Introduction

While the primary market for impact investing has grown to over £1 trillion globally (Global Impact Investing Network, Sizing the Impact Investing Market Report 2024), much more is needed in order to meet the social and environmental challenges of the world today.

The inherent illiquidity of most of these investments, often locking-up capital for 10+ years, remains a barrier to the scale required to allow institutions to further positively impact people and the planet. 

In this Insight we:

• Discuss the ways a more efficient secondary market can help accelerate institutional impact investing through; allowing increased allocations to illiquid impact opportunities, recycling capital into more impactful opportunities and enhancing accountability for managers to deliver the impact they promise

• Provide a call to action on how to achieve a more efficient secondary market through collaboration and technology

How can a more efficient secondary market help accelerate institutional impact investing?

Today, the secondary market for illiquid / private market fund investments, including impact investments, is disaggregated and opaque. This leads many institutional investors to see this market as a last resort, rather than utilise it as the efficient and trusted portfolio management tool that it could be.

A more efficient secondary market for these investments would accelerate institutional impact investing in three key ways:

1. Allowing increased allocations to illiquid impact opportunities

Perceived illiquidity is a key reason why many institutional investors haven’t allocated more capital to impact investments, despite their alignment with the mission. This is particularly relevant for UK pension funds, where they are often already overweight illiquid assets and still wounded by liquidity crunches of the past. 

The knowledge that a viable exit path exists via a more efficient and trusted secondary market would fundamentally change the considerations here because:

• When prospective impact investors know they have a viable option to sell their position before the end of a fund’s life, it can help them overcome internal hurdles related to liquidity constraints, thereby unlocking additional capital into impact investments

• As secondary investments have a shorter fund life than primary investments, more impact opportunities entering the secondary market will provide those investors with limited time horizons to access impact opportunities that fit their investment criteria

2. Recycling capital into more impactful opportunities

Another way a more efficient secondary market will enhance impact investing is that it allows institutional investors to unlock capital from existing investments and recycle it into new impact opportunities. 

This applies to both:

• Non-impact focused investments. If an institutional investor is already at their limit of private markets investments, they could reallocate capital from illiquid investments that aren’t providing much positive impact into those that are 

• Impact investments. Even if an investor is currently in an impact investment, there could be a case to exit that investment at attractive pricing and invest into a new impact investment. This could create a powerful impact multiplication effect, if the old investment continues to generate its intended impact under the new owner while the new investment generates additional impact

3. More accountability for generating impact

A more efficient secondary market should help in holding managers to account, allowing investors to potentially exit investments that are underperforming on their impact mandate. 

The promise of impact is central to these investments being made in the first place. If a fund manager fails to deliver on their stated social or environmental key performance indicators (KPIs), an investor should not be trapped for the life of the fund. 

The increased ability to sell a stake on the secondary market sends a powerful signal, leading to greater accountability among managers. This will ensure capital flows towards those managers who can effectively execute on both their impact and performance objectives. Ultimately this will create more trust throughout the ecosystem and further accelerate appetite to increase allocations to those managers that create genuine impact.

Call to action

We have shown above the ways a more efficient secondary market could help accelerate impact investing through; allowing increased allocations to illiquid impact opportunities, recycling capital into more impactful opportunities and enhancing accountability/trust.

Given the urgent need for increased impact investing, including those aligned with the Mansion House Compact, we suggest two key steps the institutional investment community can take to make the secondary market more efficient:

1. Collaborate

A collaborative effort is required to create a more efficient secondary market, in what is currently an opaque and disaggregated space. 

MeltX is facilitating this collaboration with the broader institutional investment community, bringing together the key stakeholders on the buy and sell side to improve the efficiency of the market for everyone.

Being independent of any consultant or manager is key to ensuring that no relevant parties are excluded from this collaborative effort. We invite others not currently involved with MeltX to join today. 

2. Embrace technology

Institutional investors are often slower to embrace technology than retail investors. However, technology will be essential to create a more efficient and transparent secondary market. This has been a proven approach to improve the efficiency of secondary markets in areas like housing (e.g. Rightmove), clothes (e.g. Vinted) and cars (e.g. Autotrader).

MeltX’s online secondaries platform helps improve the efficiency of the secondary market through:

• Connecting stakeholders: Sellers can easily list opportunities, giving buyers efficient access to a broad range of secondary opportunities, all via an online platform

• Streamlining processes: The regular auctions, dataroom, bidding room and legal templates provided on our online platform leverage technology to make processes more streamlined and transparent