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These pages have seen much discussion of the various challenges facing impact investors. However, one of the most fundamental barriers to impact investing’s growth is seldom given the attention it deserves: liquidity.
The big debate in impact investing has been on whether there is a financial trade-off between impact and returns, as was explored in Toniic’s 2025 Cruising Altitude report, presenting findings from an eight-year longitudinal study representing more than $3.5 billion of invested assets. However, that study’s findings highlighted another dynamic that many asset allocators have long understood: there is typically an inverse relationship between liquidity and impact. Put simply, liquidity—the ease with which an asset can be converted into cash—is often compromised when investors seek to maximize impact.
There is a logic to this. If an investment is making something happen that otherwise would not—for example funding new climate technology or building social housing where the market has failed—it is less likely to have a ready-made, liquid market. Additionality often means stepping into spaces where conventional capital is not yet comfortable, and that usually implies higher risk and illiquidity. It follows, therefore, that impact portfolios skew towards private equity, private real estate, and other alternative asset classes that are inherently hard to liquidate.
These are fundamental considerations for asset owners. At Paul Ramsay Foundation, we require income from our investments to meet our grant distribution commitments alongside sufficient liquidity to rebalance our portfolio and generate a return consistent with our desire to be long-term players. While we champion the concept of a “total impact approach”—considering the impact of all the foundation’s assets, rather than only a small percentage through grantmaking—impact investments alone cannot currently meet our requirements for income and liquidity. As a result, our allocation to impact investments is 20%, with the remaining 80% being sustainably invested using a series of positive and negative screens.
We are not unique among asset owners. In addition to foundations that require liquidity and income to meet statutory or self-imposed distribution requirements, pension funds must make regular benefit payments and meet regulatory parameters, and family offices often require sufficient liquidity to balance philanthropic ambitions with near-term spending needs across generations.
The Challenge
Illiquidity across asset classes has intensified globally. Since 2021 there has been a sharp decline in initial public offerings (IPOs), a common route for private equity and venture capital funds to realize returns. Although 2025 brought some stabilization, the number of IPOs remains well below 2021 levels. While this trend affects all markets, impact investing is particularly vulnerable due to impact investment’s heavy focus on privately held assets and often limited exposure to publicly traded funds that can be more easily bought and sold.
Liquidity barriers preventing greater investment in impact are particularly acute for institutional investors who favor open-ended funds that allow investors to buy and sell units, offering flexibility to rebalance portfolios in response to market conditions. Impact funds, by contrast, typically operate as closed-ended vehicles with 10-year or longer lifespans, modest cash distributions and limited exit options that reflect the patience required for impact outcomes.
The challenge is greater still within the highly regulated world of pensions. Accessing pension capital has long been identified as the holy grail for impact, given the size of this market. Although the Global Impact Investing Network’s (GIIN) 2024 Market Sizing study shows pension fund impact capital allocation has grown to $455 billion, the figure is dwarfed by the total estimated $69.8 trillion available in global pension assets.
In Australia, mandatory retirement savings funds called superannuation funds are benchmarked against annual performance tests with underperformance carrying severe consequences. These benchmarks rely on traditional asset class indices that are poorly suited to impact investments. For example, impact-driven housing assets lack natural benchmarks and are often forced into inappropriate commercial categories.
Superannuation reform has been floated by many in Australia, with some advocating to allow for more impact investments as a way to boost productivity and enhance economic resilience. We have seen the United States’ restrictions on 401(k) retirement plans easing following President Trump’s August 2025 Executive Order expanding access to private equity. A similar move in Australia may enable increased commitments to illiquid impact investments, though safeguards must exist to ensure integrity. Current benchmarks are intentionally backward-looking, which can result in blind spots including how well portfolio investments are preparing for global megatrends such as climate transition risk or demographic shifts. The benchmark itself may require reform.
Conversely, the answer to opening regulation may lie in an adjacent guardrail on impact: some major superannuation funds have successfully pioneered mandatory commitments to impact investments over recent years.
Emerging Solutions
Market dynamics appear to present a perfect storm working against impact: an inherent bias towards long-term illiquidity, regulatory discouragement, and struggles to exit within the broader market. Add in a tendency for impact managers to be smaller and less resourced than their mainstream counterparts, meaning that competing on fees is challenging, and the picture is bleak.
Yet beacons of light exist through new structures and strategies that ease liquidity constraints and retain impact integrity. The most significant, though also the most-often misunderstood, is the rise of impact secondary funds.
Secondary funds
Secondary markets are essential to a functioning financial system, allowing investors to trade existing assets and reduce exposure to high-risk or unproven investments. In traditional private equity, secondary markets have grown substantially over the last 10 years with a record $152 billion reached in 2024.
By contrast, impact secondaries remain nascent, with less than 1% of impact capital focused on secondary strategies. Early pioneers such as Minneapolis’ North Sky Capital launched an impact secondary strategy more than a decade ago, while others—including Blue Earth’s 2026 dedicated impact secondaries fund—signal growing interest. Meanwhile, a recent report from British International Investment examined the potential for more such vehicles in emerging markets and developing countries.
The lack of secondary funds may simply reflect the relative youth of the impact market. Limited activity may also reflect the perception that secondaries are “less impactful,” offering reduced additionality compared to primary investments. However, a strong counterargument exists; secondaries can be a core engine for impact market growth.
Secondary funds enable capital recycling and increase the efficiency of primary markets by providing liquidity to early, risk-tolerant investors, allowing this “catalytic capital” to be recycled to seed and scale new impact opportunities—this is especially important given the scarcity of such capital.
Equally, secondary markets can attract more conservative, risk-averse investors by providing lower-risk, proven, and income-generating investments to a wider market. This creates market growth and provides another opportunity to mobilize significant pension fund capital for impact.
Listed vehicles and innovative structures
Publicly listed vehicles offer a clear liquidity solution by creating tradable secondary markets. Schroders BSC Social Impact Trust was an early example, aggregating private social impact assets that are illiquid in isolation into a listed structure. Similarly, the Women’s Livelihood Bond series, listed on the Singapore Stock Exchange, demonstrates how fixed-income instruments can provide access and liquidity. However, in both instances the challenge of scale remains, with the need for an equal or greater flow of inbound capital to service any withdrawals; trading activity remains low.
Continuation Vehicles (CVs) provide another avenue to liquidity by transferring assets from older funds into new vehicles allowing initial investors to exit. CVs have fuelled the growth in non-impact secondary markets with 20% of deals reaching the end of their term expected to pass through CVs, according to a McKinsey research report. LeapFrog Investments—a notable impact investing fund manager—has considered CVs for its 2013 fund which represents an early signal that impact managers may explore similar mechanisms as exit pathways remain constrained. CVs, however, attract heavy criticism from impact and non-impact orientated investors alike: Critics argue that CVs hide underperforming assets and delay inevitable write-downs by retaining underperforming assets and promote “zombie funds,” i.e., those that extend beyond their useful life yet continue to charge fees.
Other innovations seek to go further. Octobre—a consortium of mission-driven companies—has launched a “Liquidity Guarantee Facility” that provides a form of liquidity insurance by offering a contractual commitment to buy out investor stakes in exchange for an annual fee. While still experimental, such mechanisms point to new ways of addressing the liquidity challenge.
Public equities
Public markets are increasingly offering investment strategies that apply positive social and environmental criteria. While some investors are placing capital into these strategies, others remain skeptical about whether these investments will create meaningful, additional, impact.
Public equity fund managers often argue that they create impact through active management strategies, such as company engagement, voting on shareholder resolutions and supporting stronger impact practice. However, it can be difficult for investors to judge how effective these activities are.
This also creates an important trade-off. Actively managed funds generally charge higher management fees and have been shown to regularly underperform passive benchmarks, challenging the idea that investors do not need to sacrifice financial returns to pursue impact. Yet if public equities can create portfolio liquidity while delivering credible outcomes, impact investors may need to take a more pragmatic approach.
Recommendations
We believe that solving the crucial challenge of liquidity lies beyond having “the right product” alone. To be clear, there is absolutely a need for a significant impact secondaries market, with impact secondary funds offering the most promising answer. For this to happen, asset owners must step forward to anchor purpose-built secondary funds: the provision of cornerstone capital is critical to catalysing the interest of others by instilling confidence and reducing risk.
However, there is also a need to adopt a wider perspective in thinking about how we develop the overall impact investing market. It is becoming ever clearer that a key stumbling block to the deployment of catalytic capital to advance the frontiers of impact is the fact that this capital is frequently trapped in highly illiquid investments with no prospect of exit. The fostering of exit opportunities therefore needs to be more clearly recognized as a priority in the field of catalytic capital, and the establishment of a thriving secondary market seen as a valid market development outcome that should be pursued, rather than dismissed as less impactful.
Then there is the need to rethink traditional asset allocation. While established portfolio construction frameworks remain useful, the definition of “defensive” or “income” assets—a critical component of how to balance a portfolio’s risk profile—needs to be reimagined. Impact-aligned investments backed by real assets and long-term policy support are often dismissed due to perceived political risk. Yet renewable energy projects supported by long-term Power Purchase Agreements or social housing underpinned by rental subsidies can provide more stable income than many corporate bonds.
Paul Ramsay Foundation offers a practical example. Our Investment Policy Statement classifies “stabilized real estate” and “stabilized infrastructure” as defensive assets when they are fully invested, secured by tangible assets, and generate contracted income with regular distributions. This reframing expands the scope for impact within strategic asset allocation, even if it does not fully resolve liquidity challenges.
For impact investing to move from the margins to the mainstream, liquidity constraints must become a core design consideration for impact strategies rather than an afterthought. Progress requires a combination of new structures, new thinking, and a broader—yet rigorous—view of how impact is defined and created. The alternative is to continue treating impact as a small, illiquid corner of an otherwise conventional portfolio and accepting that most of our capital will ignore its social and environmental consequences. For a field built on the idea that capital can be a powerful force for good, that must be unacceptable.
Read more stories by Ben Smith & Harvey Koh.