Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
Figure 8: Average return expectations by instrument and region
Horizontal bars: Average realized returns for benchmark and average expected returns for impact
investments, gross annual IRR or yield, in USD. Vertical lines: Range of expected returns reported, gross
annual IRR or yield, in USD.
Benchmark
11%
Impact
0-5%
Benchmark
9%
Impact
8-12%
Benchmark
28%
Impact
15-20%
Benchmark
10%
Impact
12-15%
30%
24%
18%
12%
6%
0%
Developed market high
yield corporate debt
Emerging markets
corporate debt
Developed market
venture capital
Emerging market
venture capital
Source: GIIN, J.P. Morgan. Survey participants were given a predetermined choice set of return ranges (0–4.9%; 5–7.9%; 8–11.9%;
12–14.9%; 15–19.9%; 20–24.9%; 25%+) which is why the averages are presented in the form of ranges rather than single data points.
Benchmark returns are average annual returns for: J.P. Morgan’s Developed Markets High Yield index and Corporate Emerging
Market Bond (“CEMBI”) Index, over the period 2002 – 2010 (our full data history); and Cambridge Associates US Venture Capital Index
and Emerging Markets Venture Capital and Private Equity Index, for vintage years over the period 1989 – 2006. Impact investment
return expectations are calculated by taking an average of survey responses (each of which represents a range of expected returns for
a given investment instrument in a specified region) across the population of reported investments. The number of investors who
responded for each instrument, and the number of investments in the sample (respectively) are: Dev mkt HY debt = 9, 219; EM HY
debt = 10, 411; Dev mkt venture capital = 6, 91; EM venture capital = 15, 119. Readers should note the low number of Dev mkt venture
capital investors represented. Note that the range of expected returns for developed market debt excludes a single investment
reported by one respondent with an expected range of returns of 20-24.9%; all other data points fall within the range shown. Both the
developed market and emerging market venture capital ranges include investments with expectations of 25%+ return (the range was
not specified above that level).
Choice of benchmarks
Benchmarking performance is challenging, and in this case even more so since we
are benchmarking return expectations rather than realized returns. Figure 8 shows the
return expectations (average and dispersion) reported for various investment types in
our impact investor survey against benchmarks that we believe are appropriate given
the risk of the asset class. For debt we believe the indices that best replicate the credit
quality of an impact investing portfolio are our US High Yield and Corporate
Emerging Market indices. For equity we recognize the early stage and relatively
small investment sizes and have chosen Cambridge Associates US Venture Capital
Index and Emerging Markets Venture Capital and Private Equity Index 36 for vintage
years over the period 1989 – 2006. Vintage years post 2006 have been excluded as
there are too few harvested investments for meaningful analysis.
In order to make a meaningful comparison of backward looking (realized) and
forward looking (expected) returns, we use a through-the-cycle approach in choosing
our time period of benchmarks, which results in the data shown above. The choice of
time frame results in moderate variations for the debt returns (if we focus on the past
five, rather than eight-plus years, both benchmarks would drop by 200 basis points),
but has a significant impact on the resultant venture capital returns. Narrowing our
time frame to the years after the dot-com bubble (1999 – 2006 vintages) for example
results in a return of only 0.2% in US VC/PE against a return of over 14% in
36 Cambridge Associates LLC US Venture Capital Index and Benchmark Statistics, and
Cambridge Associates LLC Emerging Markets Venture Capital & Private Equity Index and
Benchmark Statistics, as of June 30, 2010. Reports were provided directly to J.P. Morgan by
Cambridge Associates free of charge.
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