At the Frontier of Sustainable Finance: Impact Investing and the Financial Tradeoff, Evidence from Private Portfolio Companies in the United Kingdom

ABSTRACT

Drawing from the extremely novel impact investing landscape and the limited existing literature on the topic, it appears that investing in social enterprises should come at the cost of partially sacrificing financial returns to invested capital. This paper investigates the existence of this tradeoff by assessing how the performance of impact investing funds compares to that of traditional private equity and venture capital operators. Focusing on portfolio firm operating performance, we construct a dataset of 85 impact-investing observations and 5310 traditional observations over the period ranging from 2009 to 2020, in order to compare the performance of the traditional investor-backed firms with those of sustainable companies participated by social impact investors. Advanced matching methods such as Radius and Kernel matching suggest that the composition of the shareholding structure significantly affects the profitability of the company, with traditional firms outperforming their socially-concerned counterparts. Looking instead within the subsample of impact investor portfolio companies, and focusing only on the post-investment observations, we analyze how the percentage owned by the impact investors impacts the performance of the owned companies. The results show that, similarly to traditional ownership, a greater share controlled by impact investors leads to higher returns.