This article is sponsored by The Vistria Group.
How can a firm integrate impact into the investment process, from theme development right through to exit?
Jon Samuels: Robust systems and top-down buy-in are critical to ensure effective impact management. It must be authentic and supported with rigorous frameworks. We have a playbook and strong systems in place at each investment stage to ensure alignment and ownership across our internal and portfolio company teams, with support from our dedicated internal impact group and broader impact and policy network.
We have had success with our impact integration because the discipline is part of who we are. It is embraced and driven by our co-CEOs, our partners and across the firm. When we are in investment committee, it’s not just the impact team raising impact considerations, it’s our whole team.
The process begins during theme development, during which we build a thesis around the impact opportunity of a specific sub-sector, using our framework and network to guide our dialogue. We carry this work into due diligence of a potential asset, ensuring that we meaningfully assess business conduct and the impact of a company’s products and services – understanding what outcomes they drive and how they manage quality and ensure access. Investment teams cannot come to investment committee without defining the impact thesis, and we assign a score to each deal at the outset to ensure a baseline for measuring progress. Post-close, impact is incorporated into every value-creation plan and Vistria and our management teams align on KPIs to measure and manage toward goals.
This is just one discipline we leverage to deliver on the opportunity and responsibility we have to help build great companies through strong partnerships with management.
We are committed to continuous improvement and routinely evaluate our processes to ensure we are leveraging best practices to drive the best outcomes while meeting the objectives of our investors. We report regularly to LPs and present a public version of our impact work to the outside world to help drive forward these discussions.
Mona Sutphen: When we look at a deal, we prioritize alignment with the management team on the way in – and we also attract mission-driven founders.
One example is FullBloom, a leading provider of special education solutions for K-12 students and their families that we exited recently. That company was the among the largest employers of special education professionals in the US, and under our ownership completed five acquisitions and generated organic growth to advance EBITDA from $33 million at close to $80 million at exit. Most notable, though, was their leading work to track and improve student progress, through partnership with major universities to develop an education quality index for measuring outcomes associated with their work. The management team’s focus had an important impact on the quality of life of the children and families they are supporting.
Another example is Behavioral Health Group, a leading provider of outpatient substance use disorder treatment services. In partnership with the management team, we developed a clinical advisory board and hired a visionary chief medical officer to focus on creating an advanced clinical quality model for the substance use disorder space so that patients can get the optimal treatment they need.
When you have a strong company that delivers outsized value to clients and the community, that’s really valuable. Furthermore, at a time of an incredible workforce crunch, people want to work for companies they can feel good about.
Tell us more about some of your work to improve diversity, equity and inclusion.
MS: DE&I is in the fabric of our firm. One of the best things about Vistria is that the entire team reflects the breadth of diversity in the US – across gender, race and ethnicity.
Obviously, that’s important to our firm’s values, and intentional in how we have built the team, but we also think it’s important from an investment perspective as research connects the dots between diverse teams and better financial outcomes. We think it is central to driving value in our companies and we see that working time and again.
We have expectations of diversity on our boards, and the investment committee approval process includes the plan to achieve a diverse board. Also, every portfolio company has a DE&I plan, to ensure we are helping our companies understand where they are on the journey and what progress they seek to achieve. We have financial incentives in place for management teams that deliver against those DE&I objectives – advancing a culture of equity and the systems that will drive and enhance DE&I.
JS: We believe diversity is essential to growth, innovation and sustainability, so it is at the heart of how we operate. We encourage our portfolio companies to engage with their communities and support leaders in their efforts to drive forward DE&I. As with our broader impact strategy, we want to do this in a way that is enduring beyond our ownership, which means not just looking at senior leaders but also the talent pipeline driving progress long-term. Our goal is to partner with portfolio companies to establish the internal infrastructure to maintain a focus on this kind of impact.
What about your climate initiatives?
JS: Climate change is real and there is a moral, societal and financial imperative to be part of the solution. We have historically invested in climate-light, service-oriented companies, so we have avoided some of the challenges in other verticals, but we are still committed to doing our part.
In partnership with one of our LPs, we engaged with the Carbon Disclosure Project to do a deep dive on a number of our companies with a plan to complete portfolio-wide carbon accounting this year. We will then be able to begin investing behind practices that reduce our carbon footprint, with a view to getting to carbon neutrality.
Last one: What is next for impact at Vistria? How do you see this conversation evolving for private markets investors?
MS: As we think about it, existing initiatives to measure ESG are more about mitigating harm, which is critically important, of course. But we think there should also be focus on delivering positive societal impact as well. That goes to the core of our value proposition and our investment thesis, which is that if we can help build strong companies with great impact, they will be worth more. We want to prove this with data that is consistent and measurable over time. We are proud to be an early supporter of Novata, an innovative public benefit corporation and technology platform set up to provide the private market ecosystem, including private equity, with effective ESG measurement, data collection and benchmarking. Backed by a consortium including the Ford Foundation, S&P Global, Hamilton Lane and Omidyar Network, it has created an open architecture platform for private markets to consistently report relevant ESG data.
We got involved with that dialogue early on and became an anchor investor. We think the bar on these impact measures should be set high and continue to be raised.
JS: We are committed to continuous improvement and know that this work will never truly be done, so we are constantly developing and evolving our practice. We are doing our own work with research institutions to bring more objectivity to our modeling and reporting, and to better prove the relationship between impact and financial performance. We are also working to move away from just a static once-a-year impact report towards more of a living, breathing report. We are now more regularly sharing case studies on our portfolio with our investors, to spotlight the impact we are having and share best practice so everyone can benefit.
MS: More broadly we have been engaged in a dialogue around the future of capitalism and the unique role that private capital can play in driving innovation and raising the bar. People are looking to corporations and business leaders to step up and we have started to convene small groups of leaders in the private markets to discuss ways in which the industry can move the needle. We have an opportunity with private capital to rise, meet the moment and drive societal impact on many of today’s challenges.
How do you define and approach impact?
Jon Samuels: At The Vistria Group, we are building a new kind of private investment firm that delivers both financial returns and societal impact. Our thesis is rooted in the belief that companies that contribute solutions to public sector challenges are inherently more valuable; we look to invest in companies in the healthcare, education and financial services sectors that are improving access, quality and outcomes for their customers and communities.
During every stage of the investment lifecycle, we leverage our proprietary impact framework to guide our work. Our framework supports evaluation, measurement and management of impact across two dimensions: business conduct and the measured impact of each company’s products and services. Our business conduct work captures environmental, social and governance practices and priorities, including a strong focus on diversity, equity and inclusion. But Vistria goes beyond business conduct to understand how each business is driving quality and outcomes through their core products or services for the lives and livelihoods they support.
We want to make sure that as we scale performance, we are also driving the delivery of impact at scale, to ensure that every dollar we invest drives access, quality and outcomes for all stakeholders.
Mona Sutphen: Our choice of sectors – healthcare, education, and financial services – are intentional, as we believe we can disproportionately drive impact in line with long-term policy objectives – we like to say that helping individuals be healthy, wealthy and wise are key components of a strong society.
Private enterprises and smaller businesses – where the majority of people in the US work – are able to be more innovative than public companies in moving the needle. We see a lot of opportunity in the mid-market to make impact through the deployment of private capital.