Very Preliminary Impact Investing

We study investments in impact funds, which we define as private equity funds with a stated mandate to fund companies that generate both financial returns and positive externalities. Using data on the capital commitments of 6,000 limited partners (LPs) into 10,000 funds, we examine the effect of impact on LP’s fund choice within a general fund choice model. We focus on how fund choice varies by LP type (e.g., public pensions, foundations, endowments). Generally, prior LP-general partner (GP) relationships and LP-GP proximity are, by far, the most important determinants of LP fund choice. LP demand for impact may show up in tilts toward certain industries or locations. However, like most GP and LP attributes, fund industry and location per se do not materially affect LP fund choice. Controlling for these general determinants of fund choice, being an impact fund has a positive effect on the probability that an LP invests in the fund. The effect is only reliably large for development organizations, public pension funds, and banks. Furthermore, for most LP types, the designation of the LP being a United Nations Principles for Responsible Investment (UN PRI) signatory – a measure of demand for impact by its constituents – fails to predict investment in impact. Our findings shed light on the rich heterogeneity across LP types in the relative importance of various determinants of demand for PE investments in general, and for impact investments in particular.