The Changing Landscape of Impact Investing

We’ve come a long way since raising our first Impact Fund in 2016-17 to closing our second, larger fund earlier this year.

Raising the first fund was ambitious– no other mid-market firm had done it before, and for many of our investors it was the first time they had invested in an impact platform.

For these investors, supporting a new type of fund and asset class showed their commitment to being early adopters in the impact space. I’m pleased to say it has been justified. Since 2017, we’ve invested in, partnered with, and created value in more than a dozen purpose-driven companies, several of which we’ve now exited, delivering great returns for investors and, all of which have quantifiably demonstrated a positive contribution to society or the environment.

 

An evolving landscape

Today, from an investor perspective, there’s much greater awareness and understanding of impact funds. As the market is maturing, Limited Partners (LP) are becoming more knowledgeable. Even if they are not investing directly yet, they are mapping the impact fund landscape. Those who are investing are becoming more focused on ensuring General Partners are able to clearly demonstrate the positive impact being created through these investments.

As early adopters of ESG, and having embedded our ESG framework in our investment cycle over 13 years ago, Palatine has long taken an analytical approach to monitoring and measuring non-financial KPIs. This has naturally extended into our impact strategy, and we have used our experience to identify meaningful metrics to monitor and measure the impact of our companies.

We are now part of the Operating Principles for Impact Management – a global community of impact investors, which, despite only having been established in 2019, now comprises 177 signatories across 40 countries. There has been new regulation too, including the EU’s Sustainable Finance Disclosures Regulation (SFDR). I expect the regulatory environment will continue to evolve to protect investors and ensure their funds are being deployed in the right way.

 

Climate remains a dominant theme

This summer, we experienced the world’s hottest day on record – a potent reminder of the need for action on climate. Global warming is happening, and unless we make some seismic shifts in our behaviours around energy use and consumption of fossil fuels, it is not going to get any better, and we will inevitably have more episodes of extreme weather globally that will cause not only environmental disasters but also social impacts as well.

While climate is the most important challenge society faces, it cannot be and is not the sole focus of Palatine’s Impact Fund. Wider social issues are hugely important too.

Among the ESG community, there’s been a real focus on the environmental agenda but not so much on the social aspect, which I believe is really important in the context of making sure there is a ‘just transition’ to net zero – (this ensures that those already on the margins of society are not left behind or penalised and can maximise the social and economic opportunities of climate action).

In this country, it’s clear there are some very significant inequalities around healthcare, access to education, work and skills, which need to be fixed too.

I feel that with the money invested in impact funds – £58bn in the UK – there is too little focus on social issues. With the likes of the Estio, TradeSkills4U, and Veincentre exits, we have shown that you can make private equity returns with social investments.

 

Future trends in the market

As I have said, the impact market is continuing to evolve at a fast pace in order to respond to the increasingly complex and hard-felt impacts from the environmental and social challenges we are faced with. This is also in line with societal and corporate shifts. Equity, diversity and inclusion (ED&I) is an excellent example of this. Since the #metoo and Black Lives Matter movements arose a few years ago, we have seen many businesses starting to take action on ED&I.

So ten years ago, would a business like our portfolio company, Inclusive Employers, have been investible for private equity? Probably not – it would not have had the ability to scale as needed because major companies were not thinking seriously about inclusion and diversity, whereas in the last three years, they have, and it is a key strand of the corporate agenda.

This, of course, is welcome. No one should go into a workplace and feel excluded or marginalised for what and who they are. We are delighted to support Inclusive Employers in their mission to do more in this space. While our investment ethos is unchanged, and we will continue to support companies across four pillars: Sustainable Communities, Healthy Living, Environment and Resources and Sustainable Choices; within this framework, I believe biodiversity will be an increasingly key area of investment focus.

If we act with urgency and at scale, we can limit our impact on climate change and environmental pollution, but we cannot reverse the damage if we lose biodiversity (i.e. of plant and animal species), they will be gone forever.

Our portfolio company, Curra Terrae, is doing some brilliant and important work in this field; its mission is to provide services and solutions to help take care of the Earth.

 

In conclusion

The impact market is evolving all the time and maturing. We are backing businesses that might not have existed five years ago. I am delighted to see the increasing prominence of impact investing amongst LPs, which is needed to provide long-term sustainable outcomes.

What success in impact investing looks like varies significantly. At Palatine, we are looking to drive change by investing in companies that are trying to move the dial to address some of the biggest challenges society is facing.

A compelling example of this philosophy in action is Back2Work Group, a Manchester-based business that helps to upskill or reskill people struggling to get into employment.

For us, impact is about delivering change. Since our investment, Back2Work has created 200 jobs as the company has grown, but we’ve also helped train over 20,000 people and find them new roles in areas of the economy where there is a skills gap.

We launched the Impact Fund with the ambition to prove that returns and purpose could be achieved alongside each other. Having now raised our second fund, we are proud that our team and portfolio companies are delivering every day and making a difference to the world in which we live.