The results are in from impact investing’s annual report, and while they show clear progress, they raise a serious question: why can’t impact fund managers put more capital to work, even after they’ve raised it?
The headline number for the fifth annual report from the Global Impact Investing Network (GIIN) and J.P. Morgan: global impact investments under management climbed to $60 billion for the 146 investors surveyed, up from $46 billion for 125 investors surveyed last year. The survey covered some of the world’s largest impact investors, including fund managers, banks, development finance institutions, foundations, and pension funds.
But for those who dig deeper into the data, the report, “Eyes on the Horizon,” may raise more questions than it answers.
- How come, with more investors raising more money, the same amount was placed into the field? The investors responding reported committing $10.6 billion in capital in 2014, exactly flat with the $10.6 billion reported by respondents to last year’s survey.
- Did fund managers fall short in 2014? This year’s larger batch of respondents expect to place $12.2 billion, through 6,332 transactions in 2015. That would be an increase of 16 percent on 5,404 investments in 2014. But even if that forecast is realized, it would not bring actual outlays up to the $12.7 billion that was forecast for 2014 in the year-earlier survey. Indeed, just taking the two samples as reported, the 2014 outlay of $10.6 billion fell 16.5 percent short of the earlier forecast.
- Where are the deals? The same 82 respondents that responded both last year and this year, a better apples-to-apples comparison, reported raising 20 percent more capital, but committing only 7 percent more. That means even more impact capital is sitting on the sidelines.
More broadly, where is the impact investing market going? On the upside, the survey shows that the impact investments that have been made appear to be performing on impact and financial goals and are finding exits. Capital allocations are increasingly diverse in geography and sector. Impact investors are increasingly committed to and comfortable with impact measurement.
“We’re seeing increasing allocations that are speaking to diversification across geographies and sectors,” says Amit Bouri, the new CEO of the GIIN, the closest thing impact investors have to a trade association. “Investors continue to report that their investments are performing, which is critical to supporting and sustaining the market’s growth.”
The vast majority of respondents indicated that their portfolios were performing in line with both financial and impact expectations. Twenty-seven percent reported “impact” outperformance and 14 percent reported “financial” outperformance.
For the first time, the survey included data on a sample of exits from private equity investors—77 in total, 61 since 2012. The survey found seventeen exits in microfinance, nine each in financial services, healthcare, and food and agriculture. It found twenty-one exits in South Asia, and 11 each in Sub-Saharan Africa and Western/Northern Europe. Most exits took place five years after the investment and took place by sale to a strategic or financial buyer.
And many of the investors (98) say they have plans to commit more in 2015 than in 2014. Well over half of them say they plan to increase outlays by more than 50 percent. Still, a significant minority (34) say they will actually cut their transaction volume this year.
Missing data further muddies the results. Some 43 investors from last year failed to respond to this year’s survey, including a number of funds listed on the Impact Assets 50, a list of 50 leading impact funds. ImpactAlpha asked Yasemin X. Saltuk, JP Morgan Social Finance Director of Research, why. Her hunch: survey fatigue. The report notes that the sample between the two surveys is different and direct year-over-year comparisons may not be valid.
The survey’s findings point to a number of challenges that investors are facing in deploying capital. For the second straight year lack of quality deals with a track record and lack of appropriate capital across the risk/return spectrum topped the list of challenges facing investors. “This is a young and growing market. Things aren’t always growing at the exact same rate and in perfect alignment,” says Bouri. “In certain pockets of the market you’ll see that there’s a lot of capital available, in others where there’s less so.”
One continued gap in the market? The early-stage capital that young impact companies need to get off the ground. This year’s survey found that just nine percent of impact assets are in companies at seed/early stage or venture stage. “We have a risk aversion to the very early stage which is a challenge in terms of the structures… to fund those businesses and initiatives,” says Ali El Idrissi, part of J.P. Morgan’s Social Finance team.
The survey found increased competition among investors, a function of a limited number of investable ventures, a limited number of scalable business models, and a limited number of qualified entrepreneurs. Saltuk said impact companies lack the kind of support structure that, for example, the GIIN provides to impact investors. “I don’t know if there are the tools, resources, and networks for those companies to really leverage the whole market that’s developing around them,” she said.
Indeed, the report may signal a shift in the impact investing conversation. Most impact investments are made, not found. The demand for impact investments is growing, as shown by an increasing number of high-net-worth individuals and the entrance of BlackRock, Bain Capital and other institutional investors to the market.
Attention may now shift to boosting the supply, with additional support for solid, scalable businesses based on proven solutions to social and environmental challenges. Without such entrepreneurs and enterprises, impact investing can have no impact.