Private equity firms are trying to sell big investors on the idea of doing good and making money – but one major investor isn’t convinced.
TPG and KKR are the biggest names in the space after collecting billions for their impact investing funds, which promise to make a difference in the world while generating private equity-level performance. TPG is seeking to raise $3.5 billion for its second Rise fund after collecting $2 billion for the first in 2017, while KKR is soliciting $1 billion for its inaugural fund.
Some of the firms’ biggest peers are rumored to be considering similar strategies as capital flows to the space. In 2018, the Global Impact Investing Network counted $228 billion in impact investing assets, double the amount a year prior.
Despite some firms’ early success with funds, not all investors are on board. In an interview at this week’s Milken Institute Global Conference, the president of the Canada Pension Plan Investment Board – one of the world’s biggest retirement funds – told Business Insider that he’s skeptical of the impact investing strategy.
Mark Machin oversees the C$368.5 billion ($274 billion) pension, which has long invested in TPG and KKR’s private equity funds. He’s fully focused on performance and considers environmental, social, and governance factors in terms of the effect on CPPIB’s risk-adjusted returns, not the good that ESG does for the world. Machin highlighted that such a view contrasts with some of his peer investors, including some European institutional investors, that operate with an eye toward both returns and public purpose.
“We really believe that good ESG behavior is correlated with reduced risk and enhanced return,” he said. “It’s not something you need to wrestle with.”
Any ESG policy decisions for the fund must come out of rigorous analysis, Machin said. He cited CPPIB’s board voting policy enacted in December that pushes for more women on boards as one example: The policy came only after internal research on 3,800 stocks and a meta-analysis of external studies that concluded that board diversity increases returns.
“That’s where we say ‘OK, that does increase risk-adjusted returns, so we should be expressing that view,'” he said. “With other people raising ESG funds, they’re going to have to show that type of skill, and I haven’t seen anyone show that skill yet, actually over and above what we could do ourselves.”
Machin isn’t keen on various ESG ratings from a host of data providers, either.
“It’s so noisy right now,” he said. “You could be at the top of one set of ratings and at the bottom of another set of ratings. There’s no alpha in externally-provided ESG ratings. That’s a problem. It requires a lot of work internally to actually create any sort of excess return.”
‘Difficult political position’
Machin isn’t alone in voicing objections to impact funds. The New Mexico State Investment Council, which oversees the state’s $19 billion sovereign wealth fund, debated investing in TPG’s first impact fund at length in 2017. While the longtime TPG investor eventually said yes to the fund, various council members cited a number of concerns about the investment strategy, per meeting minutes.
They highlighted, among other issues, that the fund didn’t have a track record – a common concern for first-time fundraises across strategies – and the “strategic conflict” between doing good and making money. The council also debated if NMSIC should invest for impact outside of the state, given the potential “political consequences” that “could put the Council in a difficult political position.”
One council member argued that NMSIC shouldn’t invest in a social and environmental impact fund, regardless of return. He believed “the investment moved the SIC in the wrong direction [and] was a strategic mistake,” per the meeting minutes, among other concerns.
NMSIC’s consultant countered that the TPG fund’s social impact was only a side benefit, not what drove the decision, and that the fund wouldn’t give up returns by investing in the fund.
The council ultimately settled on investing in the fund after a 5-4 vote.
The TPG impact fund series, which was led by William “Bill” McGlashan, has recently come under scrutiny after McGlashan was indicted as part of the wide-ranging college admissions scandal last month. TPG allowed investors in the second fund, which has not yet closed, to pull their money. Last week, the firm said it stripped McGlashan of his fund stakes.