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.
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.