Making an impact

A groundbreaking study reveals the scale of private debt impact investing, as well as its low volatility, lack of write-offs and diversification possibilities.

The lid has only begun to be lifted on alternative asset-related impact investing. As recently as 2015, the Global Impact Investing Network teamed up with Cambridge Associates to explore the strategy’s role in private equity and real assets.

This year was private debt’s turn as GIIN partnered with investment boutique Symbiotics to produce a comprehensive report, published this week.

Perhaps the most striking data point was that, of the alternative asset classes, private debt plays the biggest role. It accounts for 34 percent of impact investing assets under management, compared with 22 percent for real assets and 19 percent for private equity.

One of the report’s authors, Abhilash Mudaliar, director of research at GIIN, told PDI that helping to fill the information gap should, in itself, attract more interest from LPs as they become more familiar with the market’s characteristics.

Their appetite is likely to be sharpened by some of the report’s key findings. For example, it discovered that the quality of private debt impact investing portfolios is very high. From 2012 to 2016, the five-year period under scrutiny, the portfolios studied had an extremely low write-off ratio of 0.7 percent, demonstrating high loan recovery rates.

They also showed low volatility, with emerging markets-focused private debt impact funds showing a volatility measurement of 0.9 percent versus 7.2 percent for emerging market bonds, the comparator selected by GIIN/Symbiotics. The Sharpe ratio – a way of examining the performance of an investment when adjusting for risk – was better for PDIFs (0.77) than emerging market bonds (0.49).

There is also a wide range of investment options for LPs to choose from, with some funds putting the emphasis on returns as much as social benefits (with PDIFs offering a way to achieve this) while others prioritise the impact element more (the approach taken by US-focused community development loan funds).

For PDIFs, where the return is held to be more important, it’s fair to say the lights have not been exactly shot out. Over five years, the 166 funds that were examined delivered an average return of 2.6 percent versus 5.4 percent for emerging market bonds. But here, as in other areas of private debt investment, manager selection is important – with the top performers capable of delivering 10 percent-plus.

There is little doubt that private debt impact investing is now on the map, with M&G’s foray into the ESG space providing a topical example this week. Mudaliar’s call for more carefully tailored products catering for the needs of particular types of investors indicates that impact investing requires honing and further evolution lies ahead. But, with the sector boasting a compound growth rate of 20 percent over recent years, the demand for more socially responsible forms of investing is clear.

Write to the author at andy.t@peimedia.com