Stockholm (NordSIP) – Independent European alternative asset manager Golding Capital Partners recently launched its first impact offering, a private equity fund-of-funds focused on renewable energy, resource efficiency, sustainable agricultural technology, and inclusive finance. Commitments from several institutional investors from Germany, Sweden and Switzerland helped the firm achieve the fund’s first closing in June last year. The final closing is targeted at EUR 300 million by the end of 2023.
Managing a multi-strategy impact fund allows for a unique perspective of this rapidly evolving market. Thanks to this favourable vantage point as well as years of experience in the field, Dr Andreas Nilsson, Managing Director & Head of Impact at Golding, has plenty of valuable insights and observations to share. In this exclusive interview with NordSIP, he guides us around the current impact landscape and discusses the advantages and some of the misconceptions surrounding fund-of-funds solutions.
Scanning the landscape
“The impact fund universe is growing really fast,” says Nilsson. “We are actively tracking hundreds of impact funds. Even if we count only the relevant ones, we are talking about a thousand funds at least.” The mix of strategies is evolving, too. “Most impact funds used to focus on emerging markets, but the fastest growth for the past two or three years has clearly been in North America and Europe,” he says. “We see many growth-stage and venture-capital funds coming to the market. It is a mixture of completely new funds and new impact strategies launched by established firms. Some managers choose to shift entirely to impact investing. We see also many corporates starting venture capital funds,” he adds.
Another trend he has noticed is that more buy-out funds are coming to the market, attempting to create impact by investing in mature companies. “There are still not that many of these funds around, and even fewer that have a thoughtful competitive strategy,” says Nilsson. “Still, it is encouraging to see that some fund managers have thought of and can demonstrate how they intend to add value, create positive impact, and simultaneously deliver returns to their investors.”
The challenge of numbers
Sifting through such an enormous and diverse investment universe is an arduous task for Nilsson and his handful of colleagues at Golding. “Mind you; we are not just analysing and discussing the funds. We talk to the managers, we have them in our office, we have several calls a day, and our inboxes are always full,” he explains. “We are constantly trying to learn from what we see in the market to improve our decision-making.”
One of the lessons learned is that you often need to dig deep down to find the right match for your portfolio. “I know for a fact that some funds are very good at fundraising, whilst others prefer to stay below the radar,” says Nilsson. “So, my advice to investors is to do thorough market research before investing.”
Given the breadth and depth of the impact market, however, it is easy to see how staying on top of so much information can be challenging for investors with limited resources. This is precisely where specialised fund-of-funds like Golding’s find their raison d’être. Having done the exercise for more than ten years, Nilsson and his colleagues have gained a solid understanding of the opportunities and what a diversified portfolio should look like. “We have really thought about the best possible strategy, which sectors, regions and development stages have the best potential to deliver both returns and impact,” he says.
“We see the whole landscape; we have been tracking the funds for a long time,” continues Nilsson. “Just before Christmas, for instance, we did a deep dive into the food and agriculture tech sector. That meant looking into 70 fund managers. Previously, we have done a similar exercise with cleantech and analysed roughly 200 impact fund managers.”
Avoiding impact washing
Besides the sheer volume of the work involved, fund-selecting skills also take time to hone. “We can be really picky as we have seen so many managers over the years and can compare within a sector or a relevant peer group,” says Nilsson.
This selectiveness is essential when it comes to steering clear of potential greenwashers. “Before making an investment, we have a very clear idea of what we expect of a certain sector or methodology. We ask the managers what kind of outcomes they expect, but we make our own estimates as well, trying to quantify the possible impact of their strategy using the latest scientific evidence,” explains Nilsson.
Golding applies a systematic approach based on the Theory of Change (ToC), a logic model widely used in the non-profit world, to analyse each potential investment’s ‘impact pathway’. It helps inform the investment decision by ensuring alignment between the investments and the overall impact goals. “After we have made an investment, the pathway helps us measure and follow up how much impact each portfolio company generates,” says Nilsson. “Obviously, this is hard work, and it goes beyond simply following the standards available out there. But, ultimately, doing your own diligent research is the best way to avoid greenwashing,” he concludes.
Although Nilsson hasn’t seen many examples of blatant greenwashing among impact funds, he does notice a certain tendency to stretch the definition of impact. “There is a lot of imagination when you look at managers working with wellness and healthy lifestyles, for instance. We are very tough, though, and have an even higher bar for such investments.”
Fund-of-funds: perceptions vs reality
Given the apparent advantages of using a fund-of-funds filter, institutional investors, at least the less experienced and smaller among them, should find such a solution compelling. Yet there are plenty of sceptics, too. Typically, the criticism of fund-of-funds revolves around the issues of costs, transparency, and goal alignment.
Nordic institutional investors are known to be especially cost-conscious, according to Nilsson. “We endeavour to be completely open about what it is they are getting for their money and demonstrate how we can help with problems that they cannot solve themselves,” he comments. “Fund-of-funds are often perceived as costly. Until you consider the alternative in-house solution, that is, and think about the cost-sharing we offer.”
Ultimately, a fund-of-funds is a one-size-fits-all solution, perhaps best suited for entry-level or smaller investors focused on cost efficiency. It is logical that some of the largest investors in Scandinavia prefer to invest directly and have both the expertise and the resources to do so. “Even they, however, have a challenge accessing smaller target funds, given the size of the tickets they want to write. This is one of the problems we can help them solve,” he says.
As for fund-of-funds transparency, Nilsson believes this issue is also a matter of perception versus reality. According to him, reporting is another area where a fund-of-funds’ manager can add much value. “When it comes to getting access and being close to the data, we collect much more information than individual investors, and we are happy to share it. If you take reporting seriously, we can help you aggregate the relevant data to measure and understand the impact your portfolio creates properly.”
For instance, Nilsson and his colleagues are in the process of applying the SFDR criteria to non-European impact funds, looking to classify some as ‘shadow’ Article 9 funds. “It is possible for us to do it because we can collect the necessary data. We are doing this as we believe it adds value to both the funds and investors,” he says.
Whereas the impact investment fund universe is steadily expanding, fundraising has been slowing down lately, according to Nilsson. “It is understandable, as investors are thinking about the right strategy in these times of economic, geopolitical and climate-related uncertainty.” His firm conviction is that these triple challenges are all interrelated. “Understanding sustainability is at the core of being a good investor right now, I believe.”
He sounds a bit concerned that the current inflation and interest rate environment might dampen investors’ appetite for impact investing. “We need more private capital to go into impactful solutions, and time is of the essence,” urges Nilsson. “Right now, inertia is our biggest competitor.”