Impact Investments and Raising Capital From Public Pensions

I was asked to speak yesterday to a working session of Impact Capital Managers, a network of private capital fund managers, on the topic of raising money for new investment funds from public pensions – ‘capital raising’.

The session was moderated by Mike Hokenson of Community Impact Management, and also included Tazia Smith of Closed Loop and Erin Molloy of Rethink Capital Partners.

Since 2008,  I worked with two carbon market funds (’08 – ’12) before joining Equilibrium and working on capital raising for seven real asset investment funds at Equilibrium. Real assets refers to physical, tangible investments, like real estate, land and forest / timber, infrastructure, and natural resource commodities like oil and gas and renewable energy structures.

At Equilibrium we specialize in agriculture and food, and water, waste, renewable energy. The two prior carbon market funds I worked with were developing emission reduction credits from renewable energy and land-use projects (that reduce emission releases through land-use change activities), one of which was within the European Union emission trading system and one within the global ‘voluntary’ market for emission reduction credits. Lastly, prior to that I was the Global Product Specialist for the Fund of Hedge Funds product, International Asset Managers (IAM) within ABN AMRO Asset Management in London for three years 2005-8 and during my training years at Merrill Lynch Investment Managers worked on raising capital for the New Energy Technology Fund launch in 2000 as well as having been the European Value team global product specialist support to a Managing Director.

On joining Equilibrium, I from day one decided to focus on public pensions.

Our goal at Equilibrium is to put the biggest lever we can into sustainability-driven real asset strategies that are proven and profitable but typically sub-scale and not yet being accessed by institutions. And, our capital raising team of myself and four colleagues at Equilibrium has raised around $3 billion in those seven funds.

So, in a sense, it was my job to figure out working with public pensions and this was an idea that I brought in interviewing (though they did spend the interview asking me about my Impact investor rolodex).

Within real assets, Equilibrium is a specialist in agriculture in food, and water, waste, energy. With around $1.5b under management in our large-scale greenhouse strategy, we’re the largest owner of mega-greenhouses in North America today. These are the massive indoor facilities that today grow much of the tomatoes, bell peppers, leafy greens that you see piled neatly in punnets and packaging in large grocery segment. The strategy is driven by bringing down the pricing and improving the quality and consistency of produce for the large grocery value chain. And so we are effectively ‘the landlord’, being the building owner, serving the needs of Heads of Produce Buying for large grocery in the US and now globally.

And we are one of the most experienced investment teams in waste-to-energy facilities from dairy, food waste, and municipal biogas development.

It hasn’t been easy, with slow but significant results for us at Equilibrium, the first fund my team closed was at $183 million in 2016 and our most recent was $1 billion in July 2021.

The public pensions are a massive source of well-run capital: most estimates put this around $100 trillion globally and I have seen a figure of $30 trillion in the US.

It’s easy to throw around large impressive figures but the real argument for working with the public pension sector is their expertise in specific asset classes, long-term horizon and transparent process.

A problem is the cultural history of ‘impact’ being related to less returns, and impact funds investment objectives being perceived as political or philanthropical rather than investment returns-driven. And, I suspect we’ve done that as a sector, because it feels good to say that you’re doing something to improve the world (remember too that Lloyd Blankfein in 2009 shared his view that Goldman Sachs was doing God’s work – and I’m not saying that Goldman Sachs is not doing god’s work, but it’s subjective for sure!).

So, a first principle in working with public pension plans is to research two things: 1. the Investment Policy Statement and whether it includes any comment on ESG or Impact, and how it positions that 2. the role and job description of the person you are approaching. It’s unlikely that either gives an express backing to picking investments as a philanthropic or political venture.

A second, the one that has kept me going, is to do ever deepening research and to play the long game in building relationships. Research the roles and likely objectives of the people you are contacting, and express yourself in their terms, not yours.

So, the third, is to adjust your language to what you know about the investor you are communicating with. I think the definitions of the word ‘Impact’ and ‘Sustainability’ will always mean different things to different people, and while we will craft arguments in terms of new markets and solving problems, they may hear politics and just think “it’s not my job”.

I learnt this the harder way, on a phone call in 2014. “We don’t do sustainability”, he said, the Head of Investments for a College Endowment. The meeting went just fine as I pivoted straight into discussing the drivers of current income and our capital appreciation assumptions. But I’ll never forget that moment.

It taught me an important exercise: if it’s an investment proposition in the main, and you are communicating with an investor, can you make the pitch without using the word Impact or Sustainability, to actually achieve the greatest impact?

So, talk in their terms:

7 or 8 pensions have Emerging Manager programs, and I share links below to two lists:

In preparing for the talk, I also enjoyed stumbling on Mobilizing institutional capital for renewable energy (International Renewable Energy Agency, 2020).

A few other general comments:

And, you will find useful lists within: