Navigating Illiquid Impact Investments: A Strategic Playbook for Professional Investors

The international organization Global Impact Investing Network (GIIN) regularly estimates the global market volume of impact investing. The 2022 results significantly surpass those of previous years: GIIN estimates the size of the global impact investing market at $1.164 trillion. Thus, the much-cited estimate of the organization exceeds the one-trillion-dollar mark for the first time. This number, which is the central result of the GIIN report "2022: Sizing the Impact Investing Market," reflects an increasingly comprehensive measurement of globally managed impact assets. "Our new estimate of a global impact investing market of more than one trillion dollars represents a significant psychological milestone for the industry as it matures and gains complexity," says GIIN CEO Amit Bouri. "While this number is a very positive sign for the industry, it is also a call for further action. If we want to achieve the UN Sustainable Development Goals by 2030 and reach net-zero emissions by 2050, we need to deploy much capital now and consciously focus on achieving positive impacts."

The German Landscape: A Focus on Illiquid Assets

Thus, impact investing is becoming increasingly interesting for investors in Germany as well. Here, illiquid assets are the primary focus for family offices and other professional investors. This is highlighted, for example, by the market study "Impact Investing in Germany 2022" by the Bundesinitiative Impact Investing (BIII). For investors, private equity investments are particularly interesting. In the future, more than 80% of participants expect particularly dynamic development in the private equity segment. Public equity, private debt, and public debt are other essential asset classes.

Direct Holdings: The Core of Illiquid Impact Investing

At the center of illiquid impact investments are direct holdings, i.e., private equity or venture capital investments. Direct holdings are understood here as stakes in companies or projects held directly by asset owners or their investment vehicles and not through fund structures. The possibility of the investor's immediate influence on the investments results in the highest possible impact, which can be achieved together with the management of the company/project. Such direct holdings are often not only seen as an investment object but also as a mechanism to reintroduce one's own entrepreneurial spirit into a particularly sustainable economy.

Access Models: Funds vs. Direct Participation

Investors find access to these participation models in two forms: as a fund or direct participation. While fund solutions require great trust in the competence of external management, own participation management is incomparably more demanding because you have to do everything yourself. Therefore, it is rather strongly entrepreneurially shaped individuals or family offices with the corresponding infrastructure (M&A team/participation managers) who prefer this path, while "normal" private clients and typical impact-oriented institutions tend towards funds to place the generation of financial and impact returns in the hands of established third parties.

Key Strategic Questions for Direct Impact Investors

It is important to answer some essential questions: Does one want to enter majority or minority stakes? In which industries should the direct holdings be, for example, to bring in own competence or to consciously diversify into areas where the assets are otherwise not invested? In which phase of the company/target company does one want to invest: in start-ups, in the growth phase of a company, or in more mature companies in a later stage of development? Private equity investors typically participate in established companies with solid substance, while venture capital investors provide so-called risk capital to finance a rather early-stage entrepreneurial venture. All these different phases can basically be associated with different risk classes. This also applies to impact direct holdings and must be coordinated above all with the strategic asset allocation and the return/risk profile of the investor.

The Attraction of Early-Stage Impact Investing

For many investors, entering at the early stage of an impact company appears attractive because, on the one hand, they participate above average in the growth story and, on the other hand, often only enable the path to more impact in the specific context through the capital measure. The possibilities for influence and change are significantly higher from an impact perspective in the early stage than in saturated companies.

Measuring Performance: The Dual Mandate

It is important to measure participation performance in a targeted manner. Here, a very individual approach is required. However, all companies in the participation portfolio should have in common that the impact criteria defined at the beginning should be continuously recorded and made measurable to be able to permanently question goal achievement. Thus, the generally accepted business key figures must be brought into line with the individually defined impact key figures. Because only in this way can the goal of combining a market-adequate financial return with a measurable impact return be achieved.

The Emotional and Strategic Advantage for Semi-Institutional Investors

Semi-institutional investors also have an emotional advantage in impact investing. As Dr. Johannes Knorz of 4L Vision points out in his essay "Impact Investing in the Single Family Office": "Every investor should also be aware that with their content-related evaluations, certain beliefs and ways of thinking always enter the investment process and thus the entire economic and financial world. This is also necessary given the immense ecological and social challenges of our time. It is therefore indispensable to critically reflect again and again on the content-related 'impact' associated with an investment, to put it up for discussion, and then to consciously decide on an investment in accordance with personal values and ideas."

Actionable Steps for Professional Investors

1. Define Your Impact Thesis: Clearly articulate the social or environmental outcomes you aim to achieve alongside financial returns. This guides all subsequent investment decisions.
2. Assess Internal Capabilities: Honestly evaluate whether you have the in-house expertise and bandwidth to manage direct holdings or if a fund-of-funds or co-investment approach with an experienced partner is more suitable.
3. Develop a Rigorous Due Diligence Framework: Create a checklist that evaluates both financial health (cash flow, management team, market size) and impact integrity (theory of change, measurement methodology, additionality).
4. Establish a Measurement and Management System: Implement tools to track both financial KPIs and impact metrics (e.g., tons of CO2 reduced, jobs created in underserved communities) throughout the investment's lifecycle.
5. Build a Diversified Portfolio: Spread investments across different impact themes (e.g., clean energy, affordable housing, sustainable agriculture), stages (venture, growth, buyout), and geographies to manage risk.
6. Engage Actively: Use your position as a direct investor to influence company strategy towards greater impact, offering not just capital but also strategic guidance and network access.

Illiquid impact investing represents a powerful avenue for professional investors to align their capital with their values while seeking competitive returns. By embracing the complexity of direct holdings and committing to rigorous impact measurement, family offices and other sophisticated players can become catalysts for positive change, proving that finance can be a force for good without sacrificing financial discipline.