It also offers a glimpse into the mindset of a new generation of business owners and its approach to investing sustainably and building an enduring legacy. However, the move has been met with mixed reviews. Some journalists question impact investing – the social benefits it offers and its investment potential.
We think this skepticism is unfounded. The view that a good impact investment has to be a bad investment is erroneous. Impact investments first and foremost must be fundamentally sound. They typically build on megatrends, capitalizing on market anomalies and translating them into commercial opportunities. Additionally, impact investors often operate in undervalued markets whose risk the global investment community overestimates or whose growth potential it underestimates.
The scarcity of capital in these markets enables impact investors to generate high risk-adjusted returns while simultaneously making a “double-bottom-line” contribution to a country’s development. These ideas are reflected in recent Cambridge Associates and Wharton School studies. Both conclude that impact private equity performs on par with conventional private equity funds. For funds analyzed with vintage years 1998-2010, the impact investment fund universe returned 8.1%, beating the conventional fund benchmark of 6.9%.
To be fair, not all impact investments have been successful. Microfinance, for example, has failed to live up to expectations. UBS’s view on microfinance has been consistently cautious due to: 1) the limited capacity – and number – of best-in-class local microfinance institutions; and 2) the fact that it is often limited to marginally improving lives in low-income communities and cannot systematically reduce the excessive reliance of the people in these communities on jobs in the informal economy.
However, we see promising opportunities across many underfunded yet profitable investment areas. They range from affordable housing and sustainable consumption to infrastructure and disease research. Specifically, healthcare can have a powerful societal impact while offering high returns: cutting-edge oncology research can advance cancer treatment for developing and developed world markets alike, while achieving traditional venture capital returns.
Additionally, social impact bonds can help prevent certain health-related risks for people who suffer from diabetes and other diseases, and offer returns above fixed income market rates based on patient success rates. While impact investing has come under the media spotlight in recent weeks, we see it as an increasing area of focus and opportunity for UBS.
We look forward to updating you with additional views and investment themes on this topic, which occupies a growing role in our research as it begins to feature in the mindset of the next generation of investors.
Andreas Ernst and Juliette Vartikar
Global Investment Office
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