Private debt impact investing on the rise

Impact investing is on the rise, with private markets “dominating” the space, according to new research from global investment consultancy bfinance.

A recent bfinance survey found that 53 per cent of institutional investors are either already carrying out impact investing or are planning to do so. In the five years leading to 2024, impact assets under management grew by 14 per cent.

Bfinance noted that there are now well over 100 private debt strategies purporting to deliver impact by targeting key environmental and social themes.

However, the firm added that there are still barriers to entry for many investors. Despite positive momentum in the impact investing space, bfinance data shows that the proportion of investors who already engage in impact investing has risen by just two percentage points since late-2022.

“Implementation challenges remain and, while there are opportunities for impact investing across virtually all asset classes, certain sectors are more mature than others,” said the bfinance report.

Across all sustainable and impact private debt strategies, infrastructure debt funds account for 46 per cent, while direct lending funds represent 40 per cent. Real estate debt funds have a four per cent share, while natural capital debt has seven per cent, and multi-asset strategies represent three per cent.

“The expansion and improved sophistication of investment products in this space has been quite remarkable, although there is of course much work still to do,” said Sarita Gosrani, director of ESG and responsible investment at bfinance.

“Investors seeking to invest with a triple bottom line—people, planet, profit—in mind now have interesting options to consider across every major public and private market asset class.

“Ultimately, we must find ways to overcome and mitigate the current barriers relating to impact investing as global challenges intensify.”

Gosrani added that 2024 ranked as the warmest year on record and has featured some of the most extreme weather events, underlining the importance of impact investing alternatives.

She added that ‘impact washing’ is a key challenge for investors, as well as the complexity of conducting accurate due diligence in an evolving space.

The bfinance report also found that blind spots remain in the private market sector. Impact direct lending is more clearly focused on the lower mid-market, while a comparable nonimpact direct lending mandate would typically lean towards a core/upper mid-market profile, the firm said.

“We also see more concentrated portfolios with a lower average number of positions,” concluded the report.

“In addition, while sponsored loans still make up the bulk of portfolios, the proportion of unsponsored transactions is higher than one would find in conventional direct lending strategies (30 per cent vs six per cent.

“One might even argue that unsponsored loans can provide clearer impact, in that the lender is driving change independently without a private equity investor.”