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Wharton School Study: Impact Investment Funds Achieve Results Comparable to Market Indices

November 12, 2015

Findings suggest that – in certain market segments – investors might not need to expect lower returns as a tradeoff for impact, according to a new study from the Wharton School of the University of Pennsylvania – Great Expectations: Mission Preservation and Financial Performance in Impact Investments. In the study, researchers look at two of the most important aspects of impact investing: financial returns and long-term impact. The study explores the widespread assumption that impact investment private equity funds cannot achieve market-rate financial performance.

Wharton School researchers evaluated the financial performance of 53 impact investing private equity funds — representing 557 individual investments — relative to public market indices such as the Russell 2000 and other benchmark indexes. They also examined expectations of a portfolio company’s social or environmental mission when its impact investors seek liquidity. After conducting the study, the researchers conclude that impact funds in the sample that reported seeking market-rate return — which is only one segment of the broad spectrum of impact funds — demonstrated that they can achieve results comparable to market indices. Read the report…

In another recent study, Omidyar Network – a self-styled "philanthropic investment firm" – found that there is an immense amount of potential for frontier capital investments that supports new business models to serve low- to lower-middle-income people in emerging markets that has the potential to generate both outsized impact and strong financial returns. In Frontier Capital: Early Stage Investing for Financial Returns and Social Impact in Emerging Markets, the Omidyar Network highlights several important factors for making impact investment in business that can produce both a financial and social return on investment (ROI). The authors argue that instead of focusing on companies that replicate and adapt proven business models, impact investors should focus on frontier capital investments – business that target the needs of low- and lower-middle-income populations in emerging markets (those who make between $2 and $8 dollars per day).

In the study, Omidyar Network researchers compare hundreds of companies in emerging markets to assess the needs of traditional VC investors. It underscores two additional business model factors that correlate well to scaling quickly and profitably:

  • A “mixed-income” model serving both middle- and lower-income populations; and,
  • An asset light model.

Mixed-income businesses are also often able to utilize existing infrastructure to add lower-price products onto existing lines, thus increasing overall profits. Asset light companies require relatively little capital expenditure (for example, for physical infrastructure or equipment) or working capital to prove their model and expand.

To support these companies, the authors conclude that investors need to remain creative and patient in helping entrepreneurs get to scale. They propose three strategies to support companies that can make potential impacts:

  • Longer time horizons – in the form of a promising return premium for not forcing an early exit;
  • Venture debt – frontier and frontier plus entrepreneurs often face a dearth of options for affordable debt due to their lack of collateral or track record; and,
  • Quasi-equity – given difficulties with exits in emerging markets, quasi-equity may offer investors a less risky form of liquidity while still compensating investors for risk.

Read the report…

Impact investing strategies, widely considered unable to achieve market-rate financial performance, have been rapidly maturing to the point that they can offer both financial returns and social impacts.  In the study from Wharton School, researchers find that impact investments fund have the potential to perform at similar levels to leading market indices. The Omidyar Network report highlights the potential for impact investments to have both significant ROIs and social impacts. However, the authors of both studies conclude: impact investors must remain patient; and, there must be a shift in investment strategies from the traditional investment models of venture capital firms to new more creative models.  

capital, impact investing