TPG’s $3B Push Amazes – and Rattles – Impact Market

By Tom Stabile September 26, 2018
TPG Capital again has grabbed the impact investing spotlight with plans for a second fund that will launch later this year and seek $3 billion, only a year after closing its first vehicle at $2 billion. But it also is a magnet for fresh concerns that its methods for tracking non-financial social benefits and its definition of what qualifies as an impact investment may dilute accepted market norms.
The new fund, outlined last week in a New York Times article, is set to come online because the first Rise Fund, which TPG launched in 2016 and closed last year, has committed 75% of its capital – either deployed into deals or reserved in advance for follow-on investments, according to a source familiar with the firm.
Impact investment funds generally seek to achieve market-rate returns as well as a measureable social benefit, and until 2016, when TPG and Bain Capital began raising capital for new vehicles, the market had largely been the realm of specialist managers. TPG’s new $3 billion target is a significant milestone likely to draw in even more investors and private fund managers to the impact market, says Matthew Weatherley-White, managing director at Caprock Group, a multi-family office advisory firm.
“It says to the market that TPG believes there is sufficient absorptive capacity in the impact market – that is a serious stake in the ground,” he says. “A $3 billion target [in late stage growth impact investing] is way more than anybody would have thought even two years ago.”
Private fund managers will be watching TPG’s progress in raising capital for the new fund, Weatherley-White says. “If they start to fill this out quickly, you’ve got to expect a raft of other [managers] coming out with new funds,” he adds.
TPG declined to comment on whether it might again tap UBS Global Wealth Management advisors to raise capital, as it did last year for its first fund, bringing in $325 million from high-net-worth clients. Earlier this month, a regulatory filing showed KKR also has begun sellingits new $1 billion impact fund at UBS.
TPG also declined to comment on whether its second impact fund will mimic the first Rise Fund in using a sales exemption introduced by the federal JOBS Act in 2013 that allows wider public marketing to investors than typical private funds.
It’s not surprising that impact investing already is attracting large amounts of capital, but greater industry size shouldn’t be the market’s overarching goal, says Jed Emerson, a consultant and author on impact investing and senior fellow at ImpactAssets, who this month released a new book, The Purpose of Capital.
“There’s no doubt you could raise hundreds of billions [of dollars] on the brand of impact,” he says. “But that doesn’t mean that size equals effectiveness or that by attaining levels of scale, we’ll achieve the corresponding levels of purpose we intended with impact. We have to apply these tools in an effective manner.”
The high-profile entries of TPG, KKR, and Bain are nevertheless drawing institutional investors into a discussion that has been the “most clandestine” topic in their ranks, with relatively few of them willing to commit yet, Weatherley-White says. That’s the market TPG wants to unlock with its brand, he adds.
“I think they see a surprising amount of demand from institutional investors for a ‘safe’ impact product,” he says.
But by jumping back in quickly with a $3 billion target and 20% rate of return, TPG may also have to eschew smaller community-level impact investments for deals that are broader and “not as deep,” Emerson says. “If a multi-billion dollar fund is trying to deploy hundreds of millions [into deals], that will restrict the types of investments it will look at [to larger opportunities],” he says.
Already the first Rise Fund has raised questions about whether some of TPG’s deals go beyond portfolio companies that have a positive social impact as an intentional, guiding mission, such as an investment announced earlier this year into C3 IoT, an artificial intelligence and internet-of-things software platform provider. TPG’s announcement appears to cherry pick an impact purpose in outlining how C3 IoT “provides several AI-based product offerings that deliver environmental and social benefits, such as energy management and precision health solutions.”
TPG plans to use the same investment strategy in both of its impact funds, says the source familiar with the firm.
It’s difficult for anyone to strictly define what constitutes an impact investment, and most industry players instead favor guidance from broader principles, Weatherley-White says. But it would be problematic to have looser definitions that allow, for instance, a pornographic film studio that uses renewable energy resources to claim it is an impact investment, he says. “We don’t want to get into this weird world where everything is impact to somebody,” he says.
Other questions surround TPG’s efforts to develop a method for tracking non-financial impact using dollars as its core measurement, and its stated interest in having others adopt the tool. New research on tracking impact is welcome, but recent entrants should acknowledge they are not trailblazers in a 30-year-old industry, Emerson says. “A lot of newcomers gloss over these issues and think they are coming up with a new metric no one has ever thought of before,” he says.
Indeed, another tracking method – the “net contribution score” developed by the Heron Foundation that creates an impact scale that can run from negative to neutral to positive – has been gaining traction, Weatherley-White says.
“You can have a Patagonia that is really pushing the envelope on sustainability in its supply chain… pushing the boundaries on a scale for zero-footprint consumer goods companies,” he says. “That’s going to set a standard for other companies but let the investor or fund [choose their spot] on the spectrum.”
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