As a manager of a fund of funds dedicated to impact investing, I welcome the publication by Cambridge Associates and the GIIN of the industry’s first benchmark study. This is a much-needed initiative to move impact investing away from debating potential trade-offs to a focused discussion of what financial returns may look like for one specific segment of the market. As rightly outlined in the report, the discussion on returns needs to go hand-in-hand with a clear identification of the market segment covered by the study.

Many of us have, in the past, discussed impact investing as a big tent with several small tents sitting under it. It would be naïve, as well as potentially misleading, to interpret these returns as demonstrating a track record of the broader impact investing tent. At the DFID Impact Fund (operated by CDC, the UK’s development finance institution), we look for funds that invest across strategies and sectors to positively impact low-income populations in sub-Saharan Africa and South Asia. From my perspective, the study needs more relevant data points and analysis relating to our investment universe.

It’s also worth noting that for more than half of the funds in the data set, returns are based largely on unrealized valuations. A lack of data in such a nascent sector is understandable, but it’s unfortunate that the research is restricted to funds targeting market returns as this excludes a large portion of the impact investing universe. Many credible investors might argue that risk-adjusted returns aren’t a realistic target when investing in the hardest businesses in the hardest geographies. We have indeed heard this as a key finding in the DFID Impact Programme Market Survey.

Broadening the study over time could provide useful insight into how certain strategies and sectors are linked to returns, thus helping to guide further capital into the sector. At the DFID Impact Fund, we encourage managers to target realistic returns that, depending on the sector or strategy, may not always be risk-adjusted market rates. This approach is needed to set and manage investors’ expectations around achievable returns that are crucial for long-term growth of this market. 

In addition to possibly homogenizing the impact universe via a standardized target return definition, I also found that the diversity and size of the benchmark’s data set hindered many meaningful conclusions on the correlation between returns achieved and fund characteristics. There appears to be a significant, but unexplained variation in returns across vintages, which I found hard to interpret with the given data. Given the significant presence of financial services-focused funds in the data set, it would be interesting to know how we can expect returns to be affected by the broadening sector focus taking place in impact investing.

The study’s findings also raise some further questions. For example, there is a reference to higher returns being driven by funds in Africa and also by smaller fund sizes. Yet, at the same time, 11 funds in the study with an exclusive focus on Africa are managing 50 percent of total capital ($3.2 billion) covered. This translates to an average size of approximately $300 million per fund, which made me question if the strong returns, in Africa at least, are indeed being driven by smaller funds. The study also seemed to suggest that the amount of capital flowing to impact investment in Africa is larger than the amount of capital invested via ‘mainstream’ private equity funds on the continent, a finding that appears counter-intuitive and worth investigating further.  

I noted an absence of a discussion on “impact achieved.” As an investor in impact funds, I understand the challenges associated with measuring impact. However, this is an area that needs deeper coverage to add an interesting dimension to the findings. 

The study is an important first step in drawing investor attention to the sector by drilling into impact investing’s track record. To make this more meaningful in the future, I’d encourage the GIIN and Cambridge Associates to expand the data set and make it as transparent as possible to enable a more granular analysis of the drivers of returns. I reviewed this data cautiously without drawing any broad conclusions or expectations around returns from our own portfolio. I anticipate other experienced, hands-on investors may have a similar view.

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