Impact investing is different from ESG in that ESG is what you don't do, what you don't invest in. Impact investing, however, is what you affirmatively and intentionally do.

In this episode of Fund Flow, host Jon Finger speaks with guest Jim Roth, the founder and managing partner of Zamo Capital, an impact investor based in London. Jim was also the co-founder of Leapfrog Investments and is currently a member of the Investment Committee of the University of Edinburgh Endowment. 

Tune in to hear Jon and Jim discuss strategies and approaches in the impact investment space, including current drivers and finding untapped market opportunities. 

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

You're listening to Fund Flow, a podcast for emerging managers offering insights into the journey of new and aspiring fund managers seeking to have access in a crowded market. Tune in as McGuireWoods partner and host, Jon Finger, is joined by guests, ranging from first-time fund managers to proven emerging managers, experienced LPs poised to back emerging managers, and other key participants in the emerging manager ecosystem.

Hear their real world perspectives, and gain actionable tips to help inform your strategy and position yourself for a successful fund closing.

Welcome to Fund Flow, a McGuire-Woods podcast for emerging managers. I'm Jon Finger, and today, I have here with me, Jim Roth, the founder and managing partner of Zamo Capital. Founded in 2018, Zamo Capital is an impact investor based in London, seeking to invest in a multitude of industry verticals.

Prior to forming the fund, Jim was the co-founder of Leapfrog Investments, and currently is a member of the investment committee of the University of Edinburgh Endowment. Welcome, Jim, and thank you for joining us.

Thank you very much. Thank you for inviting me.

The first place I want to start before we get into some of more of the substance is, personally, I love to hear stories as it relates to the forming of a fund and how that fund was named. We all know some of the great and not so great names out there for private equity funds. Jim, maybe tell us a little bit about the background of your firm and how it came to pass.

Sure. Well, I can start off with the name, and then I'll tell you a little bit about the fund. The name came, we were sort of searching for names, and so much was taken. Lots of them were that related to sort of growth, either taken or quite boring. I started searching in other languages, and there's a word in Zulu, [foreign language 00:02:14], which means let us try, let us entrepreneur. That's where I got the inspiration from and shortened it to Zamo. That's where the name came from.

Love it. That's so fabulous. Well, I appreciate you bringing up a name that is going to be unique and one that I'm sure all of us will remember. Thank you for that. Turning a bit here, you've had an interesting career path. I noticed you had a doctor of philosophy in economics from Cambridge, and then moved into founding, co-founding your first private equity firm, and then ultimately, where you are today. Can you tell the listeners more about your path and how it led to where you find yourself today?

I think I've always had an interest in how markets could be used and could be harnessed, financial markets could be harnessed to have a positive impact. I did my PhD on microfinance, I don't know if you recall, with the Grameen Bank and providing small loans in Bangladesh, and looking at the ways in which financial inclusion could help promote economic development and have a positive impact.

I've always been really focused on this question about, what can markets do and how can they really help the process of positive social and economic development? That's always been my passion. I started off focused on insurance and micro insurance, so insurance for low-income people, so thinking about how you could get insurance with low premiums, were quality, and relevant, and affordable and helpful to people, how those could be distributed, and how they could be distributed profitably so that you could get investors in them, and you could get investment to take place at scale.

I guess I've always been very focused on interventions and an impact that generates commercial returns. I think the reason for that is, because without it, it's very hard to attract any kind of investment and have any kind of impact at scale, meaningful impact at scale. That was the start. I started off in insurance, and then a friend of mine from Cambridge said one of the ways in which we can get capital, one of the institutions that gets capital, or businesses that gets capital to impactful businesses, you could use private equity.

If there were businesses that could be invested in that were having a positive impact, but that were also profitable, then that would be a good basis for a private equity fund. Together with my co-founder, Andy Cooper, we started Leapfrog Investments. This was around about 2007. Our first fund was the fund that focused on investing in insurance for low-income people, so financial inclusion, and that was Leapfrog Investments.

I did that for a number of years and I left Leapfrog, exited my stake in Leapfrog, and had a number of friends and colleagues who were in a similar position where they had had successful careers and wanted to use in private equity, and wanted to use their knowledge, and experience, and capital to help other impact managers grow, and to scale impact investing more generally. That's been my journey, and that's the foundation of Zamo Capital. That's where we are today. That's how I got here.

That's great. You touched on it a few times. I'd like to spend a little bit of time and talk about how you define impact investing. Part of the reason for that is it's obviously been an area of focus for a lot of our LP community. At the same time, it's not consistently defined or approached by different GPs.

I'd love to hear how you and the firm really define impact investing, and some of the characteristics, again, you touched on it a bit, but that make that strategy attractive to you as an emerging manager?

That's a really good question, and you're absolutely right. There's all kinds of very inconsistent understandings of what impact investing is. Some of the things that people often take impact investing to be include ethical business practices, ESG exclusions, so not what you affirmatively invest in, but what you don't affirmatively, what you don't do. The way that we think about impact investing is fundamentally a form of strategic investments.

There's an LP that wants you to invest in something that's going to generate a particular kind of intentional impact that's measurable that they want. In addition to financial returns, they also want some other return, either a social or an environmental return, that's both specific and intentional. That's the sort of crucial, I think, definition of impact investing.

It's sort of different from ESG in that ESG is what you don't do, what you don't invest in certain industries, and impact investing is what you affirmatively and intentionally do.

That's great. Maybe a little bit about what makes it attractive as an emerging manager with your investment strategy. What are some of the most relevant considerations?

There's two, I guess, broad types of impact investing. At the highest levels,, there's environmental impact investing, and then there's social impact investing. They're both about setting intentional targets to achieve particular outcomes. Within environmental impact investing, there's two broad categories. One is climate change mitigation, so that includes things like renewable energy infrastructure, energy efficiency technology, clean transportation.

The next piece is environmental conservation, so things like sustainable agriculture, water conservation infrastructure, sustainable forestry, and then you have the circular economy and recycling. I think between environmental and social, the environmental piece, and we can talk about why in a bit, is by far the most interesting and relevant to LPs. There's by far the most capital going into it. We can talk about that in a second.

In terms of the social parts of the social kinds of impact investing, you have affordable housing, you have financial inclusions, so things like microfinance, micro insurance, you have affordable and accessible healthcare, affordable and accessible education. Then you have a whole lot of, and this isn't in the private equity space, but more in the fixed income space, you have a whole series of different kinds of bonds. You've got green bonds, you've got bonds for public transportation systems. Those are other big areas.

Those are all the different areas of impact investing. Then thinking through why they're attractive to LPs, well, I think the first reason, and the most attractive, is really the climate focused investments, climate and environment, but particularly climate and clean energy generation. That's being driven by a few things. Firstly, it's being driven by huge growth in the sector, driven by concerns about climate change, resulting in all kinds of vast amounts of government subsidies, the IRA in the US being the key example, likely to be repeated by European governments and other governments so that they're not at disadvantage.

It's a huge growth industry, and private equity is behind it. I guess that's the first driver. Then related to the subsidy piece, there's also discussion and talk about, well, there are already taxes around carbon and reductions in taxes with climate friendly investments. That's another driver. Then you've got particular things that are happening in some industries. In Europe, in the insurance industry, there's talk of getting reduced capital, there are discussions underway of getting reduced capital charges on illiquid investments for climate friendly illiquid assets.

Again, it's another effective form of subsidy, but that's really, I think, one of the biggest drivers. Then there's other softer, less immediately financial drivers. There is stuff like client demand, so in insurance companies and pensioners concerned about climate change, putting pressure on their pension fund trustees to invest more in clean energy. That's part of what's going on. Then you have in the UK, for example, local government pension funds, where there's pressure on them to invest more in affordable housing.

There's something about meeting the demands of their clients, of the underlying savers, if you like. Then I think there's a sort of a piece about wanting to be good corporate citizens. I think those are the kind of key drivers, but the largest one by far is in the environmental and climate change space.

That's great, very helpful explanation there, and fulsome as well. You touched on it a little bit. How is Affirm and you specifically do you identify and really develop and help develop, both on the investment side and then post-investment, but these untapped market opportunities, where there is a desire, there is an obvious value proposition, but how do you find those relatively untapped opportunities and develop them through your investment theses?

We work alongside and invest in the managers themselves. We invest in GPs and impact GPs to help them scale. What we're looking for, GPs in the impact space that we believe will be attractive to LPs and will scale.

The way that we think about that is we kind of think about, well, and I've sort of described them, but one of the kinds of spaces that are likely to be attractive to LPs, and then the usual criteria is you think about selecting fund managers, thinking about who's most likely to succeed, and then work with those managers quite intensively to help them scale. That's what we do and how we work.

That's helpful, and I think helps kind of redirect, and I think this is where I think it'd be good for us to spend some time with that backdrop. We'll pick up on, we've talked about some of the drivers of this evolution, this growth, and you've talked about looking for different GPs. How do you differentiate and identify the GPs that you think are most attractive? What are some of those factors, characteristics that you look for?

One of the key things that we look for, sure that there's a team that has a relevant private equity track record. I think it's part of the evolution of impact investing is that there's quite a few impact managers that struggle to attract funding, because they kind of think that LPs are going to give them a break because it's impact on returns. I think for good reason, the LPs need the returns, the pensioners have to eat, and so they're not going to get a break.

We look for teams that fundamentally get that, and I think that's one of the first things that we look for. It needs to be completely commercial. They need to have a thesis that provides a risk adjusted commercial return. That's key. Then I think the next thing is really important is a strong sense of fiduciary duty, and that the manager, and particularly in emerging managers, that there's somebody there that has been a manager before and has exercised that fiduciary duty.

What we often find is that, again, managers often think that they'll get more of a break if they're impact managers on their sense of fiduciary obligations, because they're doing good for the world. That's more important than their obligations to investors, or when there's a trade-off between the two. It's really critical that they see their fiduciary obligations to their investors as absolutely primary, and they focused on that. That's the other thing that we look for in teams.

Then it's the usual things that you would look for in any kind of manager: track record, a compelling investment thesis, that they're doing something extraordinary to generate extraordinary returns. Their thesis is seen by LPs broadly. It's not just that it is an extraordinary investment thesis generating extraordinary returns, but it's seen broadly by LPs as doing that.

Then we also sort of look for teams that have come together for more than... There's sort of some other reason that they've come together, so they all came out of another private equity shop, or there's some other basis that they want to work together, because that just gives a kind of good sense that they're more likely to stay together than a team that just comes together because this is a good way to make money. That's the other thing I think that we look for.

Those are the kinds of things that we look for. One of the things that can be quite hard is particularly in the climate space, which I think is going to, because there's such a huge flow of capital in at the moment, and there's so many new private equity funds investing in the climate space, really finding that extraordinary strategy to generate those extraordinary returns.

There's relatively few of them, and that's a key thing that we look for. Maybe it's just as an example, a ton of funds out there that are sort of generalist funds that may have raised funds four years back when there weren't that many competitors by being generalist circular economy funds.

Now, I think more and more LPs are looking for the manager who, if they're in building insulation, they want to know that there's a manager that's a real specialist in that that knows everything about building insulation manufacturing, and they've seen 50 manufacturers that they think won't work, and they're able, when they see the 51st that does work, to identify it. That's the kind of strategy, I think, that's really going to be very successful, and the kinds of managers we like to work with.

That's great. Beyond just finding the right talent, and team, and coming together, what is your approach post-investment? How do you nurture and help develop your relationship with those GPs, and helping them grow and helping them flourish?

Sure. There are a few things that we do. One of the things that I've often found to be the case is that having done impact investing now for almost two decades, there's quite a lot of differences between being an ordinary investor, investing in normal firms, and an impact investor. You get quite a lot of firms that have a formula where they sort of think, well, we want to start a new impact fund.

We'll look at some old deals that we've done that sort of have broad characteristics that are impactful. We'll create a system of measuring impact for these types of deals, and then we'll put together an ordinary investment team, and we'll go and find some of those deals. That's an impact fund. I think that those firms are going to struggle. One of the things that we really help firms with is really working through what it is that you need to do.

If you've given an undertaking that you're going to deliver particular impact, whatever it is, a measured impact, we're going to reduce carbon by X amount, or we're going to provide so many people with quality relevance and affordable healthcare, or whatever the metric is, there's a whole range of things that you've got to do all the way through that are different, so in multiple different stages as you think through it.

In deal origination, you're often building relationships with different kinds of entities you wouldn't necessarily do. As an example, if you were in the UK and you were an affordable housing fund, you would develop relationships with housing associations, which you wouldn't necessarily do if you were just an ordinary residential real estate fund.

In diligence, reputational effects, and really, the extent to which you do reputational and adverse event risks assessment needs often to be much more thorough and much deeper than you would do in an ordinary investment. If you invest in a sofa factory and the sofa factory goes bust, then you lose your investments. If you invest in a care home for low-income people and the care home goes bust and the low income elderly people are homeless, that has a very different risk and reputational profile to an ordinary investment like a sofa factory.

It's really trying to think through particularly those adverse risk events. Then all the way through, integrating your financial modeling and your impact modeling. You're setting impact targets, and you want to find investments where what makes money also generates impact. If you make money by creating wind turbines, then the more wind turbines you do, profitable wind turbines you create, the more impact you have.

Your profit and purpose are colinear, and you want to be able to integrate that, and model that, and then think about that versus targets, it's kind of all the way through. Then in portfolio management, you want to think about how you work with the CEO of the portfolio company to hit impact targets. You want to work with the board, and have impact as a standing agenda item on the board. There's a lot that you need to do that's different.

One of the ways that we help managers is think through what those different things are, and help them implement it so that they can deliver both of their things that they've undertaken to deliver, both profit and purpose for their LPs. Those are probably the key things that we're helping managers with, having done it ourselves.

Obviously, an evolving segment of the private equity industry, what opportunities do you see for growth in the UK, elsewhere in Europe, candidly anywhere, but with it being your backyard, maybe we focus there, where do you see opportunities for the impact investing industry in the future? Then maybe relatedly, any thoughts on how that can benefit the GPs out there and where they're focused?

I think because of the amount of capital that's going into climate and climate-related investments, that is obviously a huge area of opportunity. I think within that, it's about becoming very specialist. It's about doing something quite particular, where you really are the experts at that particular thing. It's moving away from generalists and it's much more about specialists. That's the first piece.

Then there's a kind of an early mover advantage, that looking out for things that are quite obviously likely to get more and more significant, things like impact investors that invest in plastics recycling, the ones that really get in early, really understand what needs to be done, understand the characteristics of firms that are most likely to succeed. Those are some of the most interesting ones.

I think that's the first, that's where I sort of see the opportunities. It's managers that are specialist managers, the kind of climate and environmental space, because there's so much capital will go into that space. Then the next kind of thing that I think is the other big opportunity, but is pretty hard to get right, is that most managers in the impact space tend to be emerging managers, where less than sort of 500 billion of AUM, and they've got one fund at the most or they raising a fund, so one or two funds or none. That needs to be the opportunity set.

LPs tend to be pretty reluctant to invest in that group, and I think they're going to need, if they want to allocate to the space, LPs are going to need to get much better and more comfortable at investing in emerging managers. I don't see many other pathways to allocating capital at the kinds of scale that many large LPs are looking to do in the impact space.

One question that I think is going to be near and dear to a lot of our listeners' hearts, as you think about emerging managers, it can be with an impact investment focus or not. What advice, you talked a little bit, you talked about sector specialization, et cetera, but maybe at a higher level, what advice would you give to emerging managers looking to raise a fund in this environment?

A few pieces of advice to an emerging impact manager. The first thing is to really take the impact seriously and really think through how you're going to deliver and on the targets, how you're going to manage your impact, and really think that through. LPs are really becoming more and more wary of greenwashing and impact washing. You really need to be credible in that space if you want to raise capital. That's the one piece of advice.

Then the other piece of advice is just to sort of recognize that they're not going to get any breaks for being impact, and that they've got to do all the things that other managers have to do and more. It's a tough space to be in. It's potentially an interesting space if you can get it right. It's not an easy one. I think a lot of managers that come in thinking, "Oh, there's lots of cash being allocated to impact at the moment, I can sort of put on an impact badge, and I'll be able to collect it."

I think those managers are going to get quite a shock. You have to really be genuine and thoughtful about how you're actually going to deliver what you say you're going to deliver on the impact side, and be as good as anybody else on the commercial side.

That's great advice. Jim, one final question here. This has permeated a good part of the conversation, but I would love, without you giving away all the secret sauce, how do you and the firm stay current with the latest trends and changes within the impact investing space?

I didn't think there's any real secret sauce. I think it's the, partly, it's our engagements with GPs and keeping up with them regularly, and then they kind of keeping engaged in what's going on in particular sectors. That's, I guess, one in particular impact sectors. We attend and speak at conferences quite a bit, and that's a pretty useful way. Then media and podcasts like this would be the other way. I get a lot of my information and stay up to date with the trends.

Well, that's a good segue. I know our listeners have got a lot out of this conversation, and particularly within the segment that you all are specialists. Jim, thank you for joining me today on Fund Flow-

Pleasure.

... Sharing your insights, particularly in this segment of the community. Thank you to our listeners for joining us on this latest episode. We hope you join us next time.

Thank you for inviting me.

Thank you for joining us on this episode of Fund Flow. To learn more about today's discussion, please email host Jon Finger at JFinger@McGuireWoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment.

The views, information, or opinions expressed are solely those of the individuals involved, and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.