Mission/Impact in private markets may have lower financial returns

-Paper suggests social/environmental impact VC/PE private market returns are lower than mainstream

-Results are different to public equity market ESG strategies.

There’s an ongoing debate in “impact investment” between those who argue impact or deep impact where you are gaining measured social and environmental return will typically not give market rate risk-adjusted financial returns (this tends to be in private equity or venture capital type investments).

Others argue that market rate risk adjusted financial returns are possible alongside measured social / environmental returns. (Let’s avoid the debate about ex-ante risk measurement for now).

Investors do differentiate between concessionary capital where below market rate returns or (partial) default is expected and commercial rate capital but argue over whether deep impact always has to be concessionary.

This differs from “Integrated ESG (Environment Social Governance)” techniques in public equity markets where in general the mass of studies (although not all) seem to show that integrated ESG - where material - leads to (or can lead to) better returns or at least not worse than the market average. (Note this differs from exclusionary strategies, which are now known as SRI - socially responsible investing - or ethical exclusions).

Measurement in private markets is harder, but this recent NBER paper suggests that private equity and VC which have explicit social  or impact objectives do return less than mainstream PE/VC funds. This would be evidence for those who argue that impact will return less in private markets. Debate goes on.

Barber, Brad M. and Morse, Adair and Yasuda, Ayako, Impact Investing (December 12, 2019). Available at SSRN: https://ssrn.com/abstract=2705556 or http://dx.doi.org/10.2139/ssrn.2705556

“We document that investors derive nonpecuniary utility from investing in dual-objective VC funds, thus sacrificing returns. Impact funds earn 4.7 percentage points (ppts) lower IRRs ex post than traditional VC funds. In random utility/willingness-to-pay (WTP) models investors accept 2.5-3.7 ppts lower IRRs ex ante for impact funds. The positive WTP result is robust to fund access rationing and investor heterogeneity in fund expected returns. Development organizations, foundations, financial institutions, public pensions, Europeans, and UNPRI signatories have high WTP. Investors with mission objectives and/or facing political pressure exhibit high WTP; those subject to legal restrictions (e.g., ERISA) exhibit low WTP.”

Blog on some ESG studies here.

Impact Investing papers on return, healthcare over 200 years

Two short papers for ESG/IMpact and one for healthcare specialists

 Impact funds earn 4.7% lower IRRs compared to traditional VC funds (Barber et al, 2015, update 2018)

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705556

“We document that investors derive nonpecuniary utility from investing in dual-objective venture/growth equity funds, thus sacrificing financial returns. In reduced form, impact funds earn 4.7% lower IRRs compared to traditional VC funds. Likewise, random utility/willingness-to-pay (WTP) models of investment choice indicate investors accept 3.4% lower IRRs for impact funds. We rule out alternative interpretations of risk, liquidity, and naiveté. Development organizations, banks, public pensions, Europeans, and UNPRI signatories have high WTP; endowments and private pensions have none. ..”

But also see -  https://hbr.org/2019/01/calculating-the-value-of-impact-investing

“…Over the past two years the organizations we work for—the Rise Fund, a $2 billion impact-investing fund managed by TPG Growth, and the Bridgespan Group, a global socialimpact advisory firm—have attempted to bring the rigor of financial performance measurement to the assessment of social and environmental impact. Through trial and error, and in collaboration with experts who have been working for years in the field, the partnership between Rise and Bridgespan has produced a methodology to estimate—before any money is committed—the financial value of the social and environmental good that is likely to result from each dollar invested. Thus social-impact investors, whether corporations or institutions, can evaluate the projected return on an opportunity. We call our new metric the impact multiple of money (IMM)….” Note, TPG are actively promoting their fund - serious investors, but expect them to be arguing this case.

One confounding problem on IRR, returns is that the idea of the risk taken to achieve those returns is difficult to assess - one could argue practially impossible - and thus risk-adjusted comparisons which would better will never be known and thus this question not ever fully answered.

*

Two Hundred Years of Health and Medical Care: The Importance of Medical Care for Life Expectancy Gains (Catillon, 2018)

https://www.nber.org/papers/w25330

H/T Tyler Cowen, is a long reaching look at how medical care has impacted life expectancy (or not) over 200 years of data in the state of Mass, US.

“Using two hundred years of national and Massachusetts data on medical care and health, we examine how central medical care is to life expectancy gains. While common theories about medical care cost growth stress growing demand, our analysis highlights the importance of supply side factors, including the major public investments in research, workforce training and hospital construction that fueled a surge in spending over the 1955-1975 span. There is a stronger case that personal medicine affected health in the second half of the twentieth century than in the preceding 150 years. Finally, we consider whether medical care productivity decreases over time, and find that spending increased faster than life expectancy, although the ratio stabilized in the past two decades. “