Making an “Impact” with Private Equity
- In the past, some investors felt impact was at the expense of returns. To the contrary, as environmental impact investing feeds the growth of companies that solve sustainability challenges, investment returns are actually tied to impact.
- Acceleration capital investing is an efficient way to back companies which have a positive impact on the environment: in the acceleration phase, companies are established but still growing fast and few are expected to fail. This maximises the impact and financial return of investors’ capital.
- As a pure-play ESG and impact investment firm, Mirova is uniquely positioned to accurately research and qualify potential investments which have positive impact and strong return potential.
Impact investing can be simply defined as investing with a purpose to make a positive contribution that aligns with one or several of the UN sustainable development goals. For Mirova, impact comes through “intentionality”, “additionality” and “measurability”. It is about investing in companies which are 100% focused on delivering a positive impact. Intentions are key, but so is the measurable value that a solution provides compared to other solutions. You can only claim to make a positive impact if you can objectively demonstrate the additionality and measure it.
Q. Could you explain Acceleration Capital?
A. Along the private equity spectrum, acceleration capital can be defined as investing in the early-growth stage, in which companies are profitable or soon to become profitable, and already generate revenues through proven and demonstrable innovation. This growth phase investment usually follows on from VC funding and allows the scaling-up of technologies and businesses.
The great advantage of acceleration capital is that we can make the greatest possible impact. In early-stage VC, the failure rate could be high and only some of your capital ends up making a difference, while in the acceleration phase, companies are established but still growing fast. They are not expected to collapse. This maximises the leverage of investors’ contribution.
If we rely on the management of the company we invest in, we are also an active shareholder in terms of supporting the company’s development and usually sit on the board. We stay invested for five years on average until we exit either through consolidation with a larger company, through an IPO or through a sale to another portfolio manager. Exits will always be made with one an eye on the impact focus going forward.
Q. How does this Approach Make an Impact?
A. With less than 10 years to meet the United Nations’ Sustainable Development Goals (SDGs), private equity has a critical role to play in the “decade of action” and can help fill the annual financing gap of $2.5 trillion. After green infrastructure and a flourishing venture capital scene, we think next-generation impact investments are in private equity, especially at the early-growth stage, where capital is injected to scale up innovations and businesses that help to solve sustainability challenges.
There are multiple ways of defining impact. For some, it is about investing in “grey” companies and making them green. Our approach is to select companies which have green DNA and multiply their impact footprints on the environment by providing them with acceleration capital to grow their business.
These companies benefit from strong macro trends linked to environmental transition, which feed their growth and exit multiples and, consequently, returns to our investors.
Some investors believe that impact comes at the expense of returns. To the contrary, our conviction is that impact investing feeds company growth and fundamentals. In this way, the success of sustainability solutions and investment returns are one and the same.
Q. What Kinds of Companies do you Invest In?
A. We target pan-European companies in five key sectors with a direct connection to the environment. These sectors are natural resources, agri-agro technologies, circular economy, clean energy and smart cities.
The value-add of our portfolio companies is to deliver positive impact in terms of at least one of the UN’s SDGs. We look for companies that have proven, mature and innovative solutions or technologies, and are willing to implement strong ESG standards. They have robust business models, are profitable or will be in the short term and the majority of the capital raised is used for growth. We don’t invest in infrastructure, we don’t invest in early-stage companies and, when we invest outside of Europe, we only look to invest in developed economies, not emerging markets.
Q. How do you Measure the Impact of Each Company?
A. To demonstrate the impact of each investment, we examine the non-financial aspects with the same rigour as the financial ones. This is a core part of our due diligence. As we establish a business plan, we define an impact plan for each company and our independent impact committee validates this plan. On exit, an independent impact due diligence is performed by a third party and evaluated against the impact plan. If the impact is below expectations, this affects our carried interest – ultimately, our remuneration – by up to 50%.
Q. Can you give Examples of Companies to Which you have Provided Acceleration Capital?
A. One example is Ombrea, which develops modular and connected shading systems to protect crops from climate hazards such as frost, hail and sunlight, while collecting meteorological data via integrated sensors. We led the funding round for Ombrea, investing €5.5m for a 26.45% stake. The impact aims are to save water, produce clean energy, improve productivity and increase farmers’ revenues.
Another example is an engineering technology company focused on vehicle pollution reduction, with 24 patents registered across 11 countries. Brake dust is really harmful and is a nightmare on subways. The company’s core technology, which captures brake dust, can be applied to buses, cars, heavy vehicles and rail. We invested €6m for a 9.91% stake, and have a seat on the board. A huge acceleration in the demand for the company’s products is expected in 2025 as EU regulations on dust capture come into force.
Q. How do you Find Suitable Investments?
A. We have privileged access to deal flow opportunities through Mirova’s deep network of partners. Mirova, created in 2012 as a pure-play sustainable finance firm, is a powerful brand in the ESG and impact space and is recognised as a true pioneer.
Entrepreneurs who have developed innovative solutions recognise Mirova as a potential partner capable of truly understanding their business and partnering with them. This brand recognition and expertise has given us the opportunity to review more than 100 opportunities in the last four months alone.
A second source of deals is our network of VC fund contacts. VC funds have seeded companies and brought them to the point of revenue generation where they now need growth capital to get to the next stage.
Then there are specialist and generalist financial advisers and, finally, entrepreneurs, who we are in regular contact with.
Q. What Return can Investors Expect?
A. When we look at companies, we need to be convinced they can deliver at least a multiple of 3x on our initial investment. At the portfolio level, we expect to realise 2.5x on average gross of fees. These are companies in fast-growth mode so there is clearly some risk, but our due diligence process is intense, and we create substantial diversification by sector, so there is little correlation between companies in our portfolio.
Investors also have to live with illiquidity: it takes time – on average around five years – to realise value. A strong risk mitigant is that we focus on environmental issues which are such an important driver of value right now that our companies should still grow even in a poor economic climate. This gives us an edge compared with traditional private equity funds.
Q. Where does Impact Capital fit into Investors’ Portfolios?
A. Most insurers, pension funds, endowments and sovereign funds place acceleration capital for green companies in their private equity sleeve. In many cases, they consider it as part of their core private equity allocation. This is not surprising given that the issues addressed are too important to make impact investment a satellite part of the portfolio. One aspect of our mission is to broaden the scope of investors, so we also give access to high-net-worth individuals and mass affluent investors access.
Q. How is Mirova Suited to Execute this Investment Approach?
A. Mirova’s inherent strengths have multiple benefits for impact acceleration investments. It is a leading pure-player in impact investing. We can leverage the deep pool of Mirova’s existing expertise in energy transition infrastructure, natural capital, social impact and sustainability research. When we wanted to research insect protein for an investment for example, our natural capital team already had experience in this field.
Mirova’s internal network is an ecosystem which can rapidly assess potential investments, produce research and generate leads. Mirova also has a strong operational platform with €2.3bn of AuM in private investments and a proven track record. Mirova is second to none in the private equity landscape in term of experience and resources for impact investing.
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This communication is for information only and is intended for investment service providers or other Professional Clients. The analyses and opinions referenced herein represent the subjective views of the author as referenced unless stated otherwise and are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material.
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