Limited partners keen to deploy funds into socially conscious investment vehicles still face challenges investing higher investment amounts, three limited partners told me. Many funds targeting impact investments are taking in fundraising hauls too small to satisfy limited partners’ mandates. Even attempts to place money with women- and minority-run funds can run aground given the lack of funds of size; few such general partners are running funds large enough for LPs to hit their targets through investments.
Some of the problem will be worked out in time, one LP said. The recent uptick in ESG- and impact investment-focused funds will mint a new generation of managers who will naturally progress to running larger pools of capital. Likewise, middle-market impact funds typically targeting fundraises near or below $500 million could increase their hauls in subsequent years.
But the scale of the issue warrants action now, with another LP saying that an equity check as small as $5 million could overwhelm some of the otherwise attractive ESG-focused general partners. One solution? The same limited partner said funds of funds could provide investors with a vehicle to deploy assets at scale and still give digestible amounts of capital to emerging and impact-focused managers.
Investors repeatedly indicate an interest in ESG even as investment avenues and metric standardization pose challenges to deploying and measuring an impact. Investors’ ESG concerns are not just about upside and social responsibility; they’re also about risks. Governance controversies and sexual harassment lawsuits, for instance, pose material liabilities to portfolio companies. A Bank of America Merrill Lynch study puts the liability figure from ESG risks at $500 billion.