New Private Markets: Linking carried interest to impact
It’s clear that the funds currently tying carry to impact are pioneers – and, as with any innovation, there will be wrinkles to iron out. Yet some believe it’s just too early to align impact performance to carried interest. Many are waiting to see what happens, but there are voices that suggest a fundamental rethink of private equity metrics is necessary to make this work.
“As it currently stands, the measurement frameworks are not sophisticated enough and can be easily gamed, ” says Delilah Rothenberg, co-founder of the Predistribution Initiative and former ESG and impact adviser to funds. “But actually, [all the] while we have metrics like IRRs, which incentivise driving returns over the short term, there is an inherent conflict with trying to achieve long-term sustainability.”
Instead, Rothenberg advocates that GPs, LPs, civil society and academics work together so that potential pitfalls and unintended consequences are avoided. “Most GPs are well-intentioned, ” she says. “But we need to act with integrity not urgency when it comes to areas such as compensation. Sometimes when you act quickly, you can do more harm than good.”