Field Notes: Impact Funds and Financial Returns

A new analysis shows that investments in social impact funds and market-rate returns are not mutually exclusive. Private equity and venture capital funds that have both social impact and financial objectives are as profitable as funds that just want to make money.

Investment consultant Cambridge Associates and the Global Impact Investing Network (GIIN) have found that 51 impact funds launched between 1998 through 2010 gave returns of 6.9 percent to investors compared with 705 nonimpact funds that witnessed returns of 8.1 percent. Interestingly, those funds that were launched specifically between 1998 and 2004 — and have been largely realized – actually outperformed nonimpact funds in the comparative universe.

The report’s analysis based on geography and fund size also revealed interesting results.

The net internal rate of return (IRR)[1] of impact investing funds from emerging markets was 15.5 percent between 1998 and 2004, compared with only 7.6 percent in the comparative universe. For the entire period of the analysis (1998- 2010), the returns of the impact funds was in line with the comparative universe.

Interestingly, the impact funds in Africa gave a spectacular return of 9.7 percent. Although, this is not entirely surprising given that east Africa has emerged as the global hub of impact investments.

Based on fund size, impact investment funds raised under $100 million produced a net IRR of 9.5 percent, outperforming similar-sized nonimpact funds that had a 4.5% return.

Cambridge Associates and GIIN expect more robust data to substantiate these findings through new addition of funds to their Impact Investing Benchmark and maturation of the existing ones. Even still, the myth that impact investment is rarely profitable has been busted. Heron recently discovered another myth of social impact investing: that investor and investment (or grantmaker and grant) are the prime movers in creating impact.

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[1] The IRR is the most commonly used return metric in the private equity industry. It represents the discount rate that makes the net present value of an investment equal to zero.