Introducing The Impact Investing Benchmark by Cambridge Associates
Executive Summary
- Cambridge Associates and the Global Impact Investing Network have collaborated to launch the Impact Investing Benchmark, the first comprehensive analysis of the financial performance of market rate private equity and venture capital impact investing funds. While the impact investing industry is in an early stage of development, it is poised for growth. One of the chief barriers to industry advancement remains a paucity of robust research on financial performance. Credible data on risk and return can help both existing and future impact investors better identify strategies that best suit their desired social, environmental, and financial criteria.
- At launch, the Impact Investing Benchmark comprises 51 private investment (PI) funds. Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Funds in the benchmark pursue a range of social impact objectives, operate across geographies and sectors, and were launched in vintage years 1998 to 2010.
- Despite a perception among some investors that impact investing necessitates a concessionary return, the Impact Investing Benchmark has exhibited strong performance in several of the vintage years studied as of June 30, 2014. In aggregate, impact investment funds launched between 1998 and 2004—those that are largely realized—have outperformed funds in a comparative universe of conventional PI funds. Over the full period analyzed, the benchmark has returned 6.9% to investors versus 8.1% for the comparative universe, but much of the performance in more recent years remains unrealized.
- Impact investment funds that raised under $100 million returned a net IRR of 9.5% to investors. These funds handily outperformed similar-sized funds in the comparative universe (4.5%), impact investment funds over $100 million (6.2%), and funds over $100 million in the comparative universe (8.3%). Emerging markets impact investment funds have returned 9.1% to investors versus 4.8% for developed markets impact investment funds. Those focused on Africa have performed particularly well, returning 9.7%.
- In all private investing, manager selection and due diligence are critical steps in the investment process and are important factors in obtaining superior returns and in risk management; impact investing funds are no exception. There are funds within the Impact Investing Benchmark that have 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.
- Creating and analyzing benchmarks for private investments, especially for a younger, emerging portion of the market such as impact investing, poses a number of challenges.
Difficulty acquiring private fund performance data and strict inclusion criteria limited our ability to amass a large dataset, which presented data analysis limitations that are unavoidable at this stage. Cambridge Associates will produce an ongoing quarterly Impact Investing Benchmark report to track the industry over time.
Introducing the Impact Investing Benchmark
This report was produced by Cambridge Associates, a global investment fi rm and one of the world’s leading developers of financial performance benchmarks, in partnership with the Global Impact Investing Network, an organization dedicated to increasing the scale and effectiveness of impact investing worldwide. It presents findings from the first comprehensive analysis of financial performance in impact investing. To maintain a manageable scope, this report specifically evaluates the performance of market rate private investment funds in the impact investing space. This report also marks the launch of the first ever financial performance benchmark of private impact investing funds, which Cambridge Associates will maintain and update on a quarterly basis going forward.
The decision to focus this report on PI funds was motivated by several factors. Investing via funds is a common strategy for impact investors of all types and sizes, including development finance institutions, foundations, commercial banks, pension funds, insurance companies, and family offices. Nearly 75% of investors that responded to the J.P. Morgan and GIIN global impact investor survey, Eyes on the Horizon: The Impact Investor Survey, published in May 2015, indicated that they invest via intermediaries (regardless of whether they also invest directly in companies). Additionally, within fund investments, private equity and venture capital are particularly common vehicles. Out of 310 impact investing funds profiled in the ImpactBase Snapshot, published in April 2015, 153 are private equity or venture capital vehicles. Cambridge Associates’ Mission-Related Investing (MRI) database is further evidence of private equity’s prevalence in impact investing: of the 579 private MRI funds Cambridge Associates’ tracks, 392 are private equity or venture capital funds (the remainder are private real assets funds).
Methodology
Fund selection
Impact investments are defined by their intent to generate a social and/or environmental return in addition to a financial return. The focus of this report is PI funds with a social impact objective to allow for a clear aggregation of similarly motivated funds. Future research may look at other vehicles and/or funds with an environmental impact objective.
The research team identified a list of relevant impact investing funds through existing databases maintained by various credible networks worldwide, including the GIIN’s ImpactBase, CA’s Mission-Related Investing (MRI) database, the Community Development Venture Capital Alliance (CDVCA), the European Venture Philanthropy Association (EVPA), ImpactAssets 50, and Opportunity Finance Network (OFN). This process enabled the research team to identify those funds likely to have the intention to create positive social impact, as indicated by their membership in these impact-oriented networks. The fund list was further refined based on the inclusion criteria in Table 1. If the impact intent of a fund was unclear, the research team conducted additional detailed review to determine whether the fund could be included.
A unique feature of impact investments is that not all investment opportunities aim for market rates of risk-adjusted return. While the pursuit of a financial return is central to impact investing, some investors—by virtue of their strategy—seek to achieve concessionary returns. Again, in the interest of focusing on a relatively uniform set of data, this research restricts itself to those funds that target risk-adjusted market-rate returns. Specifically, this means private equity and venture capital funds with a target net internal rate of return (IRR) of 15% or higher, and mezzanine funds with a target net IRR of 10% or higher. These cut-offs are consistent with most conventional PI funds. Fortunately, there were no “close calls” when determining the universe of funds to be included—funds were either clearly above the cut-offs or significantly below (e.g., concessionary funds).
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