Latin America and energy are hot. Microfinance? Not. As for social impact bonds, it’s too early to tell.
We read Eyes on the Horizon, the fifth annual state-of-the-impact-market report from the Global Impact Investing Network and JP Morgan, so you don’t have to.
The bottom line: More investors, more assets, flat commitments. Investors are pleased with their current investments but wary about the deal pipeline for the future. Here was our initial take, “Impact Report Shows $60 Billion in Assets, but Where’s the Growth?” We’ve pulled out additional highlights and trends below.
Performance in line with expectations. 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. Fifty-five percent of assets target competitive, market rate returns.
“No exits” no more. The survey included data on a sample of exits from private equity investors—77 in total, 61 since 2012. The survey found 17 exits in microfinance, nine each in financial services, healthcare, and food and agriculture. Most exits took place five years after the investment, via sale to a strategic or financial buyer.
Dealflow shortage. Shortage of quality deals with a track record and lack of appropriate capital remained the top challenges for the sector. For the third straight year, “business model execution and management risk” topped the list of risk contributors to impact investing portfolios. A distant second was “liquidity and exit risk” followed by “country and currency risk.”
Measured impact. Nearly all (99 percent) of respondents reported measuring the social and/or environmental performance of their investments. More than half align their metrics with with IRIS, the set of generally accepted impact metrics managed by the GIIN, while only 30 percent report measuring impact through third-party frameworks and assessments such as GIIRS and GRI. Respondents placed greatest importance on measuring outputs and outcomes, less so on attaching a dollar figure to social and environmental performance.
Total impact assets grow, but commitments are flat. Survey respondents collectively reported managing $60 billion in impact investments, up from $45 billion in impact assets under management by 125 investors and $35 billion in assets managed by 99 investors in 2013. The respondents reported committing $10.6 billion through 5,404 transactions in 2014. That amount is flat with the $10.6 billion in commitments reported in 2013. (The report notes that the sample between the two surveys is different and direct year over year comparisons may not be valid.)
Assets rising faster than investments? For 82 respondents that participated last year and this year, impact assets under management grew by 20 percent, number of investments by 13 percent and committed capital by 7 percent. This same group reported falling short of target number of investments by eight percent (3,792 actual versus 4,222 planned ) and capital commitments by four percent ($7.1 billion actual versus $7.4 billion planned).
Fundraising hits and misses. Among the 39 fund managers that responded to the survey last year and this year, the group raised 23 percent more capital in 2014 than in 2013, though this amount was 13 percent less than they had targeted for 2014. Twenty-four of the 39 fund managers fell short of their target, seven met it, and eight exceeded it.
Direct investments with a new focus on Latin America. Nearly three-quarters of assets are invested directly in companies and, with 20 percent invested indirectly. Sub-Saharan Africa topped the list of market destinations for future investments, but “Latin America and Caribbean” jumped to No. 3 (behind ”East and Southeast Asia”). Private Debt and Private Equity accounted for 40 percent and 33 percent of assets under management, respectively.
Early-stage gap remains. More than nine out of 10 dollars are invested in companies in the post-venture stage. Just nine percent of assets are invested in companies at the Seed/Start-Up or Venture Stage.
Housing, microfinance and financial services dominate, but energy and agriculture are hot. “Legacy” impact sectors account for over half of assets under management, but Energy and “Food & Agriculture” topped the destination list of planned asset allocations by sector. Healthcare and Education were third and fourth. Nine investors (mostly equity investors), the largest for any sector, plan to reduce their allocations to Microfinance.
Growing sample, with holes. The report, surveyed 146 of the world’s largest impact investors, including fund managers, banks, development finance institutions, foundations, and pension funds. The sample size of 146 investors is a 17 percent increase over last year’s survey and 48 percent higher than 2013’s. Yet only 82 of 125 respondents from last year’s survey participated this year, and a number of funds listed on the Impact Assets 50, a list of 50 leading impact funds, did not participate. That makes the trends indicative of change, not evidence of it.
Developed-market investors. Seventy-eight percent of respondents are headquartered in North America and Western Europe. Nine out of ten dollars are managed by developed-market-headquartered investors but 48 percent of assets are invested in emerging markets. A footnote indicates $3.8 billion of the $10.6 billion was committed by just three respondents.