As part of their Impact Report: Deep Dive on Private Equity funds Phenix Capital interviewed Snowball senior investment manager Jake Levy on what he is seeing in impact private equity.

Interview

Q. Snowball has a unique approach to investment with impact, aiming to positively impact people and the planet, changing financial markets' current business-as-usual approach. Can you explain Snowball's investment strategy and how it integrates impact?

A. At Snowball, we offer a straightforward, low-risk way to invest to achieve integrated impact and financial returns. Our investment proposition is simple: we work to identify the best impact managers in each asset class, maximising impact whilst not compromising on returns.

Impact is embedded throughout our investment process using our unique impact framework, which scores the impact intensity of each investment through two lenses: (1) how a fund manager works to increase its own impact as well as that of its underlying investees; and (2) the potential and actual impact of the investments that our managers hold in their portfolios.

We combine these to create a dynamic "bullseye score" for each investment. We have shared our impact methodology in two reports. The Investors' Perspective and Managing for Impact.

Following investment, we track the impact of our managers over time with the intention of increasing it through our active engagement. For example. we have developed our own framework to analyse the content of the impact reports we receive from managers. We see a lot of impact reports so we can give feedback to our managers and share best practices. Our long-term ambition is to drive the portfolio to the centre of our impact bullseye.

Q. Has COVID-19 affected your investment portfolio? If so, how?

A. Within our private equity portfolio, we have seen a number of companies affected by Covid-19, but pleasingly we've only seen a single failure. Like the wider economy, there have been winners and losers in our portfolio depending on the sector and business model.

For example. the pandemic proved to be a tailwind for World of Books, a circular economy tech business that sells second-hand books. The company benefited from the growth of e-commerce during the lockdown, effectively pivoting its strategy to source books directly from consumers following the closures of many charity shops during the lockdown. The company has gone from strength to strength, culminating in a highly successful exit last year.

In contrast, for a portfolio company with an Al-enabled solution that halves food waste in commercial catering facilities, lockdown saw the closure of many of its core end markets, principally relating to customers in hotels. restaurants and cruise ships. It is during such periods of turbulence that our fund managers really earn their corn.

“The manager supported the business operationally and commercially during a challenging period. through which the company has retained the vast majority of its installed customer base and even managed to win new key global contracts.”

Q. How do you source and screen investment opportunities available in the private equity market?

A. For private equity, our pipeline sourcing combines top-down research of impact themes with bottom-up analysis to identify the best opportunities in the market. We have an initial impact hurdle, and each fund must be able to meet our return target for the asset class.

For example. we recently screened a longlist of 184 Cleantech funds compiled using the Phenix Impact Database, Climate Tech VC and Climate 50 (amongst others). From this, we funnelled down to a long list of funds and reached out to those managers we didn't already know.

We conducted early-stage diligence on a handful of funds - finally taking a single fund to our investment committee. Of course, we also use our extensive network developed over the last five years to build a pipeline.

You won't be surprised to hear we screen all funds for impact using our bullseye framework. We're also looking for experienced managers which we believe can execute against a credible strategy. We must be convinced they can identify, win and scale the best impact companies.

Q. Regarding decarbonising Snowball's portfolio, what sectors and markets are you focusing on?

A. In our private equity portfolio many of our funds address our Resource Efficiency theme. For example, Circularity Capital invests in circular economy companies. The Yield Lab backs innovative and sustainable Ag Tech companies, and Eka Ventures focuses on sustainable consumer technology. Climate Tech and Sustainable Food are big themes for us this year, and we expect to invest in each vertical in the coming months.

We have a multi-asset strategy and therefore approach this differently for other asset classes. For example, decarbonisation is a big focus of our public equity strategy (through funds such as Impax Environmental Markets and WHEB Sustainability). For public equity, engagement with portfolio companies around Net Zero is critical alongside investing in businesses solving environmental issues.

We don't just want to know a portfolio's CO2 emissions but also how much has been avoided against industry benchmarks. Our Energy Efficiency theme has several renewable energy infrastructure holdings across both public and private markets (these include Bluefield Solar. The Renewables Infrastructure Group and Capital Dynamics' renewable energy infrastructure funds).

Q. Are there preferred measurement and management instruments you use when looking at impact as an LP?

A. As an LP, we are primarily looking for improvement in impact created either by the manager or the enterprises they invest in. As such, we are not overly prescriptive - wanting the manager or company to identify the most suitable metric. That said, part of our impact assessment uses the Impact Management Project's five dimensions of impact - and we do encourage our managers to do likewise when analysing the impact of their investments.

The breadth of our portfolio means that we do not receive impact data in a standardised format. When assessing impact, we try to go beyond just the data to understand how each manager approaches its reporting.

For Snowball. impact reporting is not just about accountability but should provide insights to improve impact delivery over time. We want to be confident that our managers understand and analyse the impact data and. ultimately, use it to inform decision making.

Q. How is this different when you're acting as a GP?

A. As a GP, our organisation is built around the impact we aim to deliver. At Snowball, impact drives decision-making at all levels, and all our assets are invested for impact. As a result, we are backed by not-for-profit founding investors, our mission is written into our articles of association and we are a certified B-Corporation, (We're proud to score in the top 5% of B Corps for our governance structure.)

As an organisation, we should practice what we preach - and we have recently commissioned an impact report by an independent third party which includes a review of our impact process.

We will publish the findings that we believe are an important signal to the market that Snowball is modelling the type of behaviours around external verification we would like to see from our fund managers.

Q. How have you seen the private equity market evolve in 2022?

A. We have seen so much capital flowing into private equity recently - and the impact ecosystem is growing all the time. This is really encouraging and such a contrast even to five years ago.

Some sectors - Climate Tech and Sustainable Food, to name just two present real impact and return opportunities, but we also need to tread cautiously as some valuations are stretched right now.

It is a truism that venture investing is all about picking the best managers - and the data shows this is even more pronounced for impact funds. We're lucky that we have relationships with the best managers, and. as values aligned investors, they're always keen to find space for us in their funds.

If you have any thoughts on the article or would like to learn more about Snowball, please do be in touch on hello@snowball.im