Can Impact Investing Pay Off For Investors? A New Study Says Yes.

Anne Field | July 3, 2015


Good news for impact investors: you don’t have to sacrifice financial returns for social good. Not only do impact investment funds have very respectable returns, they are in spitting distance of comparable conventional funds. And in some cases, impact investment funds have outperformed their conventional peers.

Those are the findings of the first Impact Investing Benchmark, a comprehensive analysis of the performance of private equity and venture capital impact funds. The study, a collaboration of Cambridge Associates and the Global Impact Investing Network (GIIN), looked at 51 private investment funds with social objectives that also targeted market rate returns, and compared them to a control group of 705 conventional funds. The funds covered vintage years 1998 to 2010.

“We are encouraged that impact investing funds have performed so closely with peer funds in the comparative universe,” stated Amit Bouri, CEO of GIIN, a nonprofit that supports impact investing with research, education and other activities. “This demonstrates that market rates of return are achievable through impact investing.”

The firms plan to publish the Impact Investing Benchmark on a quarterly basis.

Overall, the funds in the impact group posted a net internal rate of return (IRR) of 6.9% as of June 30, 2014, vs. 8.1% for a comparative universe of non-impact investment funds. “We consider that to be fairly close,” says Abhilash Mudaliar, research manager with the GINN.

What’s more, impact investment funds launched between 1998 and 2004—leaving enough time for returns to be largely realized—outperformed funds in the comparative conventional funds.

“There are many institutions that have been waiting for data demonstrating the viability of the market”

IRR is a common metric for private equity funds. In this study, the IRR calculations are net of management fees and carried interest, representing actual returns to investors.

The results are more nuanced when broken down by geography and other factors. For example, impact funds that focused on emerging markets had higher returns (9.1%) than impact funds in developed markets (4.8%). However, the study notes there are relatively few impact funds in developed markets (the study looked at 17 such funds) and most were launched after 2005.

In addition, smaller impact investing funds often outperformed smaller conventional funds. Impact investing funds under $100 million returned a pooled 9.5% net IRR, outperforming other similar funds in each year except 2008 to 2010.  Plus smaller funds generally did well compared to bigger brethren.

“The perception in private equity is that larger funds perform better, and we wanted to see if that holds true in impact investing” says Mudaliar. “We  found that smaller funds don’t necessarily under-perform.”

More findings:

  • Impact investing funds launched from 1998 through 2004 performed in line with or better than the comparative universe of non-impact investing funds.
  • U.S.-focused impact investing funds under $100 million returned a 13.1% pooled IRR, handily outperforming the 3.6% generated by conventional funds under $100 million in the comparative group.
  • Emerging market impact investing funds raised between 1998 and 2004 generated a pooled net IRR of 15.5% compared to returns of 7.6% for other funds. Some funds within the Impact Investing
  • Some funds within the Impact Investing Benchmark performed in line with top quartile funds in the comparative universe, showing that market rates of return for impact investments are possible and also reinforcing that manager skill is paramount.
GIIN's Amit Bouri
GIIN’s Amit Bouri

On a down note, impact investing funds launched from 2005 on are trailing the comparative universe of non-impact investing funds. According to Mudaliar, however, it’s hard to draw too many conclusions from that, since their returns are largely unrealized.

Cambridge Associates and GIIN plan to add more funds to the study over time. As they do, they expect the data to become more robust.

Ultimately, the results may provide convincing proof for potential impact investors that have been afraid to take the plunge. “There are many institutions that have been waiting for data demonstrating the viability of the market,” said Bouri in an email. “This report will illuminate what was seemingly an opaque market for many investors.”

Anne Field is a freelance journalist that writes about social enterprise. A version of this story first ran on her Not Only For Profit blog on Forbes.


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