The myth of concessional returns was dealt a further blow with research showing that almost two-thirds (65%) of impact exits meet or exceed or financial performance expectations. 

The new study from Impact Capital Managers (ICM) and Morrison Foerster analysed 230 impact exits, and claims that there’s ‘alpha in impact’. The report also showed that an even greater percentage (81%) of impact exits meet or exceed impact performance expectations. 

The study is titled Strengthening Outcomes: Impact and Financial Value at Exit, it’s the second in a series exploring how an impact-focused approach can generate alpha for investors.

The data is impressive, it found that 42% outperformed financial expectations, 23% were “at target,” and 35% underperformed. The figures are similar when it comes to impact performance, with 42% outperforming impact expectations, 39% “at target,” and 19% underperforming.

“The findings of this study put private capital impact investing on a competitive footing with traditional, non-impact approaches.” said Marieke Spence, Executive Director of ICM.

“They suggest that thematic investing may not necessitate a tradeoff with financial return, and that in some cases, investing with an impact lens may in fact be a competitive advantage. While every impact exit will have distinct features, this report adds to a growing body of evidence demonstrating that alpha can be found in impact.”

The report includes 11 deep-dive case studies, covering leading impact fund managers, such as: TPG’s The Rise Fund, HCAP Partners, SJF Ventures, Achieve Partners, Energy & Environment Investment, Pangaea Ventures, New Markets Venture Partners, Lime Rock New Energy, KKR, andSt. Cloud Capital.

“Impact investors and all market participants should be encouraged by these findings. Our study shows that it is certainly possible to structure an exit event that not only achieves an investor’s impact goals but meets or exceeds financial expectations and avoids greenwashing.” says Susan Mac Cormac, corporate partner at Morrison Foerster.

“As exits involving impact investing have become more prevalent, the sophistication of effective legal tools to protect impact at exit has evolved as well. Impact investing in the private markets can and should result in positive outcomes, both for the investor and for society at large.”

The report found the follow factors influenced both financial and impact performance for impact exits:

  • Competitive advantage in funding rounds. Impact firms are branded as better long-term partners with more patience around the exit process and frequently have thematic or industry-specific expertise valued by company management. 
  • Unique impact frameworks. These frameworks guide portfolio companies toward targeted objectives and can increase the value of a company.
  • Scaled impact-driven business segments. Impact investors help management to focus on and scale specific business lines or activities that exhibit collinearity of impact with financial return, leading to financial growth.
  • Rigorous impact reporting that serves as a strategic tool during exit, by demonstrating impact as a significant component of portfolio company value. 
  • Attraction of unsolicited offers from strategic buyers interested in the historical impact-driven growth of the company and who see it as a future driver of financial success.
  • Strong management teams. Impact investors share deeper mission alignment with company leadership and, when considering exit options, tend to prioritize buyers who will value continuity of impact-driven leadership in their offer. 
  • Impact governance guidelines. Legal tools like impact-specific covenants, incorporating impact governance into the board structure, creating separate entities focused on impact measurement and reporting, or maintaining a board position post-exit, can all codify and preserve impact.

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