According to the recently published GIIN (Global Impact Investing Network) 2015 report, there is reason to look positively into the future for the Impact Investing Sector.
Overall Impact investment funds that raised under $100 million in the period between 1998 and 2010 returned a net IRR of 9.5% to investors. These funds handily outperformed similar-sized funds (<$100 Million) in the traditional investment space which only yielded approximately 4.5% IRR to their investors. Those Impact Investment Funds focused mainly on Africa have performed particularly well even returning an astonishing 9.7%.
It is interesting to note though that there is a negative correlation between Manager experience and performance of the Impact fund as well as a negative correlation between the size of the fund and the return obtained. Smaller funds (<$100 Million) outperform bigger funds. This can partly be explained by the fact that less experienced managers handle smaller portfolios which in turn look for alternative impact investment opportunities yielding higher returns.
The most common areas of investment are:
- Financial inclusion: The provision of financial services to populations that otherwise lack access. This includes investments in microfinance, small and medium enterprise (SME) finance, and community banking.
- Employment: Strategies that focus on job creation in areas of need, job quality improvement, and workforce development.
- Economic development: Investing in sectors that promote the improvement of economic
- conditions and standards of living. This includes companies contributing to basic infrastructure, such as transportation or telecommunications.
- Sustainable living: Improving access to healthy and environmentally friendly products and services. This includes organic health products and locally sourced foods.
- Agriculture: Investments along the food and agricultural value chain that are oriented towards efficient and sustainable practices and yield improvements that help feed more people at a lower cost and improve livelihoods of smallholder farmers.
- Education: Investing in innovations or business models that improve education outcomes or expand access to education.
How can Luxembourg position itself in this sector?
Luxembourg can position itself favorably through two avenues. The first and most obvious one is to establish a center of excellency for Impact Investing within our financial eco-system. The second avenue, which is a bit harder to achieve, is to build a credible pipeline of social entrepreneurs in Luxembourg. Though less visible, Luxembourg has an array of social issues that need to be tackled in the future where we can learn and implement from existing models successful in the neighboring countries. A favorable legal setup and good access to Finance would give Luxembourg the necessary competitive edge to play an increasing part in this market in the future.
To conclude, a unique feature of impact investments is that not all investment opportunities aim for market rates of risk-adjusted return. While the pursuit of a financial return is central to impact investing, some investors—by virtue of their strategy—seek to achieve concessionary returns. However, as the recent study by GIIN shows, there is no need to choose between return and social impact. Best practices in the sector are being established rapidly and with the rise of social entrepreneurship, new attractive socially responsible investment opportunities are now more abundant than ever before.
About the author:
Larissa Best is COO of Tiime and is active in the Software as a Service Industry. She has worked in New York doing Corporate M&A in the Corporate Legal Services Sector and has a background as an entrepreneur leading a company of 35 employees for 7 years in the Intellectual Property Sector.
She is passionate about the Investing space and has a special interest in the Impact Investing space, Health sector and FinTech. With her entrepreneurial background, she promotes the easy access to entrepreneurship and especially social entrepreneurship.
She holds a Master degree from HEC Lausanne and holds an MBA degree from the Sacred Heart University (Leadership Award).