Pal Erik Sjatil, managing partner and CEO of Lightrock, discusses the firm’s investment approach and current trends in the sector

RD: How do you define impact? And how do you measure and report it?

Pal Erik Sjatil: Our definition of impact is straightforward – it is a measurable positive outcome for the environment or society delivered by our companies. However, measuring and comprehending impact is complex across the sectors Lightrock focuses on, such as healthcare, education, climate change, and the realm we call “trust and safety”, which concerns cybersecurity and artificial intelligence.

For each of those sectors and others, we have developed our own understanding of what impact entails, and, for the most part, we report both our impact and financial performance to investors every quarter. Underpinning our reporting is a proprietary impact assessment methodology grounded in industry best practices. This approach, verified by leading specialists BlueMark, is a source of pride for us. Nevertheless, we continually strive to enhance our understanding of the impact performance of our portfolio companies.

RD: Impact and financial return: is it one or the other, or are they mutually reinforcing?

Sjatil: We do not view investing impactfully as a balance or trade-off. It is our firmly held belief that impactful and sustainable companies tackling urgent challenges will, ultimately, deliver better returns over the long term. What is most important to us is that we look at returns and impact independently. If an investment scores highly on impact, it does not mean that we should lower our return expectations and vice versa. If you aim for an average across the two, you may start to misallocate capital.

Impactful and sustainable companies tackling urgent challenges will, ultimately, deliver better returns over the long term

We cannot predict the future but by investing in areas such as combatting climate change or improving our healthcare systems, you are investing behind secular megatrends, which may de-risk the investment and increase your chance of reaching your financial targets.

RD: Why do entrepreneurs want their businesses to attract impact investors?

Sjatil: Entrepreneurs value investors who can contribute meaningful insights and support, and our proposition resonates strongly with them. It is not solely because we identify as impact investors, but rather, our effectiveness as impact investors stems from a deep understanding of the industries in which we invest.
This proficiency allows us to be more than just financial supporters; we are strategic partners who can seamlessly integrate into a venture, providing valuable expertise from the outset.

Through the course of our work, we are also seeing more founders who are motivated by the pursuit and delivery of impact. For these individuals, being backed by an investor who can grasp and enhance their impact dimension while also supporting overall business performance can be a compelling proposition. 

RD: Is demand for impact growing among LPs?

Sjatil: The demand for impact investments among LPs is showing a promising upward trend, evident in the impact investing industry’s estimated surpassing of $1trn (€920bn) AUM in 2022. However, this milestone, although significant, falls short of the substantial capital required to achieve the ambitious goals of delivering the United Nations Sustainable Development Goals by 2030 and attaining net-zero emissions.

In our interactions with LPs, we observe a notable shift in investment strategies, with an increasing number dedicating specific allocations for impact investments

Nonetheless, there is reason for optimism. In our interactions with LPs, we observe a notable shift in investment strategies, with an increasing number dedicating specific allocations for impact investments. Additionally, there is a growing trend where LPs are channelling funds into impact from general investment pools.

RD: Why does Lightrock target growth-stage companies and why do you take minority stakes?

Sjatil: If you look at capital markets in Europe, growth capital is often what is missing. Early-stage investors have done a fantastic job supporting the emergence of new technologies; taking these companies to the next level requires investors like Lightrock with the necessary capital and scaling experience. We opt for minority stakes to mitigate concentration risk from a fund perspective. This approach also allows us to partner with likeminded investors, benefiting our companies and our outcomes by providing founders with the best possible support.

RD: Can you describe your investments in climate-related areas, a specialist area for you?

Sjatil: We have a strong level of expertise in this area, which requires some specialist knowledge and experience. To succeed here, you need to understand the energy and electricity markets, and the macroeconomic factors that affect them. Then there is a lot of deep technological expertise required – whether you invest in batteries or hydrogen, it can be complex. We have a growing number of investment professionals dedicated to specific areas within climate who work hard to understand the ecosystems and the latest developments in the underlying technologies. 

Aerones, our most recent European climate investment, is a leader in robot-enabled wind turbine maintenance and inspection. Traditional turbine maintenance methods involve specialised technicians abseiling down the sides of turbine – a process fraught with complexity, danger and inefficiency, especially in adverse weather conditions. Aerones has introduced a modular robot capable of providing a range of services, from inspections to repair, in a significantly faster and safer manner.

We like having companies like this in our portfolio: at the forefront of developing climate-related technology and paving the way forward.

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