By Jessica Droste Yagan and Priya Parrish
The end of one year and the beginning of the next is naturally a time for reflection. And, wow, did 2023 have a lot to reflect on! It was a paradox. It both flew by and also seemed to last forever. It was both full of volatility and new challenges and also reinforced many things we already knew and believed. It was both heartbreaking and hopeful. We expect 2024 to be similar in many ways, and while we remain optimistic, we are also grateful that our team brings the experience necessary to manage through a variety of markets, so we can face whatever might come our way.
The venture capital and private equity markets experienced a meaningful slow down this year. After a multi-year period of significant capital inflows for funds and companies, investors slowed their pace of deployment into illiquid assets as they evaluated the changing macroeconomic environment. Companies with cash runway, or options to extend cash runway sustainably, waited to raise more capital or exit, hoping to see the market shift back in their favor. In the meantime, the muted exit market meant that fund managers slowed distributions to investors. This in turn led to investors slowing commitments to new funds. This cycle is still in play, and it shifts the negotiating power to funds with dry powder that are in a very strong position to find great companies at lower prices.
We are seeing all of the above across our firm, and have been focused on supporting our portfolio companies while remaining disciplined about deploying new capital with the capital we do have. Our team includes investors and operators that have managed through these market cycles before and know that those companies that make it through will be the leaders. We are confident that many of our companies and our funds’ companies will be the leaders not only from a financial perspective but in scaling market-driven solutions to critical social and environmental challenges.
A big positive this year was continuing to see more investors move from talk to action and from indifference to acknowledgement regarding the impacts of their investments. Family offices and individuals continued their steady movement in this direction, often driven by younger generations taking on more power and influence, but the real shift we saw this year was from charitable foundations, whose legal responsibility it is to address social and environmental issues.
Charitable foundations have long drawn a line between their grant and investment decisions, assigning the former to drive the mission and the latter to fund it. A handful of very early leaders started decades ago in acknowledging that their endowments and investments often affected their missions, whether they wanted them to or not, and started acting intentionally to shift their investments as much as possible toward achieving those missions, or at least not working against them. As they demonstrated the possibilities of that approach over time, while continuing to meet their fiduciary duties and financial needs, others have had the confidence to follow. Now we are starting to see them follow in larger and larger numbers.
On the down side, fewer investors of any type are willing to invest in managers without a track record, and the vast majority of impact funds as well as funds led by women or people of color are in that category (also known as emerging managers). So, while impact investing dollars continued to increase in 2023, it is almost entirely going to mega firms who are raising separate sleeves of capital to capture impact demand. We are worried about what that means for emerging managers and how it might lead the industry to backslide on its progress toward more diversity and more impact. We hope to collaborate with others to support this segment of the industry.
Government’s role in all of this will continue to be important as well. This year, we saw the government play two notable roles in the evolution of impact investing, both generally positive.
First, both European and US governments began to step into a gap in regulation related to impact investing. In the US, the SEC shared draft rules related to transparency marketing around ESG and impact. In Europe, the interpretation and implementation of SFDR articles 6/8/9 were in full swing. Second, the US government's decisions about what and how to impact market forces continues to affect the work we do. For example, the end of ESSER funding has affected the ability of schools to afford education tools from the types of edtech companies we invest in, while on the other hand the IRA created notable tailwinds for the clean energy transition, which was already gaining steam.
All in all, this year has seen some major challenges and we will continue to face them and more in 2024, not least of which is political risk as 2 billion people around the world will go to the polls this year to elect their leader, including here in the United States. But, as in 2023, we believe that impact investing and intentional management of ESG factors in business will only continue to grow.
We are seeing increased sophistication of impact management and measurement even from the largest, most mainstream players, as well as multiple industry-led efforts to create alignment around what and how to report data in this space. The political backlash against ESG is not going to stop what is fundamentally a market driven movement: a demand for corporations, which are enabled and supported by governments and therefore the people, to be a net positive for those people. This is the future of capitalism and we are proud to play a role in its progression.
We are grateful to all those who partner with our team on this, including our investors, the GPs we invest in, the CEOs we invest in, and all others doing their part to make capitalism the best it can be. Happy New Year - more to come in 2024!