Backing a new fund does not mean backing a new investor. And investing in a fund managed by a firm with a long track record does not mean their track record will repeat itself.
Impact Engine Closes First Private Equity Fund
CHICAGO, IL - OCTOBER 19, 2020
Impact Engine announced today the close of its first private equity fund. The $31.5M fund makes strategic investments in growth equity and buyout impact funds and invests directly in growth-stage companies driving improvements in economic empowerment, education, environmental sustainability, and health.
Led by Managing Partner Priya Parrish, the fund was launched to catalyze and support an ecosystem of impact investors in the middle market. Private equity funds can create social and environmental value at scale and are an essential part of the impact investing industry. Unfortunately, high barriers to entry often hold back independent funds unaffiliated by large asset managers from launching.
“The size and scope of the middle market opportunity set is large and growing, yet launching a new private equity fund with a strong commitment to driving positive impact has proven to be difficult unless you already have access to capital,” said Parrish. “We launched this fund to fill that gap, as companies need purpose-aligned capital throughout their life cycle. We’re here to support proven private equity professionals building high caliber investment firms that drive superior results for investors and society.”
The fund extends Impact Engine’s reputation as an early-stage investor in impact companies through its two existing venture funds. The Chicago-based, women-led investment firm believes that investment dollars can and should have a positive impact on society and the environment, and that those positive impacts can be tied to financial success.
”Our investor base continues to grow as family offices and institutions are drawn to our team’s rigorous and authentic approach to investing and assessing impact, as well as the support Impact Engine provides them in exploring broader impact investing opportunities and connecting with their impact investing peers,” said Jessica Droste Yagan, Impact Engine’s CEO.
Limited partners in the fund include Surdna Foundation, William Harris Investors, and the Libra Foundation, as well as investors throughout the United States, Canada and Asia. Candide Group, an impact investment advisor, facilitated the Libra Foundation investment. "The fund is exciting from an impact perspective given that it provides access to a portfolio of quality managers investing in more mature businesses that are often underrepresented in impact portfolios,” said Aner Ben-Ami, Candide’s Founding Partner. “Most importantly from our perspective, Impact Engine is not just allocating capital to these managers -- it is also actively supporting them in deepening and refining their impact practices."
The fund will invest approximately 60% of its capital in growth or buyout private equity funds with a firm-wide commitment to investing in companies driving positive impact. Given the nascency of this market, many of these funds are managed by emerging managers. Others are “impact whisperers”, or established managers quietly evolving their investment process towards intentional impact outcomes. Impact Engine supports both types of funds through first-close capital, impact management thought leadership and mentoring, and its network of purpose-driven investors and companies.
Lumos Capital Group is one of the fund’s strategic investments. “Impact Engine has been a valuable partner in helping us develop and execute on our impact management strategy,” said Victor Hu and James Tieng, co-founders and Managing Partners at Lumos. “The team understood our vision from the beginning, and has served as a trusted sounding board as chair of our Impact Advisory Council.”
40% of the fund’s capital will be invested directly in operating companies. By leveraging the fund’s network of purpose-driven investors in the middle market, Impact Engine supports its companies in scaling impact alongside profits at this critical growth stage where tensions between the two goals can arise.
The fund recently invested in Footprint, a company on a mission to eliminate single-use plastics through its sustainable food packaging products. Footprint’s plant-based packaging products are used by leading global brands, including Conagra, Tyson Foods, Molson Coors, and Sweetgreen. The company has prevented over 61 million pounds of plastics from entering our environment to date, and thereby decreasing the carbon footprint of disposables by more than 44,730 metric tons, equivalent to driving around the planet 4,494 times.
“As our company grows, we want investors that will help us achieve our environmental mission while scaling profits,” said Troy Swope, CEO at Footprint. “Impact Engine understands that these two goals are intertwined, connected us with mission-aligned investors, and is helping us continue to improve our sustainability practices.”
About Impact Engine
Impact Engine is a women-owned and led, Chicago-based venture capital and private equity firm investing in companies driving positive impact in economic empowerment, education, environmental sustainability, and health. The firm manages $63M AUM and was included on the 2019 and 2020 ImpactAssets50 lists, which recognize outstanding impact investment funds with a demonstrated positive social, environmental and financial impact. Across its portfolio, Impact Engine has invested in companies with 44% women CEOs and 24% non-white CEOs, and 56% of companies headquartered between the coasts.
SupplyShift: Why We Invested
By Tasha Seitz and Chris Wu
Companies are increasingly shifting to responsible sourcing policies. This is due to multi-stakeholder pressures from consumers, investors, NGO’s, and employees, as well as a growing awareness that active management of social and environmental issues in supply chains can decrease risk and create new opportunities.
Deloitte estimates the market for responsible supply chain tools will reach $2.7 billion over the next five years. However, 65% of procurement leaders say they have limited or no visibility beyond their tier 1 (direct) suppliers. Information they do have is often siloed in legacy systems or in unwieldy spreadsheets. Buyers need a system that supports multi-tier networks, provides superior data management and visibility through transparent reporting, benchmarks supplier performance, and facilitates engagement so that suppliers follow-through and act to make business improvements.
Solution
SupplyShift is a supply chain ESG (environmental-social-governance) data management platform enabling customers to trace, assess and manage impacts in their supply chains. It helps buyers efficiently and securely gather and analyze data about supplier performance to any level in their supply chain. SupplyShift’s platform streamlines the process of engaging the supply chain, giving buyers an end-to-end view of supplier sustainability performance. Through its focus on collaboration and shared value, the technology helps buyers and their suppliers make the fundamental shift from simple data management and reporting to active supply chain improvement. It delivers insights that enable buyers to elevate sustainability as a factor of purchasing, risk management, and overall business resilience. The SupplyShift platform makes it seamless to gain the insight needed for a more responsive, responsible, and productive supplier network.
Why We Invested
We believe that SupplyShift’s platform will enable buyers to proactively engage, understand, and improve supplier ESG performance, in turn creating a virtuous cycle that will drive sustainability throughout global supply chains. SupplyShift has demonstrated the ability to sell to large buyers, like Walmart and The Sustainability Consortium. The team also has deep subject matter expertise; the co-founders Alex Gershenson and Jamie Barsimantov both have PhD’s in Environmental Studies and have over 12 years of professional experience in the space as the co-founders of EcoShift, an environmental and sustainability focused consulting company.
Impact
Responsible sourcing plays a key role in ensuring the long-term sustainability of businesses. Global production and use of food and consumer goods accounts for more than 80% of water usage and 67% of tropical forest loss globally, and more than 75% of the greenhouse gas (GHG) emissions associated with many industry sectors come from their supply chains. An EY survey of UN Global Compact participants ranked supply chain practices as the biggest challenge to improving their sustainability performance. In order for companies to address environmental and social issues such as deforestation, human rights, and animal welfare, they must know where their inputs come from and how they are produced. SupplyShift has an opportunity to shift the level of transparency and engagement industry-wide.
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Working at a Women-Led Fund: A Man's Perspective
By Roger Liew
One of my favorite management books is Patrick Lencioni’s The Five Dysfunctions of a Team. The easiest dysfunction for a team to address is “Fear of Conflict”, described as, “…people spending inordinate amounts of time and energy trying to avoid the kind of passionate debates that are essential to any great team.” In my past operating roles, “healthy debate” was considered a sign of high team performance. And in the teams I was a part of, I heartily jumped into disagreements like a gladiator preparing for battle. Unfortunately, I would seldom “..emerge from heated debates … with an eagerness and readiness to take on the next important issue.” Instead, I felt worn out and beat up but told myself it was all in the service of avoiding team dysfunction.
About a month after I joined Impact Engine, I disagreed with my partners about a prospective investment. I just couldn’t get comfortable with the company’s growth strategy and I steeled myself for the coming debate. I prepped my arguments and breathlessly rattled them off. I tensed up preparing for the counterpunch. One of my partners simply said, “I can see how you arrived at that conclusion.” Stunned, I thought, that’s not how things are supposed to go.
Since then, we’ve had many passionate debates but they are always about getting to the right answer and not about who’s winning or who’s losing. One of Impact Engine’s key demographic differences is that we’re a women-led firm (and have a women-led board). As the sole man among the partners (a rarity in investment firms), I’ve observed that how we resolve differences is different from every previous position I’ve held; all of those were with teams led by men.
Aside from how we settle arguments, there are many other differences I’ve noticed. Our talent pipeline for both full-time and intern employees tend to have even gender representation. In the 2019–2020 academic year and this summer, we’ve had 12 MBA interns with 6 women and 6 men. When I spoke to our summer interns, one surprising thing to several of the interns was how flat our team feels when discussing deals. Interns and associates were encouraged and expected to weigh-in on potential investments. Another noticed that secretarial tasks, from note taking to scheduling events, were shared up and down the organization.
All of our partners have families with working spouses and school-aged children. This is also different from most leadership teams I’ve experienced, where it was more typical to have a spouse managing the household. At Impact Engine, we understand that there’s a need for balance and there’s no stress when we schedule meetings around school or other personal events. Not having to worry about what your coworkers think of your commitment to work because of family priorities like soccer games allows me to do my best work.
45% of our investments have had at least one woman founder. It’s not something we set out to do but it is an outcome we are proud of. It’s substantially different from the industry norm and it shows that those investments are out there.
All of these observations have made it apparent to me that greater diversity of leadership naturally leads to greater diversity of thought and outcomes. In addition to gender diversity, we are doing well on diversity of professional backgrounds, which greatly adds to our breadth of understanding of industries and deals.
When it comes to racial diversity in our portfolio, we are proud to exceed industry averages, with 27% of our portfolio companies having at least one non-white founder (including 9% Black and 4% Latinx), but we need to do better. While we do make it a priority to include racially diverse candidates when hiring for full-time roles, those positions don’t come up very often. Our intern recruiting process represents an area where we can effect change more quickly; we are actively seeking underrepresented candidates. We are also working to diversify our board. In the meantime, we’ve redoubled our efforts to source early stage companies founded by members of underrepresented racial groups, through building and strengthening additional sourcing connections.
I believe that the diversity of our team has been core to our strength as a firm. We have had several spirited debates about how we can do better to reflect racial diversity in addition to gender diversity in our team, our investments, and our portfolio companies. We will continue to push each other to raise the bar, even when it makes us uncomfortable. I like to think that we would make Patrick Lencioni proud.
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Afresh: Why We Invested
By Elizabeth Coston McCluskey and Tasha Seitz
Global grocery spend is approximately $7.5 trillion annually, and sales of fresh products (produce, meat, seafood, bakery) are rising as a percentage of that spend. Just under half of a shopper’s cart consists of fresh products. However, existing technology solutions focus on “middle of the store” non-perishable items. Because fresh food is perishable, non-uniform, and merchandised in an extremely dynamic fashion it is difficult for stores to predict and manage their inventory. This leads to 10+% “shrink”, or waste, in fresh categories. Produce waste alone is estimated to cost $10B a year in the US and close to $100B / year globally. In addition, significant (harder to quantify) waste occurs in consumer households due to food spending excessive time in the supply chain — losing precious days of shelf life that could be given to consumers. With supermarkets’ thin net margins of 2–4%, they are looking for solutions to help them reduce waste and improve profits.
Solution
Afresh’s AI-powered software enables department managers to generate waste-minimizing and profit-maximizing order quantities for items in fresh departments. The company’s machine learning model takes into account factors that drive demand such as weather, day of the week, mix of items in store, promotions, and competitive activity. It also accounts for supply considerations such as shelf capacity, shipment frequency, and existing inventory. Afresh’s tablet-based app guides the manager through an ordering workflow for each item, whereas they had previously ordered based on the produce department manager’s best guesses recorded using pen & paper. Afresh is currently serving produce departments, with plans to support meat and food service in the near term, and distribution centers in the future.
Why We Invested
Afresh has demonstrated the ability to sell to large, regional chains including Fresh Thyme, headquartered in Chicago. Early customers are committing to chainwide rollouts, with expansion from produce departments into meat and bakery products. Leaders in the industry have validated Afresh’s solution, and are demonstrating their support by investing in this round. In addition to a sizable market opportunity estimated at over $10B per year, we believe there is substantial impact potential, and the team has a strong commitment to impact.
In these challenging times, we are critically examining the potential impact of the COVID crisis on both our portfolio companies as well as new investments, and we believe that Afresh will continue to be a valued solution in the event of a protracted recession. We expect grocery retailing to see steady demand through difficult economic times. Because Afresh enables grocers to reduce waste and thereby increase profitability, we believe the company has the potential to improve the financial health of grocers during a downturn in the economy. Current customers are pushing to accelerate their deployment of Afresh’s solution, which is a positive indication of the company’s value and potential.
Impact
Food waste in the US consumes 21% of all freshwater, 19% of all fertilizer, 18% of cropland and 21% of landfill volume. Retailers throw away 40+ billion pounds of food annually, equivalent to 10% of the total food supply at the retail level. This problem is most pronounced in fresh produce, which consistently sees 12% losses. Afresh has been able to demonstrate 25% food waste reduction with initial customers, which at scale could have massive environmental impacts. Additionally, if the Afresh solution can enable retailers to make better margins on fresh food, it should become more available and affordable to consumers.
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Impact Investing & ESG: Combining Strategies to Achieve Greater Impact
By Jessica Droste Yagan and Priya Parrish
Impact investors build their investment strategies with an outcome in mind. They seek to invest in ways that measurably address specific problems in the world, such as increasing access to clean water or creating jobs in a specific neighborhood. We categorize the various ways that impact investors can intentionally create impact through the 5 P Framework. Impact Engine’s strategy focuses on the “Product” P by investing in companies whose products improve education, health, economic empowerment, or environmental sustainability. We believe that investing in product-based impact is one of the strongest ways to create alignment between scaling impact and revenues.
One of the other Ps in the 5 Ps Framework is “Process,” through which an impact investor may very specifically target and facilitate improvements in the management practices of its portfolio, such as reducing carbon or improving employee wellness. To truly be considered impact investing, these strategies should include active involvement with the business through the board of directors, a control investment, or other ways of directly influencing strategic decisions.
Related to “Process” impact investing, but at the passive end of the spectrum, is environmental-social-governance (ESG) investing, which is quickly becoming a ubiquitous strategy for investors who are thorough about managing risks and seeking opportunities to generate alpha. ESG investors understand that companies providing exemplary working conditions or minimizing the environmental impact from operations may both contribute positively to society and also improve financial returns. Typically, they build ESG data into their investment models much like any other financially-relevant data in order to build portfolios focused on these companies.
Although impact investing and ESG investing are different strategies which have developed as different industries, we believe that, at their best, each incorporates the other. A great ESG strategy will take into account the impacts of the products that are being sold. For example, MSCI ESG Fund Ratings include the weighted average of each portfolio company’s percent of revenue generated from goods and services with a positive impact on society and the environment. Likewise, an effective impact investing strategy will take into account that a business’s impacts will go well beyond its product, especially as it scales. Principle 5 of the Operating Principles for Impact Management from the IFC specifically calls out this opportunity.
In line with our goal of continuous improvement, we have recently revisited and formalized our thinking on integrating ESG into our decision-making and portfolio management processes. Materiality is a key driver in how and when we consider ESG factors. Because materiality will evolve over the lifecycle of a company, we accordingly focus on different ESG factors and with different levels of scrutiny as a company matures. Because we manage both early-stage venture capital and later stage private equity strategies, we are in a unique position to see this evolution over time.
In our venture strategy, we have always focused on a few components of ESG in our due diligence and portfolio management. Specifically, we note the diversity of the management team and board of directors as a risk or strength, we aim to ensure that customer security and privacy are addressed from the beginning, and that ethical practices and strong governance are in place. The venture strategy has not focused on the environmental impacts of our companies (outside of their products, if relevant) because we invest in early-stage software companies, and their environmental impact tends to be much less material than other factors.
More recently, we launched a private equity strategy that focuses on more mature companies across multiple business models (i.e. not exclusively software). This strategy also focuses on product-based impact, yet we see an increased need to assess ESG management in middle market companies due to the increased materiality of many factors on multiple stakeholders. For example, middle market companies often employ several hundred employees and have a more complex operational footprint and supply chain. For these companies, mismanaging ESG factors across business operations may offset the positive impact driven by its products, and the financial materiality of mismanagement is also more significant. Whereas the venture team will bring ESG issues up as needed and more informally, the PE team needs to be more formal and comprehensive in its evaluation.
In developing the PE strategy’s approach to ESG, our goal was to create value for our portfolio companies by identifying ESG risks and opportunities during the diligence process and sharing it with management teams. We then evaluate management’s ability and willingness to make these improvements and seek to actively work with them on these initiatives throughout the investment period. We feel this process can be beneficial to the company akin to the traditional private equity “value creation” process. What guides our investment decisions, from an impact perspective, remains a thesis about how the company’s products or services will drive impact along the dimensions of effectiveness, accessibility, and scale, yet we believe our ESG management process helps ensure total net impact of the company is positive.
We recently developed an ESG management tool for our portfolio companies to help achieve our goals, and will be using it and learning from it in the coming months. ESG practitioners have also developed many frameworks for assessment that can serve as valuable resources for impact investors. We incorporated some of the best practices from the ESG industry while making adjustments for our firm’s objectives and focus on product-based impact business strategies:
SASB’s materiality map is a useful guide to identify the ESG factors that are most financially material to a business, yet we’ve found it valuable to apply our own additional view of what is material for each portfolio company. We also believe that certain factors, such as Employee Engagement, Diversity & Inclusion, are material to all companies.
Sustainalytics, an ESG Ratings provider for public companies, utilizes a two-dimensional framework that measures a company’s exposure to material ESG risks and how well a company is managing those risks. This aligns with our objective of helping companies manage ESG risks, but we added a third dimension — manageability. This helps us avoid businesses with material risks that cannot be managed or have unrealistic expectations of management’s ESG performance.
Finally, B Lab’s Impact Assessment is a comprehensive set of questions that helps to assess a company’s policies and practices in relation to workers, community, customers, the environment, and governance. While not all questions are relevant and material to each portfolio company, we’ve found it useful to think through the applicability for each investment and value the inclusion of all stakeholders in their questionnaire.
At Impact Engine, we are committed to continuously improving our process to generate better financial and social outcomes for society, our companies, and our investors. The fields of impact and ESG investing are rapidly changing, and we’re excited to adopt new tools as they emerge and learn from our and others’ experience.
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Insight+Regroup: Why We Invested
By Catherine Lien and Priya Parrish
In the United States, 51% of counties do not have a psychiatrist and 37% do not have a psychologist. Meanwhile, ~20% of the U.S. population suffers from a mental health condition at any single time (Association of American Medical Colleges). With similar rates of mental health illnesses and substance abuse across urban and rural populations, there is a need for mental health care nationwide.
Solution
As a combined company, Insight+Regroup is the largest and most comprehensive telepsychiatry service provider in the U.S., connecting behavioral health providers to patients and eliminating barriers of geography by providing virtual telehealth services. Insight+Regroup has the unique capability of providing services both on an on-demand basis for emergency cases or scheduled basis for more chronic issues. The combined company serves over 250 different facilities across 35 states and employs a provider base with hundreds of clinicians including Psychiatrists, Psychologists, Licensed Clinical Social Workers, and Advance Practice Nurses.
Why We Invested
In December 2019, we invested in InSight+Regroup at it represents a compelling opportunity to (i) improve outcomes for patients with mental/behavioral health issues, (ii) reduce the cost of care for patients with comorbidity (chronic disease + mental or behavioral health condition), and (iii) decrease the negative effects of mental/behavioral health issues such as homelessness and violence. Due to its breadth of telepsychiatry solutions, Insight+Regroup is well-positioned to capitalize on a large and growing market ($40bn global market size, with 25% CAGR since 2014) with favorable industry tailwinds due to rising mental health awareness, increasing government support, and advances in communications technology.
Impact
Research from the Association of American Medical Colleges concludes that “The United States is suffering from a dramatic shortage of psychiatrists and other mental health providers. And the shortfall is particularly dire in rural regions, many urban neighborhoods, and community mental health centers that often treat the most severe mental illnesses”. Insight+Regroup’s platform helps address the shortage and mental health professionals by offering access regardless of location. As of 1H 2019, most of the combined company’s billable patient hours took place in provider shortage areas defined as correctional facilities, critical access hospitals, outpatient/behavioral clinics, and Native American organizations.
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Where to Look for Impact Jobs in 2020
In 2017, we shared “Looking for Jobs with Impact?” as a response to the growing interest in impact investing and social impact careers. Since then, the impact investing industry has continued to expand, even in the face of COVID-19. Impact investing now takes place through fund managers, family offices, NGOs, foundations, banks, religious organizations, and more. Outside of investing, impact-oriented jobs are available at impact investors’ portfolio companies and other for-profit businesses, particularly as leaders are motivated by COVID-19 to strengthen their corporate sustainability programs.
Below is an updated list of resources that our team has collected over the years, and that we feel are helpful for anyone looking to pursue a career in impact investing or within the larger impact sector.
Impact Investing:
The Global Impact Investing Network (GIIN) has an online Career Center that houses international job postings from members of the GIIN Investors’ Council and other industry leaders.
Impact Engine is a member of Impact Capital Managers (ICM), a network of 52 private fund managers representing over $11B in capital. ICM’s job board features roles posted by its members, located in the US and Canada.
ImpactAlpha is our team’s go-to publication for all impact investing-related news. While the platform requires a paid subscription, its curation of job postings alongside its exclusive content is a cost worth considering.
Opportunity Finance, the national association of community development financial institutions (CDFIs), offers an Industry Job Bank showcasing roles in the opportunity finance field.
Social Entrepreneurship:
Impact Engine’s job board features current openings across our portfolio companies. All positions entail having a positive impact within at least one of our impact sectors: economic empowerment, education, environmental sustainability, and health.
The Aspen Network of Development Entrepreneurs (ANDE), an organization focused on moving forward entrepreneurship in emerging markets, shares job postings from ANDE members and their portfolio companies.
NextBillion, which is supported by the University of Michigan’s William Davidson Institute, is a forum for discussions about the ways in which for-profit businesses can address poverty. Its job board includes positions related to supporting social entrepreneurs.
Corporate Social Responsibility:
Business for Social Responsibility (BSR), a sustainability consulting nonprofit, has a job board that showcases postings from its 250 member companies.
B Corps are for-profit businesses that have completed a rigorous certification process to verify their social and environmental performance, among many other metrics. The B Work page houses open positions available at the 2,500+ certified B Corps across the world.
Net Impact’s global network of 400+ chapters brings together the social impact community through its many programs and events. Its extensive job board includes postings from a variety of for-profit and nonprofit impact organizations.
Reconsidered offers a curated job board and newsletter highlighting social impact, sustainability and CSR-related roles, both domestic and abroad.
You may also want to consider subscribing to the following newsletters, as they offer the latest trends and initiatives within impact investing and social impact:
Impact Engine’s monthly newsletter features original content pieces about impact investing and social entrepreneurship.
Mission Throttle, an advisory firm for mission-driven organizations, publishes a newsletter showcasing impact investing and general social impact news.
SOCAP’s newsletter shares opportunities and developments within the social capital community.
Breaking Good by the Case Foundation is a weekly update on impact investing and social entrepreneurship.
We tune into EdSurge (Education), Startup Health (Health), Financial Health Network (Economic Empowerment), and ReFed (Food/Ag) to stay abreast of sector-specific updates.
To broaden your network and connect with like-minded professionals within the impact investing space, we suggest joining the following LinkedIn groups:
For insight into a “day in the life” and more specific steps to take for securing an impact investing role, you can check out “How to Get A Job in the Impact Investing Sector,” crafted by our very own Principal Elizabeth Coston McCluskey. We’d also like to especially thank Elizabeth for vetting and compiling many of the above resources.
Finally, while looking for roles in the impact investing and social impact sector is not easy, we strongly encourage passionate, talented jobseekers to pursue this work. And with more and more companies adding ESG or CSR-related initiatives, don’t forget to look inside your current company for opportunities and/or don’t be afraid to raise your hand to start programs at your firm. Addressing society’s biggest challenges on a daily basis is both rewarding and necessary. Good luck!
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