How impact fund portfolio companies perform at exit

More than two-fifths (42 percent) of portfolio companies and assets in private markets impact funds have exceeded their financial performance targets at exit, a new survey shows. Almost a quarter (23 percent) of exits were on target, while 35 percent missed their targets.

Impact Capital Managers, a network of GPs in impact investing, surveyed 30 of its member firms in conjunction with law firm Morrison Foerster. They received information on the financial performance of 224 exits over the past 10 years, including deals by Bain Capital, TPG and KKR’s impact strategies. The results are “quite encouraging for a traditional investor who’s thinking about investing in impact or thematic investing”, Marieke Spence, executive director of ICM, told New Private Markets. “It’s quite auspicious for crowding in traditional capital for the impact investing space.”

While the study paints a positive picture of 10 years’ impact performance in absolute terms, it does not benchmark the financial performance against the wider private equity space.

Although one in three exits were below target, Spence noted this does not reflect the performance of funds with multiple assets. At the fund level, there are indications that impact funds may outperform the wider private equity market: ICM found an average net IRR of 25.5 percent for the 26 participating funds for which ICM could find publicly available or third-party provided performance information. Spence added that more than 50 percent of the below-target exits were in “large venture capital portfolios. The overall return rate of those on a fund basis was actually very good”.

The results show venture stage impact investing is “very competitive with traditional VC investing”, where approximately 30 percent of companies fail, said Spence. The report accompanying ICM’s survey does not provide fund-level performance data or break its results down by asset class.

Missing impact targets was less common (21 percent) than missing financial targets, the survey found. Forty-two percent of assets had exceeded their impact performance targets at exit, and 39 percent were on-target.

More than half of the exits (57 percent) were sales to strategic buyers, while 23 percent were to financial buyers. This split was due to “the lack of large financial buyers… for later-stage companies who have high valuations and would not be appealing to early stage or venture impact investors”, the report states.

However, Spence has seen this changing over the past 10 years as more large buyout firms have launched impact strategies – and she expects this to increase further as new vintages of these funds exceed the $1 billion mark and their GPs look for dealflow.

The next 10 years

After a “temporary slowdown over the next year or two” in the volume of exits, Spence expects to see more competition among buyers, driving prices up.

“The balance of power in terms of negotiating terms has shifted to fund managers… in the last year or so,” said Spence. “Some of our members believe there is a premium for impact assets. Members are being more choosy about their exit options. We’re seeing more members doing a reverse diligence, for example, on potential buyers and exit to ensure the mission or the impact of the company will be maintained after exit.”