Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
in the data set we collected through our survey. Figure 16 further shows the breakout
of the last bucket shown in Figure 15 — deals that are larger than $5m. We can see
from these charts that the dominant portion of investments is $1m or less in notional
value. Only 35 of the 1,105 deals reported were larger than $10m in notional value.
Figure 15: Distribution of investment sizes across reported investments
Number of deals per bucket; bucket sizes shown in USD mm.
The last bucket of deals greater than $5m is broken out into more detail in Figure 16.
600
500
400
300
200
100
Figure 16: Just the larger investments
Number of deals per bucket; bucket sizes shown in USD
mm, for deals of $5m +
60
50
40
30
20
10
0
0-.5 .5-1 1-1.5 1.5-2 2-2.5 2.5-3 3-3.5 3.5-4 4-4.5 4.5-5 >5
0
5-10 10-20 20-30 30-40 40-50 50-60 60-70
Source: GIIN, J.P. Morgan. Investment sizes reported in USD as at time of investment.
Source: GIIN, J.P. Morgan. Investment sizes reported in USD as at
time of investment.
The small average deal size for impact investment presents a challenge to investors
whose due diligence costs remain more or less fixed relative to traditional
investments. For investors capable of making larger investments, the cost of
spending time and resources on a small impact investment deal is higher than for
traditional investments. Small deal sizes are especially challenging for investors
when fixed due diligence costs are high; it is particularly true for investments in
remote areas of emerging countries.
The relatively small average deal size could result from the over-sampling of earlystage
impact investors, who have tended to target more socially-focused businesses
and have been willing and able to absorb the relatively high transaction costs
associated with small-scale investments. As impact investing matures and more
institutional-scale investors with higher returns requirements enter the marketplace,
we anticipate a proliferation of new investment funds being created, aggregating
capital and increasing the size of investments that can be made. Average deal size
will grow as the industry matures and fund vehicles facilitate larger deals.
… but funds’ fees do not appear significantly higher than for traditional funds
Similarly, impact investment fund managers will also endure the high fixed cost of
investment relative to their deal sizes, and as such we anticipate that impact
investment fund management fees may be slightly higher than those charged by
traditional investment fund managers. Figure 17 shows the management fees
reported by our survey respondents, and Figure 18 shows the carry fees charged.
While the majority of management fees remain within 1–2%, we notice that there are
some investments with management fees as high as 5–7%. Similarly, carry fees for
most investments fall within the benchmark 20% range. This disparity may be a
result of the fact that many impact investment funds include a grant-sponsored
35