5 Reasons GPs Should Not Delay Fundraising for Impact Funds

Founder and CEO of ClearlySo shares his views on why GPs should not wait until "things are back to normal" raise capital for impact funds and work with this "new normal" instead.

By Rodney Schwartz, Founder & CEO of ClearlySo · June 3, 2020

Over the past few years ClearlySo has worked on a considerable number impact fund advisory and placement mandates—probably more than any other advisor in Europe—perhaps globally. Never before has the attitude of investment professionals, both LPs and GPs, then so universally positive about impact as an area they are targeting for investment. At the same time, never before have GPs looking to raise impact or any other investment funds been so much in agreement about timing for fundraising. Almost without exception the refrain is, “let’s wait until the autumn”, or “let’s pick things up later this year”.

Initially such a phrase was also paired with something like “when things get back to normal”. I think for many of us we can now see that… there will be no return to normal. And few of us have any idea of what normal means anymore.

We believe that GPs thinking about raising funds would be well served to move relatively quickly and not wait until the autumn. There are probably five reasons for this:

  1. With everyone waiting until the autumn it is likely that supply later this year will greatly outstrip demand. Thus, it is worth considering launching before the glut of new impact funds on the market—and we know from our discussions that many are pending.
  2. The growing interest in impact-oriented products and the improving reception such investment opportunities are receiving in the market is a second supportive factor to move more quickly. In fact, as an earlier blog made clear, we at ClearlySo have been able to close quite a few deals since the lockdown began. In many ways we have never been busier. So whilst in the current atmosphere, conventional investments seem risky, those which can be expected to generate impact, give an investor some sense of confidence that something positive will materialise. Also, crises like COVID-19 or the financial crisis of 2008, have a way of focusing minds on “what really matters”. In such an environment, impact investments tend to thrive. This is especially the case in the current circumstance due to speculation about how “things will be different” in the future.
  3. There is growing recognition that investments with positive impacts have performed well recently. There is considerable evidence and many recent articles which highlight that shares with a strong ESG component have outperformed mainstream market indices during the crisis. Perhaps some of the recent underperformance by mainstream indices is due to oil and gas shares, which have declined in value as the price of oil has plummeted, but this is not the only factor. Whether the remaining differential is due to fundamental factors or the “wall of money” flowing into ESG-oriented funds or ETF’s, or both, is hard to say. Nevertheless, there is a growing belief that investments which consider various non-financial criteria and avoid negative externalities may become increasingly attractive in purely financial terms.
  4. Of course, as a placement agent it is also in ClearlySo’s interest to move ahead with fundraisings. I say this in the interest of transparency.
  5. The final reason is perhaps the most important factors. It is that periods where fundraising is hard often engender above-average private equity returns. This is not surprising. When investment capital is scarce, returns on that capital are likely to be better. I think investors sometimes fail to appreciate how large the gap can be. The chart below (data courtesy of Pitchbook) is illustrative of this point.

PE Returns and PE Capital Invested

Data Source: Pitchbook

Note the inverse relationship between the amount of capital raised and the average IRR to private equity investors. The peak in capital raised in 2007 matched the poor returns of that vintage year. In the following years, as capital raised plummeted (due to the crash) returns jumped. That is until 2018, when capital raised once again peaked and returns plummeted. It is my belief that with capital sources drying up significantly in this COVID-19 environment, returns are likely to be extremely good for this vintage year. The recent falls in share prices have been amplified in the private markets—giving investors much lower entry valuations. Post COVID-19, investors will simply be getting much better deals and this will be to the benefit of their limited partners.

For fund managers and prospective fund managers this will be a challenging time to raise capital but for the benefit of yourselves and your LPs this would be a good time to try, if you think you have a decent chance of some success. And for limited partners considering current allocations to private equity this may be a good time to be bold. For those investors who for various reasons are flush with cash this may be an outstanding market opportunity.