Market-performing returns of real assets impact funds are attainable, even comparable with those of conventional real assets funds when weighed cumulatively. However, manager selection and due diligence are critically necessary, a Cambridge Benchmark report has found.
Internal Rate of Returns (IRR, pooled) for impact investing funds in timber, real estate and infrastructure were 5.9%, 0.9% and 2.5% respectively.
By comparison, IRR for conventional investing funds in timber, real estate and infrastructure were 3.3%, 4.9% and 6.5% respectively.
Significance of the Benchmarks
Fighting bias in investing is always a challenge, any experienced professional or academic will acknowledge. The study gives actual data that allows investors to better measure and evaluate the real performance of impact investing funds in these sectors. These benchmarks also provide a critical tool for removing barriers to industry growth in an asset class that has the potential to generate significant social and environmental impact.
The Cambridge Benchmark study specifically emphasizes the value of impact fund managers who are exacting in their methods for pursuing portfolio alphas while pursuing impact objectives for their clients.
Due diligence is a critical step in the investment process and is an important factor in obtaining superior returns and in risk management, the study contends.
Impact Objectives
The impact objectives of timber funds in Cambridge Associate’s benchmarks include sustainable timber production, land conservation, and biodiversity conservation.
Real estate funds include green real estate, affordable housing, AgTech and community services.
Infrastructure funds include renewable energy, climate change mitigation and water resource management.
Pioneering Credibility
Prior to this work, Cambridge Associates had already created the pioneering Impact Investing Benchmark, consisting of 51 private impact funds invested in purpose-driven companies and funds intending to generate social and financial returns.
That benchmark returned 6.9% annually to investors, according to the June 2015 report, compared to 8.1% returned by conventional private-investment funds.
Financial inclusion, jobs, sustainable housing and education were among the areas pursued by Cambridge for that benchmark.
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Partial Transcript of the Conclusion Section
At this stage, given the limited sample size, it is difficult to reach definitive conclusions, but we can make some initial observations on the real assets impact investing landscape:
- Market rates of return are attainable in real assets impact investing, but manager selection is paramount. To achieve superior returns and risk management, rigorous due diligence in manager selection is critical in all investment decisions, including those related to real assets impact investments.
- Fund managers can rigorously pursue both financial and impact objectives. These benchmarks demonstrate that funds can pursue (and achieve) market rates of return while channeling capital to investments with the intention to generate measurable positive impact results.
- Impact timber funds in the dataset have outperformed comparative timber funds for the period analyzed. While impact investments in real estate and infrastructure had pockets of both strength and weakness, impact timber funds outperformed the comparative universe in both our vintage year and fund size analysis.
- Based on a limited sample size, across all three sectors analyzed, smaller funds have had the strongest performance. Impact timber funds that raised under $100 million (3 funds) returned 8.9%, besting larger funds. Similarly, impact funds under $50 million (6) were the strongest performing group in the real estate sector, with a net IRR of 10.2%. Within impact infrastructure, funds under $100 million (3) were also the best performing, producing a net IRR of 11.7%.
- Maturity is an important consideration in real assets impact investing. Impact funds focused on infrastructure—particularly renewable energy infrastructure—and other assets whose success depends, in part, on advanced technologies, are relatively newer investment strategies with less evolved legal and regulatory guidelines. Investors should keep the maturity of each sector in mind when interpreting these findings and setting expectations for the future performance of funds.
Sources: Cambridge Associates Real Assets Benchmark, Cambridge Associates Impact Benchmark
