The Wharton Social Impact Initiative (WSII), under the supervision of Wharton finance professors David Musto and Chris Geczy, conducted a study of 53 impact investing private equity funds from around the world to evaluate the relationship between financial performance and mission alignment.
The report, “Great Expectations: Mission Preservation and Financial Performance in Impact Investments”, found that market-rate returns for mission aligned investments are indeed possible.
Several calculations of financial performance suggest that market-rate-seeking funds could in fact achieve their targeted returns while also preserving portfolio companies’ missions. In other words, the data show that impact funds did not have to make concessions in order to preserve the portfolio companies’ missions upon exit.
WSII examined four components of the link between liquidity and mission preservation:
1) Legal permission
It found that the vast majority of the fund’s agreements not only allowed for mission aligned investments but often required fund managers to consider impact in their decisions.
2) Control to influence exit decisions
The overarching answer here was no. Seventy-seven percent of the impact focused funds did not have the majority votes required to control exit decisions.
3) Motivation to pursue mission-aligned exits
While impact is believed to persist after exits, only about a third of respondents reported having explicit statements in the realization agreements.
4) Overall financial performance
The report concludes:
The acceleration of deal flow in impact investing private equity – and the subsequent upsurge of realization events – continues to highlight the interplay between financial returns and social or environmental mission. As new investors enter the space, the demonstrated performance of these early investments may help to foster the continued growth of the field, particularly in terms of the market viability of mission preservation
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