What is Impact-Linked Carried Interest?
Impact-linked carried interest ties fund managers’ financial rewards to achieving specific impact goals, focusing on tangible environmental and/or social outcomes. One of the key players in the European fund in fund investors, The European Investment Fund (EIF), actively promotes the integration of impact-linked carried interest in the funds it supports .Both Bluefront and Sandwater emphasize the importance of distinguishing measurable impact from ESG, which often focuses on operational practices.
Bluefront Equity’s Approach
Bluefront integrates impact-linked carried interest through:
- Sector-Specific Focus: Investments target seafood and ocean industries, aiming to improve ocean health and animal welfare.
- Tailored KPIs: Company-specific, weighted impact metrics aligned with a theory of change framework.
- Accountability Measures: If impact targets are not met, the linked carry portion is redirected to NGOs.
- Third-Party Verification: External validation supports transparency, though challenges remain in standardizing impact measurement.
Sandwater’s ApproachSandwater’s strategy is built on adaptability, ensuring KPIs reflect a company’s development stage:
- Stage-Appropriate KPIs: Early-stage companies use interim impact goals that evolve as they scale.
- Sliding Scale Evaluation: Impact performance is assessed at exit, determining the portion of impact-linked carry received.
- Practical Applications: Case studies, like Antec Biogas, illustrate how tailored KPIs drive accountability.
Key Takeaways from the Following Discussion
- Balancing Ambition and Practicality: Both firms emphasize setting bold yet achievable impact targets.
- Tailored Metrics vs. Portfolio Aggregation: Prioritizing company-specific KPIs prevents oversimplification of impact at the portfolio level.
- Verification and Adaptability: Third-party validation plays a role but should be complemented by internal expertise and stakeholder engagement.
- Evolving Impact Measurement: Investors, including the European Investment Fund (EIF), acknowledge the need for KPIs to evolve with company maturity.
Looking AheadImpact-linked carried interest represents a new step in integrating impact into financial performance. While still evolving, it offers exciting potential for investors committed to meaningful change. NorNAB continues to facilitate knowledge-sharing on core best practices within impact investing and emerging strategies.
