New ‘Ammunition’ For Impact Investing

Outside the Wharton School on the University of Pennsylvania campus - Ethan Baron photo

Outside the Wharton School on the University of Pennsylvania campus – Ethan Baron photo

Impact investing is currently a budding, albeit, unknown frontier. The term, which describes investments aimed to create social or environmental good while also garnering a return, has only been around for less than a decade. Certain outlets estimate that about $60 billion can be identified as impact investments to date. Mega-firms like Goldman Sachs and BlackRock have entered the area with impact investing arms. Even the Department of Labor recently supported making impact investing more mainstream. Meantime, computer tycoon turned philanthropist, Bill Gates recently warned investors to be cautious about impact investing.

Last month, researchers at Pennsylvania’s Wharton School of Business produced new input—and slight support — for this fledgling area of investments. The report and study examined impact investing in certain market segments. The researchers found in some market segments, investors can indeed do well by doing good.

“You now have a little bit of ammunition to say it’s at least worth the look,” Jacob Gray, the senior director of impact investing at the Wharton Social Impact Initiative and co-author of the report tells Poets&Quants. “When people are sort of dismissive about the field—that you can never get market rates in that area—now the answer is, well, maybe you can and it’s definitely worth a deeper look.”


The study examined financial performances of 53 impact investing private equity funds that represented 557 individual investments. The researchers evaluated the investments relative to the Russell 2000 and other benchmark indexes to determine market value returns.

“We’re not saying you will or should get those (market value) returns,” Gray admits. “People have been hanging back and waiting on the sidelines to see if people in this field could actually sell there companies to someone else and get some money out of the deals and that is happening. For those who’ve been hanging back on the sidelines, it’s worth some deeper observation.”

To gain a better grasp on the research, Gray says to imagine impact investing as a “very broad spectrum” that exists on a “number line.” On one end is traditional philanthropy and the other side is traditional investing. “We zeroed in on the part of the spectrum that’s closer to traditional investing,” Gray says. “And we found that these funds seeking out traditional market rate returns, alongside their social mission are apparently getting pretty close to that, if not having the exact same performance as traditional funds.”

In other words, “There doesn’t necessarily need to be a tradeoff between economics and social mission when you’re looking at impact investing in certain segments of the market,” Gray insists.


However, Gray continues, “The certain segments is a really important caveat.” Unable to go into specifics or details about the private equity funds they were examining, Gray explained investing in organizations existing in developed economies tended to produce returns.

“This kind of fund often could be a developed market fund that’s looking for, say, tech investing focused on better access to education in the developed world,” Gray explains. “It’s less likely to be the impact investing that’s focused on distressed people at the bottom of the pyramid in the most distressed economies. When you get to helping people where there’s been deep market failures, those impact investors are often the ones that do not seek to return market rates.”

But, Gray says, that’s obviously a “gross generalization.” Some impact investments addressing deep market failures, Gray adds, do indeed produce similar market rate returns. “And the inverse is true as well,” he says.

The other big takeaway, according to Gray, is some funds produced good exits.“There actually have been exits in this field,” Gray says, sounding equally surprised as excited. “So they are happening and they do appear to be both mission-aligned and apparently pretty financially good exits as well.”

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