rise Fund in Digital House, a group of schools that teach digital skills to Latin American students.

Bain, which closed its Double Impact fund on $390 million last year, announced its first two investments, in green material recycler Living Earth and Impact Fitness, a franchisee of gym chain Planet Fitness.

TPG and Bain emphasized their ability to both drive returns and create positive change through their respective vehicles.

With its investment in Digital House, TPG saw an opportunity to support efforts that could help fill some of the 500,000 openings for technical positions across Latin America.

“There are trends around things, like healthy eating or general wellness, fitness [and] environmental stewardship, that are driving market changes,” Bain Double Impact Managing Director and former Massachusetts Gov. Deval Patrick told Buyouts last year.

“The challenges that we face as a country and this world are too big for government and philanthropy alone. It’s not like those don’t have a role, but business has a role as well,” Patrick added. “The trends around healthy enterprise, they’re not going back. They’re not going anywhere.”

Action Item: For more on impact investments, visit the UN Development Programme at www.undp.org/content/sdfinance/en/home/solutions/impact-investment.html

Former Massachusetts Gov. Deval Patrick receives an honorary doctor of laws degree during the 364th Commencement Exercises at Harvard University in Cambridge on May 28, 2015. Photo courtesy Reuters/Brian Snyder