A step-by-step resource to creating and managing a private equity impact fund
Only a very qualified team can effectively implement a fund’s strategy and produce both financial returns and impact for investors. A typical fund management team includes three core roles: senior deal team leader, associate, and analyst. These roles can be expanded or collapsed as needed; for example, a fund may have multiple analysts or associates depending on its size and need. While advisors and experts are usually not considered part of the core fund management team, except for larger funds, they are regularly involved for specific deals, depending on their areas of expertise. The responsibilities of the fund manager include maintaining a roster of experts to consult when needed.
Impact fund managers also need to consider who will be responsible for measuring and managing the social and environmental impacts of their investments. Respondents to a GIIN survey, described in its report The State of Impact Measurement and Management Practice, most commonly assign the responsibility for impact measurement and management (IMM) to the broader investment team, often alongside dedicated staff:
Although impact investors employ various formal staffing structures, many respondents view IMM as a central component of their work, noting that all employees contribute to IMM. Most commonly, respondents assign the responsibility of IMM to the broader investment team (46%) or have both dedicated IMM staff and the broader investment team conduct IMM (42%). Fifteen percent of respondents contract IMM work out to external consultants, 9% rely only on staff members who are solely responsible for IMM, and 9% integrate IMM into the responsibilities of other staff members. … For the 71 respondents that have staff solely dedicated to IMM, the median is two staff members per organization.[1]
Staffing structure notwithstanding, building internal staff capacity is absolutely vital to plan and execute a thoughtful IMM strategy. As one fund manager who integrates IMM responsibilities commented, “Impact is at the core of our business, and therefore every staff member is responsible for its achievement.”[2]
The fund management team should have a diversity of skills. PE investments particularly rely on relationships, which team members must manage, and require nuanced expertise. The fund manager must regularly interact with key fund stakeholders, namely entrepreneurs, the board, and the board’s committees. While LPs positively regard previous fund management experience, most equally weigh deal experience. So, while a manager needs skills in investing—both buying and selling—and operations management, they need not necessarily have achieved this experience as a fund manager. That is, LPs may also value experience as a direct investor or former entrepreneur. Depending on the fund’s industry target, domain expertise can be critical.
Similarly important is PE experience in investment selection, management, and exit. Such experience could involve direct fund management, but could also involve corporate, operational, or consulting experience. Because financial management and reporting are crucial aspects of successful fundraising and capital deployment, financial and accounting expertise are also valued.
Many investors look beyond traditional criteria to consider team diversity, including:
The Impact Investing 2.0 study offers the following perspective on impact fund management teams:
Founders and leaders of successful funds frequently come from varied backgrounds and have expertise in both the social and private sectors. This “cross-silo” experience enables leaders to communicate effectively with diverse sets of stakeholders and systematically approach the challenges of developing and executing an impact investing strategy. … In the traditional view of players operating in financial markets, performance is quite simply a function of assessing financial returns. Within impact investing, however, performance is better understood as a blend of financial returns and the creation of social and environmental impacts. Therefore, performance itself is a cross-sector concept and discipline; while effectively “doing the deal” is key, impact investing, by definition, is about much more than simply structuring and harvesting investment opportunities.[3]
Fund managers must demonstrate robust pipeline early in their fund design process to establish their ability to find good deals and deploy capital quickly. When evaluating funds for investment, one of LPs’ key concerns is the team’s ability to deploy capital immediately once a fund has closed. Over 60% of respondents to the GIIN’s 2017 Annual Impact Investor Survey cited ‘track record’ and ‘current pipeline’ as ‘very important.’[4] LPs evaluate the consistency between a fund’s ability to source deals and the promises it makes in the investment thesis. Developing pipeline in the early stage can be difficult, as a fund manager can make no capital commitments to companies until its investors are confirmed. Fund managers must balance the timing of investment from their LPs and the financing needs of their potential investees to avoid missing out on potential deals. This challenge is, unfortunately, unavoidable and must be managed effectively, as LPs need to see a real pipeline in which the fund manager can invest.
Though fund managers present their pipeline to investors in substantially different ways, a compelling presentation of an investment pipeline includes the following details:
In addition to the core aspects of fund design laid out in the preceding section, many important aspects of a fund’s operational platform must be in place to successfully attract investors and make investments. Each of these topics is complex, and the right design will be unique to each fund. This guide makes note of these elements and provides additional resources for more detail at the end of this section.
ADDITIONAL RESOURCES
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