Navigating Risks as Private Equity Moves into Impact Investing: Examples from Kenya

It does not come as a surprise that impact investing has been adopted by development-focused organisations like the International Finance Corporation and other DFIs. But it has increasingly also attracted the attention of more profit-driven institutions like banks and now, private equity firms – companies which have traditionally been seen as the pinnacle of capitalist enterprise seeking the highest possible returns on investment. Indeed, some of the largest and most well-established global private equity and investment management firms have embraced impact investing, marking an important milestone in the practice.

However, the growth in money-backed demand for these types of investments begs the question of whether there is a sufficient supply of appropriate enterprises to absorb this capital. According to a 2019 survey carried out by the Global Impact Investing Network (GIIN), finding high-quality investment opportunities with a track record is a significant challenge for over a third of investors, and a moderate challenge for another 40%.

The emergence of new and sizeable impact funds backed by private equity behemoths – together with a limited pipeline of actionable deals – will have opposing effects. On one hand, this will encourage existing and new firms to incorporate positive impact into their operations, in order to attract this expanding pool of impact investment capital. On the other hand, there is the much-discussed risk that this may generate perverse incentives, including “impact washing” by asset managers who deceitfully market investments as addressing environmental, social or governance issues to attract investors.

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