“Market Rate Returns: the ultimate red herring…”

(Note: I’m sitting on yet another plane, this one bound for Newark. It is amazing how frequently I find myself writing blogs on a plane. Perhaps it is the last refuge from the always-on/always-demanding flow of e-communication, and thus it offers the rare chance to just sit and think? Of course, it is soon to be despoiled by the expectation that when flying, one will connect to the plane’s WiFi. At least plausible deniability will be in effect for a few more months.

The bonus is that I was trolling my folder of orphaned blogs and stumbled upon the one pasted below. A timely discovery for several reasons. First, we just completed a detailed since-inception performance review for one of our most important impact clients (disappointing, for many reasons, none of which relate to impact), which has me thinking, hard, about performance. And second, I’ve recently enjoyed a trio of conversations on the subject of “market” vs. “concessionary” returns, with: Cranemere’s always insightful and experienced Diana Propper; The MacArthur Foundation’s impatiently savvy Debra Schwartz; and F.B. Heron’s provocateur-in-residence Clara Miller. Have I told you recently how much I love my job?

What did all three conversations have in common? Financial performance and the intersection thereof with impact performance. Fascinating, I assure you. While the scope of this blog does not permit deep analysis, and while I am operating under the presumption of Chatham House Rule (so I can’t share who said what)… well, I guess I just feel this blog deserves to see the light of day.)



It is Sunday morning, July 5th. Last night’s fireworks are still banging away in my head, the consequences of a few too many beers. Which, for me, is the grand total of two. So I’ve sipped two cups of coffee with my customary Sunday croissant, a remarkable amount of caffeine for me. “Lookin’ good, Lewis.”

The subject at hand is financial return. More specifically, the returns that one might reasonably expect to receive if one were to deploy one’s capital with an impact orientation. We’ve written extensively about the importance of financial return in the impact discipline, most recently here and here, so we won’t re-tread our opinion.

What caught our attention last week was the much-ballyhooed research-cum-marketing press release that our friends at Cambridge Associates released. Never mind that the application of the word “index” in this context is hugely misleading, creating the impression that impact investing is some sort of homogenized data set that can be “invested”, like public equities. Seriously, guys, you have done useful and important work, but just call it “research” and stop trying to brand the effort. If you feel inclined, you can read the whole report here, or a high-level summary from the WSJ here.

Primary take-away (which should be no surprise to anyone who has been active in the discipline for more than a few months): there is no required return concession to invest with impact, but you have to invest well, as there is the potential for underperformance.


The more I think about it, the more frustrated I become that this is even still an issue. Or, rather, that this issue continues to attract the kind of relentless attention that it does. Just a few days ago I was prepped for an interview on Bloomberg Radio and the first question asked: “So, you’re an impact investor. What about the fact that you have to give up return to pursue impact?” Argh.

We all spend an enormous amount of time defending impact investing. And the attacks/questions/challenges against which we most commonly defend almost always orbit the question of financial return. And I get it, I really do. “Investing” implies some expectation of a positive financial return… but impact investors are not immune to this logic.

The whole line of inquiry is a red herring of the highest order.

A thought exercise:

Imagine if the world of conventional investing debated whether or not it made sense to deploy capital because of the potential for below-market returns. After all, it is axiomatic that half of all public equity managers will earn returns that are below the average. And we can talk about “top quartile performance” (as the team at CA does) only because fully 75% of all managers underperform that mark. And in esoteric asset classes like hedge funds, venture or private equity and private debt, while the quartile math still holds, the performance dispersion is massive. The top performers absolutely crush the bottom performers. And yet people continue to willingly allocate capital to all sorts of strategies, despite having no assurances that their capital will perform “above market”.

I mean, think about it for a minute. Despite all the brain-power, all the research, all the very damn thoughtful and patient and analytical behavior around conventional investing, there is… wait for it… no guarantee of return. People lose money. Some investments don’t perform as expected. There is a Gaussian distribution of talent in the capital markets, just as there is in the rest of the world. Surprise!

I’ve written this before, and I’ll surely write it again, but…

There are innumerable ways to lose money when investing. The future is unknown. Markets are fickle. Animal spirits can run amok. Disappointments are legion. But we don’t know any other way to fund the innovations that serve as the foundation for progress, for change, for creating opportunity. Yes, the markets can be a brutal place to thesis-validate, for they can be merciless when one is wrong.

But, and I know how trite this sounds, the power of the capital markets to optimize for a given set of objectives is without equal in the world; Capitalism is the most powerful change-agent known to man. If we accept prima facie that the capital markets are astonishingly good at identifying, surfacing and scaling solutions – as well as making sure that we can all surf potential hookups with a swipe of our finger – then why would we not presume that some impact funds will be wildly successful, just as some will be equally disappointing? After all, that is the fundamental reality of ALL investing.

And, just to point out the glaringly obvious, impact investing is not philanthropy. It is investing. Only those seeking positive financial return need apply.

Your occasionally-irascible scribe,