As evidence mounts that impact investments can generate returns competitive with conventional investment returns, the same is true in the private debt asset class, according to a report released Tuesday by the Global Impact Investing Network and Symbiotics, a market access platform for impact investing.
Private debt or fixed income instruments comprise the largest asset class in impact investing, which pursues positive social and environmental impact goals, accounting for 34% of impact investors’ reported assets under management, a 2017 GIIN survey found.
“This report offers the most definitive evidence for private debt investors still not sure if impact investing is right for them,” GIIN’s CEO, Amit Bouri, said in a statement. “Impact investments in private debt are an attractive option that can yield a stable return and drive capital toward powerful global progress.”
Besides financial performance, the new report examines the investment strategies, fund structures and impact measurement practices of two types of vehicles: 50 private debt impact funds, which primarily invest in emerging markets, and 102 community development loan funds, which exclusively invest in the U.S.
Both PDIFs and CDLFs in the study offered stable returns. Weighted net returns of PDIFs averaged 2.6% per annum since 2012, with the 90th percentile registering 10% returns in 2016.
CDLFs paid an average of 2.9% on their notes, with the 90th percentile registering 3.6% return in 2016.
According to the report, PDIFs had a Sharpe ratio of 0.77, which compares favorably with other traditionally stable asset classes such as bonds or cash. They also offer an uncorrelated asset for portfolio diversification.
The fixed income funds demonstrated very high portfolio quality overall, with average write-off ratios in both sets of funds below 1%.
Characteristics of the Funds
Private debt impact funds in the sample ranged in size from $3 million to more than $1 billion, with a median just below $100 million as of December 2016. Total assets in the sample were $10.6 billion as of December 2016, registering compound annual growth of 15% between 2012 and 2016.
A majority of the PDIF sample focused on the financial services sector, followed by arts and culture, education, energy, and food and agriculture.