CIO sees further opportunity within private equity investments in the area of health and education, as broad access to the structural shift toward more inclusive economic growth. (UBS)

Private market investments remain at the forefront of financing innovation and capturing longer-term growth opportunities, in our view, including via impact investing strategies. Impact investing across both private and public markets topped USD 1.1tr in assets in 2022, according to the Global Impact Investing Network, consistent with the trend of continued positive net flows across the wider sustainable investing theme, reported by Morningstar.

Impact investments offer an opportunity to generate measurable positive social and environmental outcomes by financing scalable market-based solutions to some of the most pressing sustainability challenges. In particular, we see opportunities for private market investments within the environmental themes around the circular economy, clean air and carbon reduction, and enhancing agricultural yield.

  • Clean air and carbon reduction: Longer term, renewable energy companies and technologies that enable efficient use of energy and electricity are well-positioned to benefit from the structural shift to economically cleaner energy sources. The International Energy Agency estimates that to reach net zero emissions by 2050, clean energy investments need to increase to USD 4tn annually by 2030. Over the past decade, over USD 30bn in private capital was raised towards the energy transition in North America alone, with 2021 marking a record with nearly USD 7bn. Private market investments in real assets and infrastructure around renewables and energy storage, as well as private equity stakes in growing clean technology companies offer 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 (3R) materials. Current consumption requires the environmental resources of 2.3 planets, according to the World Business Council for Sustainable Development. Private market investments can help access innovative early-stage companies in the rising recycling and resale market, critical waste management infrastructure, and well as new circular economy technologies.

  • Increasing agricultural yield: With the global population expected to grow to 9.3 billion by 2050 according to UN estimates, food production would need to increase by 50-60%. Shocks in food prices and supply chain disruptions in recent years raise questions about food security. Responses would require investment and innovation in food and agriculture technologies over the decade ahead to improve and protect crop yield, farming efficiency and resilience, and innovation in how food arrives from production to the dinner table. By mid-2022, agtech raised USD 5.7bn in venture capital funding and foodtech has raised USD 18bn by Q3 2022, with segments including alternative proteins, bioengineered foods and food production covering the development, manufacturing and packaging of food products.

In addition, we see further opportunity within private equity investments in the area of health and education, as broad access to the structural shift toward more inclusive economic growth.

As always with private market investments, manager and strategy selection is key as well. We recommend that investors consider the rigor of the impact management capabilities (including the strategy’s intent and approach to impact measurement and verification) alongside the manager’s potential to deliver competitive financial returns.

Takeaways for investors:

  • The current market environment benefits select private market investments. The asset class is well suited for impact investments, with the opportunity to generate positive impact through additional capital and active work with portfolio companies.
  • Technology investments will likely continue to be the focus of many impact private market strategies, including across circularity, clean energy, energy efficiency, carbon capture and agtech. In addition, infrastructure and real asset investments along renewables, energy storage, and waste management facilities will be key, in our view.
  • Private market solutions can offer a way to gain exposure to impactful investments for investors with adequate time horizon and with the ability to endure lock-up periods. As always, manager selection and diligent approach to investment and impact assessment remains key.

Risks: Investors need to ensure that the extended lockup periods required by private market investments align with their cash flow needs.

Read the full report Sustainable Investing Perspectives: How to position in emerging markets, privates, and fixed income 7 February 2023.

Main contributors: Amantia Muhedini, Stephanie Choi, Antonia Sariyska, and Antoinette Zuidweg

This content is a product of the UBS Chief Investment Office.