Impact Engine is a women-owned investment firm in Chicago with a low profile despite a track record of building the field of impact investing since it was founded more than a decade ago.
The firm, which announced Tuesday that it has reached US$240 million in assets under management, has attracted major foundations and impact investors, including AllianceBernstein, the W.K. Kellogg Foundation, and Builders Initiative, a division of the family office of Lukas Walton (grandson of the Walmart founder). All are interested in receiving market-rate returns from companies creating positive social and environmental impacts.
Impact Engine also announced the US$85 million close of its second private-equity fund, which invests in individual companies and other impact-oriented private-equity funds that are focused on advancing environmental sustainability, economic opportunity, and health equity. It’s a milestone in the history of the firm, which initially assisted start-up companies in becoming sustainable.
“From the very beginning we always had this North Star of, ‘how do we build the impact investing field?’” says Jessica Droste Yagan, CEO and partner in the firm.
Impact Engine’s view is “we need to shift more capital in this direction particularly in the private markets, and across all stages,” Droste Yagan says. “It’s really important not just for start-ups to have impact investors at the table, but also for middle-market investors.”
The firm is also a public benefit corporation, which means it aims to maximize the interest of employees and customers in addition to shareholders, while conducting business that is good for society. Besides investing for positive outcomes, Impact Engine’s 12 employees each receive an ownership stake in the firm and a percentage of the carried interest from the fund’s investment profits.
“We want everybody to have a chance to create wealth alongside the owners and founders,” Droste Yagan says.
“Changing the Fabric of Our Economy”
Though private-equity funds have garnered a reputation for boosting returns for investors from squeezing profits out of the companies they buy, leading to losses in jobs and services, “we believe there’s a better way to do it, and we want to help facilitate and support and invest in that better way,” Droste Yagan says.
Impact Engine invests in environmental sustainability, economic opportunity, and health equity, because these three sectors each represent a large portion of the economy and therefore, present a large investment opportunity, says Priya Parrish, the firm’s chief investment officer, and a partner.
Its high bar for impact naturally narrows the potential group of companies within these sectors that it can invest in, “and that’s why we need to start large,” Parrish says.
Impact Engine also chose these three sectors because they offer a number of commercial solutions.
The goal is to invest in companies that they can “build and scale to compete with incumbents who are maybe not as impact-driven or impact-built,” Parrish says. “We’re really trying to change the fabric of our economy and eventually the makeup of the S&P 500 as these companies [become] successful.”
Impact Engine invests in both funds and individual companies in its private-equity strategy. The funds—representing 59% of the capital the firm has raised—provide diversification and scale. The individual company investments pose higher risks, but they also provide potentially higher returns, she says.
Among funds in Impact Engine’s latest vehicle is New York-based Lumos Capital Group, which has a growth-equity approach to investing in companies that are developing technologies and platforms in educational technology, knowledge services, and human capital development. Impact Engine was one of their earliest partners, helping them create the tools and frameworks to invest for impact, Parrish says.
“They went from just focusing on human capital and education to being more specific that they’re trying to create better educational opportunities for more people in a more accessible and equitable way,” she says. “That’s what we’re looking to do—we want to be the catalyst.”
It also invests with Martis Capital, based in Washington, D.C,. and San Francisco, which focuses on healthcare equity but didn’t initially promote itself as an impact investing vehicle. “But they were doing it,” Parrish says.
Martis created a seat for Impact Engine in its limited partner advisory committee “so that they could leverage our insights and help them become more impactful,” even though it wasn’t one of its largest investors, she says. “Since we’ve invested, we have helped them begin to measure impact for each of their companies. We have given them feedback on some of the themes of healthcare that they’re looking at and what we believe are most likely to drive impact for more people.”
Companies the firm has invested in include Jetty, based in New York, which aims to make renting a home affordable; Circuit, based in West Palm Beach, Fla., which provides on-demand short-distance electric vehicle services; and Matsmart, based in Sweden, which has created a platform for selling surplus food from leading “fast-moving consumer goods” brands.
Walton was an early investor in Impact Engine’s start-up accelerators, and today, his Builders Initiative invests in the firm’s private-equity strategy because “there’s a shared ethos around impact authenticity and the ability to make compelling returns while also having an impact,” says Noelle Laing, its chief investment officer.
There’s also a desire by both Impact Engine and Builders to expand the impact-investing community, Laing says.
Impact Engine’s fund in particular is attractive to Builders as an investor because its approach of investing in both funds and companies lowers the overall fees, which can be high for a fund-of-funds strategy. Moreover, Builders—which has a focus on climate, food and agriculture, and oceans—was drawn to the opportunity to invest in later-stage companies.
“Private equity is an area that has just historically been lighter on impact opportunities,” Laing says.
Droste Yagan has seen the impact-investing sector accelerate especially within the last few years, which makes her optimistic for the future.
“It’s not to say there aren’t skeptics,” she says. “But I see the speed of what’s happened in the last decade and think about how that can play out in the next decade—it’s very exciting.”
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