Capricorn Investment Group is paying it forward – and taking a stake.
The $12 billion asset management firm founded by former eBay president Jeff Skoll has taken minority stakes in about a dozen impact fund managers it thinks can help drive the transition to a sustainable economy, and build their own profitable businesses as well.
Capricorn last month took a “GP stake” in Closed Loop Partners, which launched in 2014 with capital from strategic investors like Pepsi and Walmart to invest in circular economy companies and recycling infrastructure. Closed Loop has invested more than $500 million in 80 companies.
That puts Closed Loop in the sweet spot of Capricorn’s own $365 million Sustainable Investor Fund, a player in the booming GP stakes business, in which investors or asset managers take minority stakes in the general partnerships, or GPs, of smaller fund managers. Like other GP stakes funds, Capricorn gets a cut of the fees its set of fund managers collect and a slice of their carried interest, or “carry,” their share of the profits from their portfolio companies, as well as long term appreciation in the value of the general partnerships.
Purpose built
The Sustainable Investor Fund, launched in 2019, has taken minority stakes in about a dozen funds to date. They include Lafayette Square, which invests in middle market companies in overlooked communities; MSquared, a women-owned real estate impact platform; and Community Investment Management, which lends to tech-enabled lenders to small businesses. Last year, it took a stake in SER Capital Partners, which invests in mid-sized renewable energy and other green sectors.
Capricorn has helped those managers grow their total assets under management over the past five years, by more than six-fold, to $20.8 billion by mid-2024, according to the firm. Every $1 of GP stakes capital has the potential to help unlock more than 10x in institutional capital for impact, it adds.
Capricorn spots an opportunity to back more impact funds that have traction and are poised to scale. It’s looking for fund managers with between $100 million and $1 billion in assets that have carved out a defensible impact niche and, with capital and resources, can become the next impact fund management powerhouses.
“The transition towards a more sustainable economy and the transition towards finding more solutions in areas such as climate change, financial inclusion, health access and equity is a capital-intensive one,” Capricorn’s William Orum told ImpactAlpha.
“The asset management industry is a great enabler and beneficiary of that transition. We want to help capitalize and grow the asset management industry that is purpose-built to deploy this capital.”
The GP stakes business is just one arm of New York- and Palo Alto-based Capricorn, which manages the assets of Skoll as well as of other families, foundations, and institutional investors. The firm knows something about fund management from building its own successful Technology Impact Fund and Technology Impact Growth Fund, venture capital and growth funds that invest in “deep tech” climate solutions.
The firm also operates an advisory and outsourced chief investment officer, or OCIO, business for foundations and wealthy families. (This week Capricorn hired Mark Berryman and Nick Flores, formerly of Caprock, as partners on the advisory side).
ImpactAlpha spoke with Orum, a partner and member of Capricorn’s investment team, and Marie-Céline Damnon, a director on the investment team, about the GP stakes strategy, the need for fund managers to specialize, and what’s next in impact.
ImpactAlpha: What role does the Sustainable Investors Fund play and how does it fit within the broader impact investing and GP stakes world?
Bill Orum: We started this strategy as an extension of our impact focus and our theory of change. We have to transform the real economy, and it takes real dollars and real scale to do that. The asset management industry is a great enabler and beneficiary of that transition. We want to help capitalize and grow the asset management industry that is purpose built to deploy this capital. It satisfies two of our objectives. One, we want to be catalytic and help move capital in these areas. And two, financially, we think it’s a wonderful strategy, because if all of these dollars are going to move towards these issue areas over the next 10, 20, 30 years, the asset management industry will be an important part of that.
If you’re able to provide growth capital and help build high quality asset management firms in these areas, we think you’ll not only achieve a great deal of impact and have a lot of leverage in that, but you also likely do quite well financially, because these businesses will grow their AUM, they will be investing into under-capitalized areas that we think offer high rates of return, and will hopefully become kind of these industry leaders in what today are nascent sectors, but long term should be very big.
ImpactAlpha: When people talk about emerging managers, they often think diverse managers. But you are thinking about it more broadly.
Marie-Céline Damnon: The Sustainable Investors Fund focuses really on managers that are impact-aligned across various verticals. Our focus is not specifically on diverse managers. When we [say] emerging managers, it’s really going to de novo firms, or firms that have grown to a certain scale but have a lot of room to grow, to managing sometimes many billions of dollars and being investable for some of the largest asset owners.
Bill Orum: When we started this work many years ago, a lot of the work was on de novo firms and seeding and creating new companies, because the ecosystem hadn’t really been fully formed. Roll forward 10 or 15 years, there’s obviously been a great deal of maturation and progress made in terms of a number of firms that have been developed — Closed Loop being a very good example. But in the traditional kind of segment of asset management, almost all of them would still be considered emerging managers. So where we see the biggest opportunity set today is in firms that have somewhere between $100 million to $1 billion dollars of assets under management. So they’re still emerging, as defined in the traditional segment, but they’re further advanced than truly seeding or de novo company creation. We only focus on those firms that you know are specialized and focused on an area related to sustainability or impact.
People talk about the missing middle in climate; to us, there’s a missing middle in the asset management segment. You have a few really large, scaled platforms, predominantly in infrastructure [that] tend to be the established players. Then you have a whole series of sub-$100 million funds. There are very few firms between $100 million and $5 billion. They tend to be the firms that professionalize companies, develop smaller projects and build them into larger platforms. And right now, the impact segment doesn’t have very many of them. One of our reasons for being is to help take those firms that are $100 million or less — because we will do smaller firms — and help catalyze their growth to really fill that missing middle that we think is so critical to getting more capital moving into these areas.
This is ultimately a scale business. We’re in a world where I do think you have to be over $100 million to start to really have discussions. Most asset owners view emerging managers as anything below $2 billion right? So we have to be a bit bold in terms of putting, prudently, but putting capital into these businesses that gives them a shot at success.
ImpactAlpha: Interesting. What do you look for in a fund manager?
Bill Orum: One of the big trends that we’re seeing is that, as people move more and more towards one-stop shop platforms, if you want to build an independent company, you need to be highly specialized, with some very strong barriers to entry or moats around either your proximity to an issue area, your technical or your network experience.
We’re very much driven by the mission, but the characteristics of what we’re looking for in terms of asset managers that we want to provide growth capital to is not really dissimilar to what you would look for in any segment. The climate and impact sectors are highly fragmented. They’re very large addressable markets. They’re fast growing. There are areas in which there’s technical, network or behavioral competitive advantages. So specialization is kind of rewarded.
We’ve always had more success with firms that are super specialized in what they do, with high barriers to entry, even though it feels a bit scary because, you know, there’s, there’s no Plan B, right? You kind of live and die by that. But I think it’s turned out to be a much better experience for us to take that risk and then build an ecosystem of partnerships that aren’t all one type of risk, but they’re highly specialized in their areas. So that’s a big thing.
ImpactAlpha: Closed Loop would certainly fit that description.
Marie-Céline Damnon: Closed Loop is a firm that fits into the template of a specialist firm that has already had tremendous success, has developed a specialization, in this case, circular economy. They have very strong corporate relationships, and have been able to provide consulting services to some of these corporates to help them understand how to bring more circularity to their supply chain, both by changing their sourcing practices and being more innovative with waste management.
On the asset management side, [Closed Loop Management] is active in various asset classes. They have a venture capital strategy, which is really to be in the loop of innovations occurring in the space. So this is really an early stage strategy. They have a catalytic credit strategy, where some strategic partners of theirs have very specific goals around certain materials that they would like to recycle in a certain geography, in the US, for instance. And so they offer this investment strategy, which is really private credit. And then finally, they have a middle market buyout strategy focused on waste management.
So what’s drawn us to Closed Loop is one, this sector specialization. Two, the strong partnerships that they have developed to date, but three, really the potential for growth here. We believe that some of their offerings can be really attractive for institutional investors. There was an opportunity for this firm to strengthen the team, institutionalize the platform, and really try to grow and diversify their LP base.
ImpactAlpha: Where do you see opportunities for growth within the impact space?
Bill Orum: Natural capital is an area that we continue to be focused on. It’s been complex, but we just don’t see pathways around addressing climate change and emissions without much more substantive solutions and commercial solutions as it relates to natural capital, and so we continue to look very actively in those areas.
First-of-a-kind, emerging infrastructure we’re very interested in. But to be honest, I think that right now is a bit harder because of some of the policy dynamics and fluidity there. We remain optimistic, but it’s not as clear to us that you’re going to be able to build platforms solely focused on that, in the way that probably there was a lot of optimism in 2024.
ImpactAlpha: What about in emerging markets?
Bill Orum: We have not backed a platform focused on emerging markets infrastructure, not for lack of trying. I think this is a critical element of the transition. And I do think you are seeing firms like Actis and some of these others be able to scale deployments. And particularly as the US becomes maybe a bit more challenging, I think it could be a catalyst, in a positive way, to force US asset owners to look at emerging markets and Europe in a way that they just haven’t had to or needed to in the last couple years. The rates of return and the opportunity set is probably increasingly competitive relative to what could be done elsewhere.
ImpactAlpha: Anything else?
Bill Orum: One of the other recent investments we made was in Astanor, which is in Europe, focused on food and ag. To us, this is such an interesting segment because we talk a lot about the intersectionality of these issue areas and how co-dependent many of them have become. How we are dealing with the energy transition affects how we’re doing with financial inclusion and, in turn, how we’re dealing with health access and equity. Agriculture really exemplifies that, because of how much of the global population is dependent on food systems and agriculture, farming. Obviously, from a health perspective it’s critical. And then there is the one-third of global emissions that are attributable to ag, so it’s a big focus of ours. It’s an enormous segment, but it’s been very underdeveloped in the asset management industry. That’s something that we’re going to do a lot more in.
