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Impact investments can achieve market rate returns, says new research

A pioneering survey examining the performance of impact investment funds, and comparing them with those that have no explicit social impact objective, has found market rate financial returns can be achieved, and in certain segments even exceeded.

The new research from the Global Impact Investing Network (GIIN) validates industry advocates who say “doing good” while achieving financial returns is possible.

Impact investing is a form of socially responsible investing that has been building steam over the last two decades, but received a boost in 2013 when the G8 created a taskforce dedicated to establishing a robust framework around the emerging industry, which is this year expected to be worth $12.2 billion.

The Impact Investing Benchmark, which focused on private equity (which accounts for approximately a third of impact investment capital) and venture capital, analysed funds by vintage, geography and fund size.

Across all categories the research found the average internal rate of return for impact investment funds (IRR) was 6.9%, versus 8.1% for non-impact counterparts, but performance varied across funds (IRR is net of management fees and carried interest, representing actual returns to investors).

While impact wasn’t measured in the research, the funds’ social objectives included financial inclusion, economic development and education, among others.

“In some segments, the idea has generally been that if you focus on impact then it’s going to cost you on your return. That’s more been a theoretical or conceptual framework rather than something that’s based on data,” GIIN’s lead research manager Abhilash Mudaliar says.

The research shows, however, that market rate returns are feasible. “Just like in mainstream private equity or venture capital, the key to success in impact investing as well is really manager selection and due diligence,” Mudaliar says.

Emerging market impact investment funds that raised capital between 1998 and 2004 performed particularly well, according to the study, which was produced in conjunction with investment advisory firm Cambridge Associates. These funds saw internal rates of return (IRR) of 15.5%, compared to 7.6% in non-impact counterparts.

For the total period analysed, 1998 to 2010, emerging market impact funds returned 9.1% compared to 10.4% for non-impact funds; however, the report points out that much of the performance in more recent years is unrealised.

A major challenge to the growth of the impact investment industry has been a shortage of quality investments with track record, said this year’s Eyes on the Horizon impact investing report, by GIIN and JP Morgan.

Mudaliar points out that of the 51 funds analysed in the research almost three quarters were a post-2005 vintage. “For these funds to develop track record you just have to wait a couple of years. I think when it comes to track record what people mean is data on performance, and that’s a key gap that this study will fill.”

Smaller impact investment funds were found to produce a high internal rate of return with funds under $100 million seeing an average of 9.5%, compared to 4.5% for non-impact funds of the same size.

This may address a common perception in private equity and venture capital that smaller funds underperform, Mudaliar says. “For institutional investors that are considering impact investing and were perhaps reluctant earlier because a lot of impact investment funds are small, I think this shows investing in smaller funds can also be a legitimate strategy to achieve market rate returns.”

According to the Eye on the Horizon report, 55% of impact investors want market returns, while 18% seek capital preservation. The remainder seek returns somewhere in the middle.

Mudaliar adds that the findings are not just relevant to investors seeking impact. “Since you can achieve risk-adjusted market rates of return, even if you don’t necessarily care about impact, this could be a good strategy just to diversify your investment portfolio.”

All funds analysed for the benchmark had to have the specific objective to create positive, measureable social impact and create risk-adjusted, market rate financial returns. The benchmark will be now be updated each quarter. 


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