For years I, along with many others in the emerging field of impact investment, have been suggesting that impact investing has something to offer for fiduciary investors’ portfolios. We have argued firstly that you can find attractive risk-return characteristics in at least parts of the impact investing space (attractive risk-adjusted return), and secondly that impact investing offers substantial diversification benefits when placed in a portfolio which is largely invested in equities and bonds (uncorrelated sources of return).
As chief investment officer at Christian Super, an Australian pension fund, I’ve made these arguments to regulators, to peers at other institutional investors, to the media and, of course, to others within my own organization. And I have not been alone. Our board and management team support the idea that it’s possible to be a fiduciary and to invest for social impact at the same time. For us this is more than an academic argument. Entrusted with the retirement savings of tens of thousands of Australians who want their money invested well in every sense of the word, we have already allocated and committed roughly AUD $100 million to impact investments in Australia and around the world.
For years we have pointed to case studies and conceptual arguments to support our theses. The success of particular components of the microfinance and renewable energy industries has aided our cause, showing that there are some parts of the market with attractive risk-adjusted returns. The idea that our co-investors in impact funds would behave very differently in times of economic uncertainty compared to our co-investors in the mainstream has played out to some extent over the course of the last five to seven years, supporting our idea of the importance of uncorrelated sources of return. As markets have repeatedly adjusted their perceptions of risk, our co-investors in most of the impact funds in which Christian Super invests have, like us, remained focused on the long-term.
We have used these as signposts along the way to suggest that our two core hypotheses outlined above are correct and that there are legitimate opportunities in impact investing for us as an institutional, fiduciary investor. We of course support this with internal analysis on the performance of our impact investments, but this sample set is obviously very small. That is why the new report from the GIIN and Cambridge Associates is important.
The GIIN and Cambridge Associates’ new Impact Investing Benchmark begins to ground these debates—particularly on performance—and promises what we, as investment professionals, always search for: data, based on a systematic approach, to either support or contradict our beliefs. We are never afraid of the evidence, whatever it may be. Where evidence supports our view, we can continue down that path with heightened confidence and conviction. But evidence that contradicts our view is often the most valuable—forcing us to refine our arguments, to correct our portfolios and sometimes to abandon ideas altogether. Investing has always been both art and science; intuition and data walking hand in hand.
But, like almost all investment data, the data in the Cambridge-GIIN report is both tantalizingly insightful and frustratingly inconclusive. For every point at which the data gives us useful evidence, there is another question raised.
- Impact investment funds under $100 million (the ones in which we have historically invested) have outperformed their mainstream private equity peers. But the sample set is small—can we rely upon that information?
- Performance of the impact funds over the time frame of the benchmark report has been a touch under the mainstream universe. It’s great to show that the performance is in the same ballpark, but are there systematic factors causing that difference? How much does the geographic concentration of the impact funds impact the result? How significant are fees in the equation?
There is evidence to suggest that manager selection—always important in private equity—is crucial for impact investing. But is survivor bias—always a problem in performance measurement—more pronounced in a young industry? Will the performance figures improve as managers gain more experience?
All in all, the report offers enough to suggest that the arguments we’ve made to date (at least on market rate returns) might be on the right track, and nothing to suggest we are wildly incorrect. But our two core hypotheses are far from conclusively proven, and we look forward to further iterations of research so that we can refine our approach.
And there is fertile ground for further research. Knowing that manager selection is paramount is one thing; knowing what drives successful managers and whether strong performance is either predictable or replicable is something else. Understanding the differences between impact investing private equity and mainstream private equity is also important. Why, for example, does the performance of the impact funds appear to be more concentrated than that of the comparative universe? Finally, there is a lot of work to be done in understanding the evidence for and against the argument for impact investing offering uncorrelated sources of return, with only some hints that we might be onto something.
In the meantime, we walk away with some work to do. The report gives us some insights into where there might be common risks in our portfolio (vintage year, for one), where we need to ensure that we are well-resourced (manager selection comes to mind), and where there is still a massive gap in our knowledge (correlation with other asset classes). As a first step this research provides some quantitative support of the arguments we have been making; we look forward to seeing the next iterations!