Impact Engine closes Fund II to bring social lens to private equity

Impact Engine, a women and minority-led asset manager, closed a second vehicle to invest in impact-focused private equity funds and companies.

Impact Engine Private Equity Fund II secured $85 million in a final close this month, CEO Jessica Droste Yagan and CIO Priya Parrish told Buyouts, increasing the Chicago firm’s assets to $240 million.

This was achieved despite a tough fundraising market, perhaps owing to durable LP appetite for opportunities in harmony with ESG criteria.

IEPE II was backed mostly by family offices and foundations, Droste Yagan said, among them Builders Initiative, Hanley Foundation, WK Kellogg Foundation and Surdna Foundation.

Impact Engine was launched in 2012 as an accelerator of start-ups with the potential to align financial performance with social impact. It has since evolved to tackle a broader lack of impact opportunities available to LPs across the venture and private equity industries.

“Private equity is a huge and powerful force in capital markets and the economy,” Parrish said, “and it takes up a lot of space in LP portfolios.” However, while there is growing LP demand for impact products, GP supply is nascent, reflected in “too few options out there.”

Impact Engine addresses the gap as an “impact LP,” deploying most of its capital to the funds of emerging and established buyout and growth equity GPs with a social lens. These are defined as having strategies driving positive outcomes in economic opportunity, environmental sustainability and/or health equity.

One fund partner is Vistria Group, a self-styled education, financial services and healthcare investor “at the intersection of purpose and profit.” IEPE II committed capital to Vistria Fund V, targeted to raise $4 billion, building on an earlier investment in Fund III.

Another is Ara Partners, a specialist in industrial decarbonization, which recently closed a third fund at $2.8 billion with a commitment from IEPE II.

In addition, Impact Engine co-invests in companies sponsored by fund partners, such as Vacuumschmelze, an advanced magnetic materials producer bought by Ara in 2023. It also invests directly in companies like Circuit, a short-distance electric vehicle solutions provider.

Adding value

Prior to Impact Engine, Droste Yagan and Parrish had long and varied careers in the impact investing space.

Droste Yagan was formerly an executive at McDonald’s, leading the integration of ethical, environmental and economic sustainability with the company’s food and packaging sourcing. Earlier, she worked in urban development at the Initiative for a Competitive Inner City.

Parrish was previously CIO at Schwartz Capital Group, a family office, and strategy head at Aurora Investment Management, a hedge fund. Before, she led development of ESG-friendly products at Northern Trust Asset Management and KLD Research & Analytics.

Droste Yagan was running Impact Engine when Parrish joined in 2018. They together designed the private equity strategy, closing a debut vehicle in 2020 at $31.5 million.

Impact Engine Private Equity Fund I and its successor have to date invested in 11 funds and 18 companies.

As an impact LP, Impact Engine utilizes its in-house expertise to optimize the capabilities of fund partners. It offers value-added aimed at helping GPs effectively identify and manage opportunities, moving them from “aspirational impact” to “operational impact,” Parrish said.

This begins, she said, “with a first conversation” about applying impact criteria to investment strategies and processes as well as post-investment oversight and measurement. Thereafter, support is provided systematically through impact advisory councils and GP exchanges, where investors share best practices.

The end goal is to build out a private equity firm that is “100 percent aligned” in the pursuit of both superior, risk-adjusted returns and social benefits, Droste Yagan said. In so doing, “we can better link capital with what the world needs.”