We believe private markets investment remains a leader in funding innovation and capturing longer-term growth opportunities, including through impact investing strategies. Impact investing in both private and public markets surpassed more than $1.1 trillion in wealth in 2022, according to the Global Impact Investing Network.
Impact investments offer the opportunity to achieve measurable positive social and environmental outcomes by funding scalable market-based solutions to some of the most pressing sustainability challenges. In particular, we see opportunities for private market investments in the environmental issues surrounding circular economy, clean air and CO2 reduction as well as increasing agricultural yield.
- Clean air and CO2 reduction: In the longer term, renewable energy companies and technologies that enable efficient use of energy and electricity are well positioned to benefit from the structural shift towards economically cleaner energy sources. The International Energy Agency estimates that clean energy investments need to increase to $4 trillion per year by 2030 to achieve net-zero emissions by 2050. In the last ten years, over USD 30 billion in private capital has been raised for the energy transition in North America alone. 2021 marked a record with almost USD 7 billion. Private market investments in real assets and infrastructure related to renewable energy and energy storage, as well as private equity investments in growing clean technology companies, provide access to impactful environmental solutions.
- Circular Economy: The intrinsic link between economic growth and resource consumption is likely to continue to drive demand for solutions that can help reduce, reuse and recycle materials (3Rs). According to the World Business Council for Sustainable Development, current consumption requires the environmental resources of 2.3 planets. Private market investments can help access innovative early-stage companies in the growing recycling and resale market, critical infrastructure for waste management and new circular economy technologies.
- Increasing Agricultural Yield: As the world population is projected to grow to 9.3 billion by 2050, according to UN estimates, food production would need to increase by 50-60%. Food price shocks and supply chain disruptions in recent years have raised questions about food security. The answers would require investment and innovation in food and farming technologies over the coming decade to improve crop yields, farm efficiency and resilience, and innovation in the way food gets from farm to table protection. By mid-2022, Agtech had raised $5.7 billion in venture capital funding and Foodtech had raised $18 billion through Q3 2022, with segments such as alternative proteins, bioengineered foods and food production covering food development, manufacturing and packaging.
Additionally, we see further opportunities in private equity investing in healthcare and education as a broad gateway to structural change towards more inclusive economic growth.
As always with private market investments, manager and strategy selection is crucial. We encourage investors to consider the rigor of impact management capabilities (including the strategy’s intent and approach to impact measurement and verification) in addition to the manager’s potential to generate competitive returns.
Takeaways for investors:
- The current market environment is benefiting selected private market investments. The asset class is well suited to impact investing, with the opportunity to generate positive impact through additional capital and active work with portfolio companies.
- Technology investment will likely continue to be at the heart of many impactful private market strategies, including circularity, clean energy, energy efficiency, carbon capture and agtech. In addition, infrastructure and real asset investments in renewable energy, energy storage and waste management facilities will be critical, in our view.
- Private markets solutions can provide an opportunity for investors with an appropriate time horizon and the ability to tolerate lock-up periods to gain exposure to high-impact investments. As always, manager selection and a careful approach to investments and impact assessments remain crucial.
Risks: Investors need to ensure that the extended lock-up periods required for private markets investments align with their cash flow needs.
Read the full report, February 7, 2023, Sustainable Investing Perspectives: How to position in Emerging Markets, Privates, and Fixed Income.
Main responsible: Amantia Muhedini, Stephanie Choi, Antonia Sariyska and Antoinette Zuidweg
This content is a product of the UBS Chief Investment Office.
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