Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
involved have resulted in mainstream institutions defining both as separate asset
classes within the category of alternative investments. We note that this definition
was a key catalyst in driving the institutional growth of these assets over the last 20
years.
We recognize an alternative view that impact investors should seek to assign their
investments to traditional asset classes such as equity, debt and cash. We believe,
however, that this would lead to a fragmentation of impact investing skills and
constrain the industry's potential growth. We argue, therefore, that defining impact
investing as an asset class in its own right is consistent with recent history and
current practice in the investment industry and is more likely to lead to a rapid
growth of assets.
Financial return expectations for a sample of impact investments exhibit high
variance
Before identifying the potential market opportunity for investments in businesses
serving BoP customers, we analyze a sample of current impact investments across
business sectors and impact objectives (i.e. no longer limited to BoP-serving
businesses). As the market is primarily private, we obtained the data by surveying a
market leading group of impact investors, from which 24 respondents provided data
on over 1,100 investments.
Return expectations vary from competitive to concessionary
Reported return expectations for impact investments vary dramatically. Figure 4
illustrates the range of expectations with a vertical line, and we see that some
investors expect financial returns from their impact investments that would
outperform traditional investments in the same category, while others expect to tradeoff
financial return for social impact. Increasingly, newer entrants to the impact
investment market, in particular those focused on BoP consumers in emerging
markets, believe that impact investments need not sacrifice competitive financial
returns in exchange for social impact. The International Finance Corporation, which
makes many impact investments, recently revealed that their emerging market equity
portfolio has outperformed traditional emerging market venture capital and private
equity benchmarks for investment vintages from 1989 to 2006 2 .
Whether or not there is a return trade-off in impact investing depends on instrument
type, investor perceptions, and of course, chosen benchmarks. Developed markets
(DM) debt investors appear to expect some return sacrifice. This could be explained
in part by regulatory features and, in some developed markets, tax incentives that
encourage investment in lower-return social ventures. Emerging markets (EM) debt
on the other hand appears to target returns that are competitive with long-term
realized index returns. For equity, the results are mixed. If we benchmark against the
realized DM and EM index returns, impact investors’ targets appear competitive for
EM but concessionary for DM. If, on the other hand, we benchmark against the 20-
25% gross or 15–20% net returns that our interviews tell us managers raising money
in the current environment would target, then there does appear to be a trade-off for
EM.
2 See Appendix V.
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