With strengthening consumer and investor awareness, socially-focused themes have become increasingly attractive, with notable developments coming from biotechnology and education. (UBS)

Impact investing across both private and public markets topped USD 1.1tr in assets in 2022, according to the Global Impact Investing Network.

Like mainstream private equity investors, impact investors focus on building scalable market-based solutions, i.e., those that deploy robust business models and technologies to generate extensive reach and growth over the coming decade. While impact investments can be found across the spectrum of private market investments, we find an opportunity set within venture capital and growth equity as the ability to accelerate change is highest in the earlier stages.

In February, we highlighted investment opportunities within several environmental themes. With strengthening consumer and investor awareness, socially-focused themes have become increasingly attractive. Many notable developments have come from biotechnology, education, and diversity and equality.

Biotechnology and genetic therapies: We see opportunities in early-stage virology treatments and genetic therapies. The pandemic highlighted severe weaknesses in our collective response to viral diseases. And while human ingenuity prevailed with the development and scale of the COVID-vaccines, many other viral diseases—such as hepatitis, HIV, and the human papilloma virus (HPV)—remain challenges that pharmaceutical companies and society at large must still address. According to Pitchbook, biotech and pharma raised around USD 31bn in venture capital in the US last year, a 21% decline compared to 2021, but saw significantly less steep declines than other sectors like fintech (–38%) and consumer tech (–54%).

Education: We think education technologies and platforms will continue to scale. The growing middle class globally will continue to seek opportunities to advance their education. At the same time, global professionals will need to upskill and reskill to future-proof industries and drive innovation. We recommend that impact investors focus on addressing two key verticals of education opportunities: Quality and access, with the latter being increasingly relevant in light of the debate around affordability of education, and with the emergence of digital technologies that enable homeschooling and remote learning.

Diversity and equality: An increase in the income and wealth of minorities should lead to overall economic gains, while company changes and the rise of Gen-Z could also prompt new behaviors and an increasing focus on how companies deal with diversity and a wide range of sustainability topics. We think that companies able to improve their corporate diversity should benefit from a “diversity bonus” through improved innovation, higher sales growth, and profitability. Within private markets, we think opportunities come from companies providing solutions to serve diverse communities, for example through financial inclusion and economic empowerment.

Manager and strategy selection is key for impact realization. We recommend that investors consider the rigor of the impact management capabilities alongside the manager’s potential to deliver competitive financial returns. Investors should also be aware of certain drawbacks when investing in private markets, including illiquidity risk.

Investment takeaways

  • The current environment is well suited for private market investments, in our view. We recommend selectivity within venture capital and growth equity, where declining valuations can be seen as a short-term risk, but also an attractive long-term opportunity to enter the market.
  • Early-stage investments in virology treatments, education technologies, and solutions for diversity and equality continue to capture a growing set of investment opportunities driven by strong consumer demand and shifting regulations.
  • 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. Manager selection and diligent approach to investment and impact assessment remains key.

Main contributors: Amantia Muhedini, Stephanie Choi, Antonia Sariyska

Content is a product of the Chief Investment Office (CIO).

For more, see Sustainable Investing Perspectives: EU green bond standards, IPCC report, and PE impact , 5 April, 2023.