The recently published report by Cambridge Associates and the GIIN analysing the relative performance of impact private equity and impact venture capital funds makes for interesting reading. For years, there has been a widely held assumption on the part of investors and their advisors that there is a necessary trade-off between financial and social returns. While individual impact investment fund managers, such as Bridges Ventures, have shown that market rates of return can be achieved by investment in poorer areas, few people have understood just why this is possible. Investors are largely unaware that investing in poorer areas or in emerging markets enables them to access a different set of investment opportunities, involving more price-sensitive and less investment-intensive business models capable of achieving high rates of growth. Much of the entrepreneurial effort in the decades ahead is likely to focus on such opportunities, driven by a millennial generation that seeks to improve society and the environment as it does well.
The report is instructive because it shows that market rates of return are indeed attainable through impact investing. If this report helps to overturn conventional notions, it would be a great contribution to the development of ‘profit-with-purpose’ impact investing. It would drive investor allocations to the sector, the absence of which has been a major brake on the flow of capital into it. The report is also valuable in providing granular information about the performance of different types of funds. It shows that to date smaller funds and emerging market funds have been the strongest performers. It is not intuitive that small funds will continue to outperform into the future, but this report marks the start of an important monitoring process to inform investors. It is important news that Cambridge Associates will produce quarterly Impact Investing Benchmark reports, adding relevant new funds to the existing set.
Cambridge Associates and the GIIN are also to be congratulated for establishing vintage year benchmarks and comparing the universe of conventional private investment funds with ‘impact’ private investment funds. If, as the G8 Taskforce believes, we are moving to the measurement of risk, return, and impact in making investment decisions, then the publication of this report marks an important milestone.