Basiran
The landscape of global impact investing is currently defined by a dual narrative: the urgent struggle of diverse fund managers to secure “second-wave” capital, and the emergence of massive, strategic sovereign-backed funds designed to keep innovation within domestic borders. As institutional investors balance these micro-level commitments with macro-level economic sovereignty, the definition of what constitutes “impact” is evolving from niche philanthropy to systemic, structural necessity.
The Second-Wave Gap: A Crisis of Maturity for Emerging Managers
For diverse and first-time fund managers, the journey from an initial fund to a subsequent one has become the most treacherous stretch of their professional lives. While the post-2020 social reckoning saw a surge of capital directed toward underrepresented managers, that momentum has faced a significant cooling period. Today, these managers are encountering what industry experts are calling the “second-wave capital gap.”
The Chasm of Growth
Raising a debut fund is universally understood to be a feat of grit. However, the transition to a second or third fund requires proof of concept, realized exits, and institutional-grade operational scale. When the post-2020 commitments dried up, many of these managers found themselves stranded with early track records but no path to liquidity or follow-on capital.
Javier Hernandez, an investment lead at the $1 billion California Wellness Foundation, emphasizes that the true test of institutional commitment is not the initial seeding, but the follow-through. “We are sticking by our managers,” Hernandez says, noting the foundation’s continued support for firms like Vamos Ventures, Urban Innovation Fund, and Illumen Capital. “These are funds that are top-performing. How do we sustain these firms and allow them to mature and graduate? That is the real test for institutional investors like us.”
Chronology of the Capital Crunch
- 2020-2021: A surge in pledges from major LPs and corporate foundations follows the death of George Floyd, leading to a boom in first-time, diverse-led fund formations.
- 2023-2024: Rising interest rates and global macroeconomic uncertainty lead to a “flight to quality,” causing LPs to consolidate portfolios and retreat from emerging managers.
- 2025: The “second-wave” crisis intensifies; many managers who launched in 2020-2021 reach the end of their initial investment periods without clear paths to successor funds.
- Mid-2026: Leading LPs, such as MassMutual and the Goldman Sachs Foundation, begin formalizing strategies to provide operating capital and multi-fund commitments to stabilize the ecosystem.
Supporting Data: Resilience Amid Headwinds
Despite the difficult fundraising environment, a subset of diverse-led GPs has defied the odds. By focusing on sector-specific expertise and rigorous diligence, firms have continued to attract institutional backing. Key players currently navigating this terrain include:
- Collide Capital & Zeal Capital Partners: Focused on bridging the opportunity gap through scalable tech investments.
- Impact America Fund & MaC Venture Capital: Proving that culturally competent investment strategies yield competitive returns.
- Collab Capital, Slauson & Co., and Harlem Capital: Each of these firms has successfully moved into subsequent fund cycles, proving that institutional LPs like MassMutual and The California Wellness Foundation recognize the value of their specific market insights.
The European Response: EQT and the Scaleup Europe Fund
While US-based managers struggle to secure growth capital, the European Union has taken a decisive, state-backed approach to the same problem. The European Commission has officially selected Swedish private equity titan EQT to manage the landmark €5 billion ($5.9 billion) Scaleup Europe Fund.
Addressing the “Brain Drain”
For decades, Europe has acted as a primary nursery for global innovation, only to see its most successful startups migrate to Silicon Valley due to a local lack of late-stage growth capital. The Scaleup Europe Fund is designed as a direct counter-measure. By pooling capital from the European Commission, Novo Holdings, the Export and Investment Fund of Denmark, and others, the fund aims to provide the necessary fuel for deep-tech companies to remain in Europe.
“This is a significant milestone for Europe at a critical moment,” said Per Franzén of EQT. “Europe has proven its ability to create successful early-stage technology companies. The challenge is now to scale those businesses into becoming global leaders while maintaining their European roots.”
The mandate was highly competitive, with EQT besting firms like Atomico. The fund’s focus spans AI, quantum computing, dual-use technologies, and clean energy—sectors the EU deems essential for its long-term strategic autonomy.
Implications: Catalytic Capital and Structural Resilience
The intersection of private capital and public interest has never been more vital. In the United States, the role of “catalytic capital”—investment that accepts disproportionate risk or concessionary returns to mobilize larger pools of capital—is taking on a new, urgent form.
The Pioneer Gap in Climate Finance
The recent freezing of $20 billion in Greenhouse Gas Reduction funds by the US government created an immediate crisis for green projects, ranging from electric drayage trucks to university solar arrays. In response, a coalition including the MacArthur Foundation, the Packard Foundation, and ImpactAssets Capital Partners mobilized a $50 million Energy Catalyst Fund.
Robert Zulkoski of Conduit Capital notes that this initiative represents the “impact field at its best.” By using blended finance structures, the fund makes senior tranches viable for family office investors who might otherwise avoid the risk of the currently frozen public infrastructure projects. However, Zulkoski warns that project finance alone is insufficient. “The fund managers and platforms that originate, underwrite and distribute those projects need an instrument of their own,” he argues, highlighting the need for institutionalized, recurring capital for the impact-intermediaries themselves.
Official Responses and Strategic Shifts
The current trend toward professionalization in impact investing is reflected in the high-level personnel shifts across the sector. Talent is migrating to where the capital is being deployed:
- Corporate Governance: John Ellis of Woodforest National Bank has joined the board of Alleviate Impact Capital, signaling a deeper integration between traditional banking and impact-focused equity.
- Leadership Evolution: Aurora Sustainable Lands has undergone a significant restructuring, promoting Cakey Worthington to senior vice president of sustainability and natural capital, and Mike Phelps to COO. These moves underscore a shift toward operationalizing ESG and impact metrics at the C-suite level.
- Global Expansion: As Hatch Africa brings on Habib El Magrissy as head of strategic finance, it reflects the growing importance of infrastructure finance in emerging markets, requiring sophisticated financial oversight that bridges local needs with international capital standards.
Conclusion: A New Era of Impact Discipline
The impact investing sector is moving out of its experimental phase. The challenges faced by emerging managers in the US and the massive sovereign-backed interventions in Europe demonstrate two sides of the same coin: the need for sustained, institutional-grade infrastructure.
For LPs, the lesson is clear: the “impact” is no longer just in the asset class, but in the support of the firms that manage them. Whether it is through multi-fund commitments to diverse GPs or the creation of massive state-led funds to capture the value of deep tech, the industry is entering a phase of maturity where long-term survival is contingent on structural, rather than incidental, support. As the market continues to evolve, the distinction between “mainstream” and “impact” investing is likely to vanish, replaced by a singular, more rigorous standard of what it means to build a resilient, future-proof economy.
Pevita Pearce
Jia Lissa
