Where entrepreneurs and impact investors meet - Danny Vroegop & Karin Huizinga
Investors are increasingly looking for ‘real world impact’ through investments in private markets. Private markets offer investors direct access to ambitious companies and the opportunity for meaningful engagement. This way, they can effectively contribute to the transition to a sustainable society. Companies include those that are willing and able to meaningful contribute to the needed transition, by making their business processes more sustainable and/or providing sustainable products and services. Private markets enable direct investment in companies with concrete results in the real economy.
Investment in Private Debt has grown strongly…
In recent years, the investment category Private Debt has experienced strong growth. This is partly due to the withdrawal of banks due to changing regulations. For example, in the EU, the market share of banks as primary investors in syndicated loans has steadily declined from 69% in 2010 to 22% in 20211. Investors fill up this gap; they are attracted not only by the risk-return profile and diversification opportunities, but also by the opportunity of making a direct and meaningful contribution to a sustainable society."
In numbers…
- The global Private Debt market grew to $1500 billion by the end of 2022 and is expected to further grow to $2800 billion by 2028.2
- The corporate Direct Lending market, the largest sub-asset class within Private Debt, accounted for $540 billion AUM globally in 2023, a significant increase from $71 billion a decade ago.3
- Since 2015, more than €43 billion has been specifically allocated to Private Debt impact funds.4
…partly due to the opportunity of impact investing through private markets
Providing financing to companies (‘Direct Lending’) for the realisation of specific goals, gives direct influence on the company and consequently the real economy and society. The direct and frequent access to the management of companies that strive to be more sustainable, the focus on the long term that comes with private assets, and holding the majority of the shares or debt, make both Private Equity and Private Debt effective instruments for impact strategies.
The key question: What is impact?
Institutional investors often refer to the GIIN definition of impact in their impact strategy, which is: “impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
Many investors focus on a selection of the Sustainable Development Goals for impact. However, these goals are specifically aimed at governments and mainly at goals for developing countries. For Western European countries, this requires a translation. In general, in Western Europe, companies act as intermediaries between governments (and their policies) and consumers (and their demand for sustainable products): they are on of the driving forces behind the transition by implementing sustainable practices.
The two dimensions of impact in the Western world
The two dimensions of ‘impact’ on which investors can contribute to the transition in the Western world can be depicted as follows:
1. Transition through business operations: Aligning business operations with a sustainable future
Companies can improve the sustainability performance of their operations by incorporating ESG criteria into their decision-making processes and actions, allowing them to reduce and/or mitigate the adverse impact caused by their operations and increase long term value creation. This includes initiatives such as reducing greenhouse gas emissions, transitioning from linear to circular use of resources, and employing individuals who are distanced from the labour market.
2. Transition through products and services: Aligning products and services with a sustainable future
Companies that offer, or are strategically moving towards offering, products and services that contribute to specific themes or social megatrends are key drivers of the transition towards a more sustainable future. This includes e.g. the production of energy-saving products, renewable energy, plant-based proteins, and organic food, innovation in the field of circularity and recycling, or access to education and healthcare.
The goal: Real-world impact
The ultimate goal of both entrepreneurs and impact-investors is to achieve real-world impact. Within the world of investors seeking to realise impact, there are two streams:
1. Deep Stream: This group of investors focuses on what is already ‘dark green’. Capital is directed towards the most sustainable companies that lead the transition to a sustainable society with their products and services and do not cause any material damage to the environment or society. These companies typically fall under the second dimension, “Transition through products and services”.
2. Broad Stream: This group of investors embraces the idea that the entire society needs to become more sustainable and that every company must contribute to supporting this transition. Companies that fit the broad approach are those:
- Implementing material ‘transition through business operations’;
- Pivoting their products and services towards a sustainable society; or
- Making progress on both dimensions
The majority of companies are not expected to be able to contribute positively with their products in a direct manner, yet they play a critical role in society. It is also important for these companies to produce more sustainable products with minimal negative impacts on people and the planet. There is still much progress to be made on the sustainability front. It comes with the opportunity to contribute by investing at scale. Ultimately, the question is: what impact do you want to achieve? And how scalable do you want to do this?
Sustainability throughout the value chain
Achieving sustainability throughout the chain is complex and requires collaboration at various levels. The time pressure under which the transformation must take place is severe. In addition, sustainability themes are interconnected. Addressing one goal, such as affordable and sustainable energy, affects other goals, such as nature and biodiversity. Investors are a link in the chain that can facilitate transitions with the right strategy.
The essential job of investors
Significant investments are needed to make the transition towards a sustainable society. In the energy sector in the EU alone, €396 billion in investments are needed annually until 2030. This amounts to €520 - €575 billion annually until 2050. These investments are crucial for achieving net-zero emissions.5
Investors have a crucial role to play. Private investments make it possible to make a difference in the local real economy by financing the right companies.
1 Pitchbook LCD - European Quarterly Review Q4 2022.
2 Preqin – News report (13 december 2023).
3 PitchBook – Global Private Debt Report 2023 (20 maart 2024).
4 Phenix Capital Group – Impact Report on Private Debt (22 mei 2022).
5 Energy transition in the EU, europa.eu.