A Guide for Impact Investment Fund Managers

A step-by-step resource to creating and managing a private equity impact fund

Managing Investee Relationships

Working closely with portfolio companies in order to realize the shared vision for growth – both in financial returns and impact – is an important activity for fund managers. Dealing with numerous portfolio companies at once requires fund managers to be highly organized and efficient, accurately estimating how many companies each team member can work with, how many interactions they can handle with each company each week, and how these interactions will be tracked or followed up. A well-staffed operational team is key to managing these relationships and leveraging external resources and independent experts, as needed; this includes LP networks, technical assistance facilities, industry associations, and valuation services. Such external resources can reduce the financial and capacity burdens on the immediate fund management team without sacrificing the needs of portfolio companies.

Crisis Management

Figure 15: Crisis Management

 
 
Monitoring

Monitoring and supervision by the fund manager are a combination of risk management and value-add to the portfolio company. Investors perceive private equity as an attractive asset class with high returns that outweigh high risks, which makes risk management critical. The fund must stay actively involved in the portfolio company throughout the lifecycle of the investment. Below are some tips for developing professional monitoring practices:

  • Establish annual portfolio monitoring cycle: quarterly review of investee reports and regular valuation
  • Early identification of issues and problems: regular monitoring and early warning signs
  • Take early action to resolve issues: build capacity in portfolio monitoring teams to deal with issues when they arise
  • Common shared services: optional shared services for investees include (1) finance, accounting and reporting, (2) human resources, and (3) recruitment

 

Governance

After investment, funds must provide transparent reporting on its relationships with portfolio companies to both its advisory committee and LPs.

 

Fund Advisory Committee

A fund advisory committee is an independent group of investors whose power and duties are specified in the fund’s legal documents. They are typically savvy and knowledgeable investment professional who may have a strong regional knowledge or expertise in a particular sector, and sound business judgement. Their purpose is to advise fund managers and provide advice on the strategic direction of funds and their progress. Their duties may vary depending on the jurisdiction, but their activities are typically restricted to activities that are not deemed managerial, for example, conflict resolution, review valuations, or feedback on a fund’s progress. They may help review conflicts of interest events such as key-person situations, audits of financial statements, or approve valuation policies and valuations assigned to portfolio companies. They may also notify fund managers of any breach of its obligations and approve waivers under the legal documents, i.e., investment limits or extensions of the investment period. Advisory committee members do not have a fiduciary duty to the fund or other investors. Any expenses they incur on behalf of work related to advising the fund should be borne by the fund.

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