Plums, lemons and measurement

In recent weeks, a flurry of reports on the performance of impact investments has been posted to my inbox.  Following years of debate, we are finally moving from talk to deals – and from deals to exits — now we are seeing the first analyses of results.

All three recent reports should be commended for their honesty and effort.  With such data and the analysis that has accompanied each report, the work of impact investors has become a little easier.

The first report was entitled The Social Investment Market Through a Data Lens, which was produced for the Social Investment Research Council by EngagedX (an index for impact investments), which sought to consistently measure impact investment performance.  The report is a brave and ambitious attempt to combine into a common framework the results of different investors such as CAF Venturesome, Key Fund and the Social Investment Business. 426 investments had matured and could therefore have their performance measured; the report found that overall impact investors had made a loss of around 9%, while 10% of all these investments were totally written off.

There is an element of mixing apples and pears, as the objectives and approaches of these funds differ. Some of the individual investments made were more impact-orientated, and others less so – these are combined without accounting for this.  There is also nothing which takes time into account as a factor.  For example, if the average investment were held for five years, the average annual loss is only 1.9%; the report does not tell us much about the term over which these investments lost 9.2%, so we cannot make the calculations.  Additionally, the costs of managing the funds were ignored.  Finally, an old venture capitalist adage is that “lemons ripen faster than plums”, so perhaps the investments which had not yet matured will reduce the 9.2% negative figure (or improve the results).

It was a shame more funds did not participate.  Two pioneers, Esmee Fairbairn and Bridges Ventures have spoken informally about their returns, but to my knowledge, have not made such data publicly available. It would be particularly useful to see Bridges’ data; it is by far the sector leader, and its funds target market returns. I suspect the average returns in the study would have increased sharply; so we see that the mix of funds has an excessive impact on the average.  Despite this, it was an excellent first attempt at a tricky subject.

The second report was called Introducing the Impact of Investment Benchmark and was published by Cambridge Associates and the Global Impact Investing Network.  It concluded that 51 impact investment funds (IIFs) performed at nearly the same level (6.9% internal rate of return vs. 8.1%) as 705 comparable non-impact funds.  The report is excellent and the key points are easy to discern.  Most critically, more than half of the IIFs sampled were African and a third from the US – again, what is in the “fruit basket” can have enormous influence.  Interestingly, first-time funds performed well.

The third report, A Tale of Two Funds: The management and performance of the Futurebuilders-England Fund, is a detailed analysis of Futurebuilders, a fund that provided £145m of loan finance to third sector organisations.  The report is primarily intended to answer the question of how the fund performed and whether this changed in its two phases.  The document is very well written and highly transparent.

For all these reports, and for future ones, the lack of performance data relating to social impact makes sensible comparisons more challenging.  This should also be integrated in the future – as should data on risk. I believe that impact investment funds are lower risk than mainstream funds and that correlation to markets is quite low, and would love to know if this is correct.

On the whole, more impact investment funds need to participate in such exercises.  This is especially true for IIF managers like Bridges, Cheyne Capital and LGTVP, which have higher performance targets than those in the EngagedX study.  We might then all feel better about the outcome of the reports.

First published in Third Sector in