Private equity, with its appetite for risk and ability to quickly access industry expertise, represents an increasingly promising source of capital for socially conscious and environmentally sustainable enterprises. In fact, “impact” or “social” investment funds are carving out a growing segment of the private equity market in terms of both size and number of funds. The World Bank estimates that assets under management allocated to impact-focused private equity has increased by 19 percent annually over the past five years, with private equity and venture capital investors placing approximately $79 billion globally in sustainable technology alone over the last 12 years. Recent years have seen impact investment move from smaller, issue-driven funds to mainstream private equity firms. With this move into the mainstream, potential investment targets and private equity professionals are developing novel solutions to some of the putative challenges to conventional private equity impact investment.

One of the principal challenges is that the modest size and liquidity of the sectors in which impact investors work increase the risk of a longer hold period and uncertain exit opportunities. According to GIIN’s 2018 Annual Impact Investor Survey, approximately 39 percent of private equity investors characterize the liquidity and exit risk in the sectors commonly considered for impact investing as “severe,” while traditional exits, such as M&A or an IPO, remain relatively infrequent across most of these sectors. A majority of private equity investors also express a desire to identify “responsible exits”—i.e., exits that do not compromise the enterprise’s social mission—which further narrows the pool of potential exits. This experience has led certain commentators to caution that the traditional exit-oriented approach of conventional private equity funds favoring high-risk, high-growth enterprises can compromise either the social enterprise’s mission or its natural growth trajectory.

Pre-Investment Diligence Considerations

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