Investment funds that aim to do social good also generate financial returns comparable to traditional investments, suggests a new benchmark for private impact investment funds developed by Boston-based advisory firm Cambridge Associates and the Global Impact Investing Network (GIIN).
Impact investing funds launched between 1998 and 2004 have matched the performance of a comparative universe of non-impact investing funds, Cambridge Associates reports. However, investment funds that were launched more recently are lagging their non-impact investment funds, but their returns remain largely unrealized.
Overall, the funds in the new benchmark, which includes 51 private funds launched from 1998 to 2010, posted an internal rate of return (IRR) of 6.9% as of June 30, 2014. A comparative universe of more than 700 private investment funds with no social impact objectives returned 8.1% over the same time frame, according to Cambridge Associates data.
“There’s a view among some investors that impact investing necessarily entails a sacrifice in financial return. However, this data help to show this is more perception than reality,” says Jessica Matthews, managing director with Cambridge Associates. “This Impact Investing Benchmark has exhibited market rate returns — and stronger performance in a number of vintage years, sizes and geographies of focus.”
Indeed, the firm reports that emerging market impact investing funds, and smaller funds with less than US$100 million in assets, generally outperformed their non-impact investing counterparts.
For example, impact investing funds in emerging markets that were launched between 1998 and 2010 have performed in line with non-impact investing funds; and, impact investing funds raised between 1998 and 2004 generated an overall net IRR of 15.5% vs 7.6% for non-impact funds launched in the same period, Cambridge Associates reports.
“An important thing to note is that the keys to success in social impact private investing are the same as in private investing in general — smart manager selection and due diligence are critical,” Matthews says. “There are funds within the Impact Investing Benchmark that have performed in line with the top-quartile funds in the comparative universe. This underscores the notion that market-rate returns are possible, but that it really depends on manager skill.”
Cambridge Associates notes that the data underlying the new benchmark is in its infancy and that it will change with the addition of new funds and the maturation of existing ones. Also, the firm says that the data will become more robust as the sample size grows.
“This benchmark lays the groundwork to generate critical financial performance data for the impact investment industry,” says Amit Bouri, CEO of the GIIN. “This demonstrates that market rates of return are achievable through impact investing. We hope this will strengthen the credibility of impact investing for a broader set of investors.”