Beats | November 19, 2013

Impact Investment Performance: Tiptoeing Toward Transparency

The team at


The recent release of details about the performance of several impact investment portfolios and funds is another step toward answering the question more and more investors are asking: Is impact a boost — or a bust — in terms of financial returns?

“Institutional investors aren’t going to move on impact until they get more data,” says Lisa Kleissner, who with her husband Charly was a force behind Sonen Capital’s 65-page report on the portfolio performance of the Kleissner’s $10 million KL Felicitas Foundation. “Who better than foundations, who are already required to be transparent?”

Separately, a dozen funds and portfolios holding a total of $1.3 billion make some of their performance results and other details available in “Impact Investing 2.0,” a rich mine of insights, best practices and policy opportunities. The result of a two-year collaboration between Pacific Community Ventures, CASE at Duke University, and ImpactAssets, the report doesn’t attempt to make broad conclusions about the performance of impact-driven funds, but includes six case studies (with more to come) with a wealth of data and detail.

Elevar Equity, for example, in San Francisco and Bangalore, reported a 21 percent internal rate of return (IRR) for is $24 million Unitus Equity Fund, much of it from the controversial IPO of SKS Microfinance in India. Huntington Capital Fund II, in San Diego, a growth capital, or mezzanine fund, reported a 13.8 percent net IRR as of March 31 on its investments in small and medium businesses in underserved areas of the western U.S. The $9.4 million Aavishkaar’s Micro Venture Capital Fund in Mumbai said it achieved a 13 percent IRR net of fees and had had six exits, half of them with returns between 12 and 39 percent and half at a loss, and three write-offs. Other case studies cover an $80 million Deutsche Bank microfinance fund; Accion’s $30 million small business fund in Texas; and Microvest’s 2004 microfinance fund, which has fluctuated between $24 and $49 million.

As heroic as are both disclosure efforts, the two reports show the field of impact investing is still not ready for the full monty. The Impact 2.0 team, which started with a list of 350 funds, said one of its biggest challenges was finding a dozen funds with long enough track records willing to share their models and data outside of their investor circle.

For it’s part, the Sonen Capital report on the KL Felicitas portfolio leaves out results from private equity and real assets – key impact investment asset classes — and, indeed, excludes KL Felicitas’s entire “impact first” portfolio, in total about 30 percent of its holdings. Those results, if available, would certainly affect the overall financial performance of the portfolio; leaving them out may leave many investors thinking, yes, and not in a good way.

The early headlines for the report echoed the conclusion from Sonen Capital, an investment management firm in San Francisco formed in 2011 specifically to create impact portfolios,that “impact investments can compete with, and at times outperform, traditional asset class strategies while pursuing meaningful and measurable social and environmental results.” KL Felicitas moved from a 2 percent allocation to impact investments in 2006 to to more than 85 percent by 2012, “achieving index-competitive risk-adjusted returns.”

A closer read, however, shows Sonen is talking about only 55 percent of the foundation’s holdings — it’s holdings in cash, fixed-income, public equities and hedge funds. Private equity and real asset investments are too immature and difficult to value, the report said, while the “impact first” portfolio is not managed by Sonen and is selected by the foundation for social and environment impact, rather than financial performance. (Also excluded are the 14 percent of holdings still unallocated to impact.)

Returns on the 30 percent of impact holdings Sonen omitted are in prime impact investment areas that other other investors are most likely to be interested in. The report itself labels them “maximum-impact solutions.” For example, KL Felicitas has private equity investments in clean and renewable energy, sustainable food and agriculture, water delivery and financial services for underserved populations. It has real asset allocations to “ecosystem services” investments that harness the benefits of functioning ecosystems, such as carbon sequestration or nutrient cycling. The foundation’s 17 “impact first” investment strategy ranges across cash and fixed-income as well as real assets and private equity. None of those results are reported.

Instead, the report includes results only in the more mainstream asset classes in its “returns-based impact portfolio.” In the one-year ended Dec. 31, 2012, cash holdings beat the three-month Treasury bill. Public equities slightly outperformed the MSCI World index. Fixed-income and hedge funds underperformed relevant benchmarks. Overall, the net returns were 4.87 percent, compared to 6.1 percent for a portfolio-weighted benchmark. The portfolio slightly outperformed the benchmarks over three- and five-year periods. The foundation is preparing a follow-on report, combining both financials and social and environmental impact, for its 10-year anniversary next year.

The available results appear reasonable if not noteworthy. Many studies have shown that screens for social responsibility or “ESG” (environmental, social and governance ) factors can have a positive, or at least not negative, effect on public-equity portfolios. Raul Pomares, senior managing director for Sonen, said KL Felicitas is focused on impact across its portfolio so there’s demonstration value in showing even partial financial results. He said it is short-sighted to dismiss the impact potential of public equities and fixed-income.

“We recognize that they do not have the same degree of impact as private investments, but they can still influence behavior and drive material change,” Pomares told Impact IQ. “Many investors don’t have the flexibility and risk profile to invest 100% in private equity opportunities; they need public vehicles. The focus should be on encouraging more investors to recognize macro impact trends and allocating entire portfolios in the direction of positive impact.”

The Impact Investing 2.0 report does dig into private equity and debt in an attempt to address continued skepticism from institutional investors and ultra-high net worth investors (and their advisors). The authors concede, “The market has not been growing as fast as many practitioners had hoped, in part because the larger wealth advisors and institutional investors on which growth depends are demanding a level of product and performance specificity that only time and experience can provide.”