Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
There are a few marketplace dynamics we can consider to potentially explain the
lack of a traditional upward slope to the yield curve, as well as the high level of
dispersion across realized rates:
1. Debt impact investments can be compared to high yield credit investing, where
yield curves can often be downward sloping to reflect the near term risk of
smaller companies in growth phases 117 .
2. Foundations and/or government programs may be more comfortable lending at
subsidized rates. This could keep longer-term yields artificially low.
In any case, we find it intriguing that there have been transactions made at such a
range of interest rates, since this reveals that there can be a place in the market for
investors that might demand a range of return expectations. We also would have
liked to analyze risk data on this portfolio, but the database was compiled at the time
of investment without tracking defaults or payments in arrears over time. We
anticipate that future data sets will begin to incorporate more of these kinds of risk
metrics, and future analysis will then be possible on the risk profiles as well.
IFC’s sample of private equity returns
While our survey did not produce enough realized return data on private equity
impact investments to analyze in a significant way, we did receive the
performance history of one long-term private equity investor in the international
development arena. The IFC has been investing to encourage private sector
development in EM for over twenty years. While some part of IFC’s investment
portfolio may not meet our definition of impact investments, we believe it is a
representative sample of how a portfolio of EM equity investments can perform.
The data is shown in Figure 32, where we can see that the IFC portfolio has
outperformed the Cambridge Associates Emerging Market Venture Capital and
Private Equity Index over much of the past twenty years.
Figure 32: Private equity portfolio returns for IFC against benchmark
IRR by vintage year
35%
30%
25%
20%
15%
10%
5%
0%
Net IRR IFC ALAC (simulated)
Pooled Mean – EM Benchmark
intrapolation
1989 1991 1993 1995 1997 1999 2001 2003 2005
Source: IFC, Cambridge Associates. To simulate performance for comparison, each vintage year represents start of a notional fund
with 5-year investment period that includes every IFC equity investment in that time period. Investments held until exit or June 30,
2010. Performance simulated on 5-year rolling-basis, i.e. each investment considered in several vintage years. Cambridge Associates
Emerging Markets Venture Capital and Private Equity Index (March 2010).
117 The concept is that the highest risk lies in the near term, as the company establishes itself.
If it overcomes the initial hurdles to financial sustainability, the risk is expected to subside.
Yields for longer tenors can be lower to reflect this expectation.
85