NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, August 27, 2015

Fence-sitters, naysayers, and doubting Thomases amongst investors who always sought proof that impact investing – investments made with the intent of generating environmental and social benefit alongside a financial return – is worthwhile and profi table can now write out their cheques without losing sleep. 

The first ever global analysis, covering data from 1998 to 2010, on the financial performance of private equity and venture capital impact investing funds has busted the widely held assumption that investors who part with money for impact get only concessionary or muted rate of returns. The analysis — Introducing the Impact Investing Benchmark 2015 — conducted by Cambridge Associates, a US-based investment advisory, and the Global Impact Investing Network (GIIN), a non-profit impact advocacy, has caused quite a stir amongst the investing fraternity. The hard evidence proffered is beginning to change the nature of the debate. 

Generous Returns 

The findings indicate that impact investment funds can return as much as conventional or mainstream funds and that, on same parameters, the returns can be even better. The impact funds (51 funds with total fund assets of $ 6.4 billion) in the study have posted a net internal rate of return (IRR) of 6.9% as of June 30, 2014 as against 8.1% for a comparative universe of nonimpact investment funds (705 funds with total fund assets of $293 billion.) 

It's even better for 'emerging market' impact funds. They have returned 9.1% to investors compared with 4.8% for 'developed market' impact investment funds. "Many often perceived impact investing as philanthropy in a new avatar," says Amit Bhatia, CEO, of the New Delhi-based Impact Investors Council, an industry regulatory body. "This analysis proves that impact investing is indeed a sustainable business." He also points to the exceptional performance of smaller impact funds in the benchmark. 

Impact funds that raised under a $100 million returned a net IRR of 9.5% to investors. These funds outperformed similar sized funds in the comparative universe (4.5%). (Impact funds over $100 million though yielded returns of 6.2% compared with 8.3% in the case of similar-sized funds in the comparative universe.)
The revelations have come as a booster shot to the impact investing fraternity as the hype around this space had waned lately given the huge excitement surrounding the new darling of investors — e-commerce.