How can I expect my impact investing fund managers to perform, relative to my non-impact fund managers? Are market rates of return possible, or should I consider these funds to be concessionary in some way?

Until last month, the honest answer to these questions might have been, “I just don’t know,” as aggregated performance results from impact investing funds had been largely anecdotal. With the launch of the Impact Investing Benchmark, however, private equity and venture capital impact investors finally have an empirical base to begin shaping performance expectations.

Cambridge Associates is not only a research firm and benchmark provider. It is primarily an advisor to large institutional investors—a growing number of whom are exploring and making private impact investments. As such, we view this benchmark both as a field-building research exercise and as analytical fodder for conversations about impact investing with our clients, who are potential limited partners (LPs) in private impact investing funds. Here are three important ways we think the benchmark can be useful to LPs, and hopefully to the impact investing field at large.

  1. Signifies growth and legitimacy. While this benchmark represents only one sliver of the impact investing industry, its creation signifies that the opportunity set for impact investing funds has grown sufficiently to represent a meaningful and measurable private investment sub-category. This benchmark includes second and third time funds from some general partners, and a track record that dates back to 1998. The impact investing market is clearly poised for growth and this signals legitimacy to potential LPs and advisors.

  2. Helps dispel misperceptions of impact investing performance. This data helps show whether market-rate returns are attainable and provides some indication of how the opportunity set is dispersed. Performance varies by vintage year, geography, and fund size, but there are several subsets of the data in which impact investments have outperformed comparable non-impact funds. For example, impact funds launched between 1998 and 2004 outperformed conventional private investment funds, as did US-focused impact funds smaller than $100 million launched during all years analyzed (1998 to 2010). The wide range of performance outcomes for impact investments as a whole, however, indicates that fund selection is at least as important in private impact investing as it is in conventional private investing.

  3. Provides more concrete data for comparison. LPs and advisors generally find it difficult to gain comfort in an idea or investment concept without sufficient data. In a traditional nonprofit organization, the investment side can look at fund performance and compare it to expectations and benchmarks. Similarly, best practices on the grantmaking side include reviewing the outcome from a grant and assessing if it was money well-spent. Impact investing bridges both of these traditional processes, but until now lacked a benchmark as a financial measuring stick. For example, investing $100 and turning it into $110 might seem like a successful investment, until you learn that direct peers turned $100 into $120. In practice, we can use this data to analyze and provide reporting on clients’ quarterly impact investing performance to allow for more precise benchmarking comparisons as in other parts of the portfolio. 

By demonstrating that private impact investing is a legitimate market in which competitive returns can be achieved, this benchmark should help to remove several of the hurdles that have prevented institutions from making private impact investments. For those that have already made limited impact investments, the ability to measure financial success may help increase their comfort levels. The benchmark’s utility as both a comparison tool and an industry tracker will continue to increase as the dataset grows—enabling more meaningful performance comparisons through further data segmentation—and as its track record develops—allowing analysis of performance over multiple quarters and years.

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