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Profits and Purpose: Wharton Study Finds that Impact Investments Can Produce Both Market-Rate Returns and Long-Term Impact

Impact investments are capable of producing market-rate returns alongside long-term impact, according to a study released by the Wharton Social Impact Initiative (WSII) at the Wharton School of the University of Pennsylvania. In their study, Great Expectations: Mission Preservation and Financial Performance in Impact Investments, the WSII analyzes 53 impact-focused private equity funds, representing 557 individual investments, to determine the interplay between investment performance and impact mission preservation of portfolio companies on exit.

Key Findings:

Mission Preservation and Fiduciary Duty to LPs – In traditional investment agreements, General Partners (GPs), or fund managers, are held by legal requirements and professional standards to make investment decisions to deliver the maximum risk-adjusted financial returns to their Limited Partners (LPs), or investors. However, in impact investing, GPs must balance their fiduciary duty with LP expectations of social and/or environmental impact in major investment decisions.

Reviewing fund managers’ respective Limited Partner Agreements, Private Placement Memoranda, and other legal investment agreements, the WSII found that a majority (90%) of fund managers had entered into agreements with LPs that explicitly allow and, in most cases (70%), require impact metrics to be considered in investment decisions.

Portfolio Companies and Impact Investor Influence on Exit Decisions – For companies backed by private equity and venture capital investors, it is common for investors to acquire a controlling portion of the portfolio company’s board of directors. This majority control allows investors to make major decisions, including those related to exiting investments.

Of the sampled impact funds, WSII assessed the number of portfolio companies and their board composition, finding that only 23% of partner companies had boards in which impact investors secured 50% or more votes required to control exit decision, meaning a majority of funds may not be in a position to influence mission preservation, within the board structure.

Mission Preservation and Investment Exit – One common misconception about impact investments is that investors must accept concessionary returns in order to achieve impact and maintain a company’s impact mission. To access this, WSII surveyed fund managers to determine their expectation of mission preservation on investment exit as well as access the financial performance of impact investments.

WSII found that 95% of the fund managers surveyed expected the company mission to persist after exit, even though 67% of the representative exits did not have a contractual agreement for companies explicitly stating a commitment to mission preservation. Furthermore, WSII found no evidence to suggest that impact investments draw weaker returns; rather, that impact investments produced strong returns and that investors and shareholders may not have to sacrifice financial return for mission preservation.

Impact Investments and Overall Industry Performance – Further examination into the financial performance of impact portfolio companies provides evidence that impact investments can produce strong financial returns. WSII found that financial performance of portfolio companies is comparable to an S&P 500 index as well as a Russell Microcap index, when looking between the years of 2000-2015. This comparison suggests that impact investments may be financially competitive with other equity investment opportunities.


Making a Profit and Maintaining Purpose - The WSII study provides evidence that private equity impact investments are capable of producing not only strong financial returns, but also long-term social impact through the preservation of portfolio company impact mission. It is important to note that the WSII focused on impact investment funds that specifically seek to make market-rate financial returns alongside impact; the degree to which an impact investor prioritizes financial return and impact may vary based on individual investment strategy and investment type. Nonetheless, the WSII report is part of the growing body of evidence that suggests that impact investments can be both profitable and impactful.

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IRS Ruling Makes Impact Investments More Accessible for Private Foundations

In an announcement released by the IRS, mission-related investments (MRIs) – investments made from a foundation’s endowment with the intention of generating social impact in addition to financial returns – made by foundations will be seen as “non-jeopardizing”, and thereby will not be subject to an investment gains tax.

PRIs and MRIs: A Tax Perspective

MRIs differ from Program-Related investments (PRIs) based on the investment intent and how the investment is viewed from a tax perspective. PRIs are considered investments out of a foundation’s grant-making budget that can be made in below-market guarantees, loans, and equity investments, for which the primary objective is to achieve a charitable purpose. Additionally, PRIs account for approximately 5% of a foundation’s annual payout requirement – the minimum amount that a private foundation must spend annually for charitable purposes, in order to avoid paying excise taxes. MRIs are market-rate investments in which the foundation intends to generate both social and financial returns; however, endowment officers must follow prudent investor standards similar to conventional investments. In addition to achieving social outcomes, MRIs are primarily seen as finance engines that allow the foundation to continue its charitable operations. (

Foundations are taxed for gains made on investments, if, the IRS states, foundation investment officers do not exercise “ordinary business care and prudence.” That is, foundations are subject to taxation on investments that are seen as risky or compromising to a foundation’s financial security and its charitable, tax-exempt operations.

However, according to the IRS ruling, endowment officers are “not required to select only investments that offer the highest rate of return, the lowest risks, or the greatest liquidity so long as the foundation managers exercise the requisite business care and prudence...  in making investment decisions that support, and do not jeopardize, the furtherance of the private foundation’s charitable purposes.” In other words, incorporating social impact metrics to achieve impact returns, in line with the foundation’s mission, as well as financial returns when making an investment decision is not deemed as a lack of “business care and prudence”, and is not taxable as a risky investment. (

Until the IRS ruling, it was unclear whether private foundations could select an investment for which the primary purpose was to achieve a social outcome alongside financial return without facing investment gains taxes. However, the IRS ruling definitively clarifies that it is permissible for endowment managers to incorporate impact metrics as legitimate factors when making investment decisions, and allows for foundations to potentially devote more of their annual endowment payout toward impact-focused investments in line with their charitable purpose, while also achieving a financial return. 

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Pay for Success Impact Investments

Innovating Government Procurement of Social Service Contracts

Santa Clara County announced Project Welcome Home, a Pay for Success (PFS) project that aims to reduce homelessness in the County of Santa Clara. In partnership with Abode Services, a nonprofit agency that implements innovative housing programs to alleviate homelessness, and Third Sector Capital, acting as an intermediary, Project Welcome Home represents one of the first PFS impact investments in California and one of the frontier PFS projects in the United States.

What is the Pay For Success?

PFS is a funding model that leverages private and philanthropic capital to drive public funding to service providers, innovating government procurement of social service contracts. Within the PFS model, service providers, private funders, and Federal, state, or local government entities enter into an agreement that specifically identifies a population to be served, an outcome to be achieved, a timeframe and a metric to measure progress of impact achieved.

Private funders, leveraging both philanthropic dollars and private investment capital, provide initial financing to the service provider through an intermediary in order to achieve the designated outcome. Once the agreed upon timeframe is completed, the government entity pays a return to the private funder(s) if, and only if, the agreed upon outcome is achieved. This return is usually from the net savings the government entity realises by implementing a PFS project in place of the status quo.

Source:  Third Sector Capital Partners
Source: Third Sector Capital Partners

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The Financial Performance of Impact Investments

The Impact Investing Benchmark, an analysis of the financial performance of 51 impact-focused private equity and venture capital funds launched between 1998 and 2010, demonstrates that impact investments are capable of producing internal rates of return (IRR) equal to, and at times better than, traditional investments of comparable size and geography. The Report was produced by the Global Impact Investing Network and Cambridge Associates.

Socially-focused impact investments can achieve market-rate financial returns

The Benchmark draws comparisons between 51 impact funds – defined as private investment funds with “intent to generate a social and/or environmental return in addition to a financial return” – and 705 investment funds focused purely on financial returns, referred to within the report as the “comparative universe.” These comparisons span across various markets – emerging markets, emerging markets excluding Africa, and developed markets – impact spaces – including Financial Inclusion, Employment, Economic Development, Sustainable Living, Agriculture, and Education – and fund vintage year, or the year the fund was raised.

Key Findings

Financial Performance Across Vintage Years: Collectively, impact funds launched between 1998 and 2004, or those largely realized, outperformed the comparative universe. Within the full period of 1998-2010, sampled impact funds had an aggregate IRR of 6.9% to investors versus 8.1% in the comparative universe, though much of the performance for funds launched after 2004 has yet to be realized.

Fund Size and Financial Performance: For funds launched from 1998 to 2010, impact investing funds with under $100mm AUM outperformed similar-sized funds in the comparative universe with 9.5% and 4.5% IRR, respectively; for impact funds with over $100mm AUM, IRR came in at 6.2% compared to 8.3% from funds in the comparative universe.

Financial Performance Based on Geography: Emerging Markets (EM) impact funds launched between 1998 and 2004 outperformed the comparative universe with a pooled net IRR of 15.5% versus 7.6%, respectively. For EM funds launched between 2005-2010, performance is still inconclusive, as these funds remain largely unrealized from date of launch.

Emerging Markets excluding Africa (EM ex Africa) funds launched between 2005-2007 performed relatively well with a net IRR of 8.4%, while being outperformed by the comparative universe, which had a net IRR of 11.2%; impact funds launched between 2008-2010 did not perform as well as the comparative universe with an IRR of 0.6% and 13.1%, respectively.

Developed Markets (DM) impact funds realized a pooled IRR of 4.8%, over the full period of 1998-2010, compared to 7.6% for the comparative universe, with 11.6%. However, the Benchmark notes that just 21% of DM impact funds sampled were launched before 2005 whereas 41% of the DM funds were launched before 2005, which may represent a disconnect between realized and unrealized performance of DM impact funds.

Fund Manager and Fund Strategy: As with all private investing, selection of investment manager is paramount in ensuring superior returns. Particularly emphasized by the Benchmark, selecting the appropriate fund manager and understanding the fund’s emphasis on social returns relative to financial returns are critical to the individual investor’s goals. You can read more about this on our blog: 10 Impact Investing Blogs and Influences to Follow Right Now and 10 More Impact Investing Organizations and Leaders to Follow.

As the first comprehensive analysis of the financial performance of impact investing funds, the Impact Investing Benchmark represents the first of many steps in understanding industry performance of impact investing. The Benchmark is part of the growing evidence for impact investments as a competitive financial product, working against the misconception that impact investments must sacrifice financial return in order to achieve social return. (You can read more about this in our blog post, Impact Investing 101 – Challenges. As the impact investing industry continues to expand, additional performance data becomes available and the community of impact-minded investors grows industry performance reports similar to the Impact Investing Benchmark will help further build the industry and normalize it alongside the comparative universe.

 To learn more about careers and jobs in Impact Investing check out our Job Board or Job Tips.

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