
Impact investing gains traction in Spain

Despite representing a very young niche within the country's private equity landscape, impact investment is picking up steam in Spain and is attracting the interest of local LPs. Alessia Argentieri reports
The momentum has been fuelled by public initiatives such as the deployment of €50m for social impact funds by state-owned development bank ICO, and the allocation of €30m to invest in impact opportunities by the council of Madrid.
Furthermore, Spain recently joined the Global Steering Group for Impact Investment (GSG), an international taskforce created with the aim of promoting real impact and bringing together leaders from the worlds of finance, business and philanthropy.
Unfortunately, this approach remains quite uncommon, accounting for only around €311m of the total €502bn in assets managed globally by PE in 2018, according to sustainable investment association Spainsif.
The local market is still nascent and the LPs that have shown appetite for impact-orientated GPs are mainly state-funded institutions and a limited number of private investors, primarily family offices, high-net-worth individuals and foundations. Furthermore, while in Spain returns are still lower than the market rate, the global LPs' perception of impact investing as pure philanthropy has changed and they now expect to reap decent financial returns.
"At this stage, the capital for impact investing strategies comes almost exclusively from the European Investment Fund, ICO's Axis, and a relatively small number of family offices and foundations, more willing to prioritise their values when deploying an investment strategy," says Juan Bernal, CEO of Caixabank Asset Management. "Nevertheless, the number of LPs interested in deploying larger pools of capital in impact initiatives is rapidly growing. This is happening because impact strategies can provide LPs with a wider array of profitable opportunities and increased diversification in their portfolios. In addition, they can sometimes even amortise risks, since the financial returns of some of these investments are uncorrelated with the economic cycle."
Meeting the demand
Driven by the demand of this growing LP base, several impact-dedicated funds were launched in Spain in the last couple of years, targeting primarily growth capital investments.
One such fund is Q-Impact I, which was launched by impact-focused firm Qualitas at the beginning of this year with a €40m target and has already raised around €15m. The fund has an LP base mainly composed of Spanish family offices, high-net-worth individuals and some institutional investors. It targets growth capital investments in companies specialising in energy efficiency, sustainable agriculture and social inclusion.
Pablo Valencia, a partner at Qualitas, says: "In addition to the two traditional dimensions of a classic portfolio, which are risk and return, our approach requires the incorporation of a third element, a positive and measurable social and environmental impact, which we need to take into account in our investment decisions and pricing valuation. Following this strategy, we can still deliver positive returns and guarantee an IRR of around 8% to our investors."
In addition to impact-dedicated firms, an increasing number of more generalist funds have shown an interest in impact investing and have developed teams and projects to pursue this investment strategy.
However, while the market is expanding and diversifying, several risks have emerged, including the lack of financial track records and the challenges in finding high-quality targets. In addition, the absence of a commonly accepted definition for impact investing, an approved methodology and a framework for measuring impact has increased the risk of "greenwashing".
"As this is still a very young industry in Spain, we run the risk of impact washing. It is tempting to label products as impact investments just to increase sales or to rebrand existing funds by changing product names and strategies, and using impact to raise further capital," says Caixabank's Bernal. "We need to avoid these bad practices at all costs by integrating rigorous impact measurement and standardisation into the investment process."
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