Impact Investing: How a Fund of Funds Approach Can Help Address Challenges

Private equity markets have seen a surge of interest in impact investing in recent years. In a recent survey by Pitchbook, 65% of respondents managing external money said that they had offered impact strategies to their clients, up from 57% in 2021. However, challenges around transparency, reporting and access to opportunities are common. Here’s how a fund of funds approach can help.

Minimizing the negative societal consequences of an investment is no longer just a nice-to-have. Investors today are increasingly prioritizing positive and measurable environmental, governance or social outcomes alongside financial gains. We call this impact investing.

Impact investing is complex

The complexity involved when researching an opportunity is amplified when you must consider impact as well as financial gain. This is especially true for small companies or other investors who do not have the time or resources required to be deployed in this critical part of the process. Conversely, larger investors can suffer from diseconomies of scale due to the more nimble nature of smaller fund sizes in the impact universe. This is where a fund of funds approach can help.

Fund of funds strategies help investors diversify into a plethora of fund categories that they might not otherwise have access to, all wrapped up in a single investable portfolio. The approach is ideal for retail investors who lack the expertise, capital, or risk appetite to invest directly in individual securities or funds. If we add an organization’s bespoke impact considerations to the mix, then the support a fund of fund structure offers can be crucial.