Global private equity advisory firm Apax Partners has a long history of prioritizing sustainability and responsible investing. In 2011, it was an early signatory to the UN Principles for Responsible Investing. In 2012, the firm began collecting and reporting on portfolio company sustainability KPIs, and in 2013, the firm released its first annual sustainability report to investors.1 Today, the firm monitors more than 140 impact indicators in areas such as carbon baselining, decarbonization planning, board diversity, workforce safety, and antibribery. In 2021, the firm launched the Apax Global Impact (AGI) fund. Sir Ronald Cohen, cofounder of Apax and one of the pioneers of impact investing, now chairs AGI’s advisory board. AGI’s first fund closed in December 2023 with about $900 million invested.
In this episode of Deal Volume, McKinsey’s podcast on private markets, host and McKinsey partner Brian Vickery speaks with David Su, a managing partner and cohead of the impact investing team at Apax. The two discuss the evolution of impact investing, the importance of measuring impact, the case of AGI portfolio company Swing Education, and a key lesson for impact investors to keep in mind. An edited version of their conversation follows.
Impact investing is evolving
Brian Vickery: How has the impact market evolved, and where is investor interest coming from today?
David Su: The industry has evolved in several ways. First, there were sector exclusions. Traditional private equity funds would avoid certain sectors such as tobacco, firearms, and gaming. Next, investors set minimum ESG [environmental, social, and governance] standards for companies. Today, there’s been a fundamental shift to investing intentionally in companies that are directly tackling ESG issues.
Some funds, such as climate-specific funds, are narrowly focused, while others, including ours, are broader. But we all align with customers, employees, and founders in our interest in mission-driven companies. Businesses with strong sustainability characteristics also get premiums in the public markets. Structural support for sustainable businesses—for example, lower-cost financing and regulation—provides strong tailwinds, creating a self-reinforcing flywheel.
Brian Vickery: How would you characterize the LPs who invest in impact funds?
David Su: There are two types of LPs. The first type either has sleeves for impact investing or has transitioned their entire fund to focus on impact investing. These LPs firmly believe we can simultaneously generate market rate returns and material and measurable impact outcomes. The second type may primarily be drawn to our platform strategy—for example, our sector focus or our middle market focus—but it also happens to have an impact lens.
Brian Vickery: The broader fundraising environment has been very challenging for the past 18 months or more. How is that affecting the impact-investing market?
David Su: Although the overall fundraising environment is tough, authentic impact funds with a strong measurement system and a differentiated platform are getting fundraising dollars. We also see tailwinds from the firms that are transitioning their entire portfolios to impact investing.
Measurement helps ensure accountability
Brian Vickery: You’re quite passionate about the ability to measure impact. What does measurement mean to you?
David Su: Our measurement system is central to our impact investment strategy. It subjects the impact of each of our investments to the same level of scrutiny as risk in return. We spent more than six months with our advisory board developing a proprietary system that incorporates impact into every stage of our investment process. It’s simple, evidence-based, and adaptable because we are in the early innings of impact investing, and everybody is still learning. It starts with calculating a company’s “threshold score” to determine whether it is making the defined minimum level of impact required by our portfolio. Only companies with a score of 60 or higher (out of 100) are accepted.
Once a company is in the portfolio, we calculate an impact improvement score—broken down into scale of impact and the depth of impact—to measure the impact it would generate over four years of investment. We work with the management team to determine those targets and look to tie management and company bonuses and compensation to those targets. We also tie some of our own compensation to the impact improvement score. We set KPIs and hold ourselves accountable on an annual basis.
Brian Vickery: How do CEOs of portfolio companies relate to the measurement system? Do they view it as another layer of bureaucracy coming down from private equity?
David Su: So far, all our portfolio companies have welcomed it with open arms. And it isn’t only the management teams; employees like to see that we are a legitimate impact fund that cares about its mission.
Swing Education exemplifies impact investing
Brian Vickery: Can you share an example of a portfolio company the AGI fund has invested in?
David Su: Swing Education is a great example. Swing is an online marketplace that connects substitute teachers with schools—an Uber for substitute teachers, if you will. We all remember a teacher being out sick and the principal or a gym teacher coming into the classroom and putting on a movie. Unsurprisingly, student outcomes are better if a substitute teacher is actually teaching the coursework. Swing is focused on filling absentee days with real teaching days. Additionally, more than 50 percent of substitute teachers have never taught before. Swing is alleviating teacher shortages by recruiting folks from the community and providing them with a pathway to becoming a substitute classroom teacher.
Swing checked all the boxes for us from a business and financial underwriting perspective. It is a technology company disrupting legacy staffing providers with a high-quality business model and online marketplace, and it has an exceptional management team. From an impact standpoint, research has extensively proved that more teaching days lead to better student outcomes. Swing is also increasing the teacher supply pool.
We worked with Swing’s management team to develop the KPIs we are targeting over the hold period. The scale impact KPIs are increases in the numbers of days filled by Swing substitutes, which equates to more teaching days. The second KPI is the number of new teachers added to the platform or increases in teacher supply.
The depth metrics we’re focused on improving are filled-day reliability and quality. For reliability, we measure the percentage of substitutes that showed up compared with those canceling or not showing up. And for quality, we measure whether the school had a positive or negative experience for each filled day.
Look for the negative externalities
Brian Vickery: What have you learned about impact investing that might help others who are newer to this space?
David Su: The biggest lesson is that we’re still in the early days of impact investing. We have a lot of discussions on the total impact of companies and on the negative externalities. For example, we were looking at a medical-products company that makes urinary-incontinence collection bags. And although the products have a large, positive impact on patients, the bags are made out of plastic and other polymers, so we focused on the negative externalities of the materials. A traditional private equity fund wouldn’t have that discussion.
