Impact investing’s institutionalization gap: legal takeaways on data, scale, and liquidity

Institutional interest in impact investing continues to grow as large investors increasingly seek strategies capable of delivering financial returns and measurable impact outcomes. But the market has yet to reach full institutional maturity. In the January 2026 report by the Institutional Limited Partners Association (ILPA), “Impact Investing: The State of Market Institutionalization”¹ (the ILPA Report), ILPA identifies structural constraints that continue to shape the sector’s development. Among the areas of improvement are persistent gaps in financial and impact data, scale constraints in certain impact sectors, and the absence of a robust secondary market. While these challenges are often discussed from a commercial perspective, they also raise important legal and structuring considerations for fund sponsors and investors.

The following are a few legal and structuring considerations and takeaways from our reading of the ILPA Report.

What you need to know

• ILPA identifies data limitations as a barrier to institutional adoption of impact investing. Governmental programs could boost the investment standards that would need to be developed. To raise further capital, emerging impact managers could look toward the European market or source catalytic capital.
• ILPA also sees a mismatch between institutional capital and the scale of many impact investment opportunities. While some sectors have seen substantial growth in transaction size, others remain characterized by smaller investments and more limited deal flow.
• A further constraint is the limited development of a secondary market. This is not a likely major area of development in the short term.
• In the interim, legal frameworks will remain central. Carefully structured disclosure, reporting obligations, and investment policy provisions can help allocate risk appropriately while supporting the continued maturation of the impact investing ecosystem.

Data deficits and the growing diligence burden on LPs

The ILPA Report identifies data limitations as one of the most significant barriers to further institutional adoption of impact investing.

Financial performance data

The ILPA Report notes that compared with traditional private equity strategies, many impact fund managers are relatively early in their lifecycle and can often be categorized as emerging managers. The industry has also generated fewer exits and distributions, meaning that realized performance data and benchmarking remain limited. For institutional investors—particularly those subject to fiduciary duties—this lack of track record can make allocation decisions more complex. Investors must demonstrate that their investment decisions meet prudent investment standards, even where historical data is scarce. This issue often arises when a new sector arises. Venture capital funds were encountering similar problems 20 years ago. Since then, catalytic governmental programs, such as the Venture Capital Catalyst Initiative (VCCI), allowed strong venture capital to emerge in the Canadian market.

The impact investment world will need a similar boost to follow the same path. While we do see governmental actors providing catalytic capital, we will need greater efforts in that sector in the next decade if we want to build a strong ecosystem of impact managers that will be able to attract larger amounts from private institutional investors. Canadian emerging impact managers should also look toward the European market to raise further capital, as the demand across the ocean in that sector remains strong, while the offering in the United States has decreased in recent years.

In the meantime, the ILPA Report indicates that one consequence for private institutional investors is a heavier due diligence burden. LPs frequently need to rely on proxies (when data is unavailable), qualitative assessments or additional research to evaluate a fund’s strategy, expected financial performance, and ability to achieve impact objectives. These processes can require more time and resources than traditional funds.

Impact measurement and reporting

According to ILPA, impact data presents a different but related challenge. Investors often receive detailed impact metrics from managers, but these metrics may vary widely across funds and sectors, making comparisons difficult.

The industry already has several recognized frameworks intended to bring greater consistency to impact measurement, including IRIS+ developed by the Global Impact Investing Network and the five dimensions of impact framework from the Impact Management Project². Increasing alignment around these types of frameworks may help reduce fragmentation in impact reporting over time, according to the ILPA Report.

From a legal perspective, however, reporting obligations are frequently negotiated through side letters rather than incorporated directly into the LPA. As the market evolves and institutional investors seek greater transparency, sponsors may wish to consider including more detailed impact reporting provisions directly in LPAs. Impact reporting should not be bespoke to certain investors and impact managers should have from the outset a clear strategy as to how they intend to deal with impact goals and metrics. That also means that the manager should have a clear approach as to how they intend to address situations where investments will not achieve the desired goals. Investors will expect managers to be actively using the levers they can control to try to achieve their goals, and to actively engage in discussions with them if they are not able to. All of this should be part of a clear strategy and approach detailed in the marketing documents and to a certain extent in the LPA. Impact managers should not be reactive to investors’ requests in that regard.

The role of catalytic investors

Given the data gaps that characterize the sector, institutional investors often look for additional signals of credibility during the diligence process. One such signal may be the participation of development finance institutions or other providers of catalytic capital.

These investors frequently maintain sophisticated impact frameworks and conduct extensive diligence before committing capital. Their presence in a fund can thus provide reassurance to other institutional investors evaluating the strategy. In many cases, LPs may view the participation of a catalytic investor similarly to the presence of an anchor investor in a traditional fund. While this may be true when it comes to the impact performance of the fund, private investors should not necessarily assume that this will prove true when it comes to financial performance. While these institutions will generally not completely ignore the financial performance of a fund, private investors should be aware that financial performance will often be subordinated to impact goals in level of importance for many of these institutions.

Private institutional investors who invest alongside such catalytic investors must compromise. One notable aspect is that they need to accept that such catalytic investors may benefit from certain governance or consent rights reflecting their role in the fund. Accepting this dynamic may be a practical trade-off for accessing opportunities in the impact investing space³.

Scale constraints and fund structuring considerations

The ILPA Report also highlights the mismatch between institutional capital and the scale of many impact investment opportunities. While certain sectors—particularly climate-related strategies—have seen substantial growth in transaction size, others remain characterized by smaller investments and more limited deal flow. As a result, institutional investors seeking exposure to these sectors may need to accept structural differences compared with traditional private equity funds. These may include smaller commitments per investment, longer investment horizons, and potentially slower exit timelines.

From a legal perspective, these characteristics reinforce the importance of carefully drafted investment policies. Where investment opportunities are limited (for example, in sectors such as financial inclusion or diversity-focused strategies), funds may face greater portfolio concentration risk. Impact managers should be prudent in clearly describing these risks in marketing documents. Clear parameters around diversification and investment strategy can help mitigate this risk while preserving the flexibility needed for the manager to pursue the funds’ impact objectives. Greater flexibility and tolerance may likely be needed in investors accepting to grant the manager such additional flexibility even if that may, to a certain extent, be slightly at the expense of some level of predictability. Requesting consent rights for any deviation from the existing investment parameters may appear as an easy solution, but it will not always be appropriate nor provide a real solution, and its effectiveness will largely depend on the level of consent required and the make-up of the investor base.

Infrastructure gaps and liquidity

Finally, the ILPA Report identifies the limited development of a secondary market as another factor constraining institutional adoption of impact investments. Indeed, in traditional private equity markets, secondaries have evolved into a sophisticated ecosystem that provides liquidity options for investors and facilitates portfolio management. By contrast, the secondary market for impact fund interests remains relatively underdeveloped. While this may change in the future, we do not see this as a likely major area of development in the coming years.

As stated in the ILPA Report, in an environment where private market distributions are already near historic lows, this lack of liquidity infrastructure may reinforce investor caution. Over time, as the impact investing ecosystem grows and fund strategies mature, a more active secondary market may emerge. However, we think that this will take time and that investors should in the coming years expect a lack of liquidity concerning their investments in impact strategies. Until then, these liquidity considerations should influence how transfer provisions and secondary transaction mechanisms are structured in fund documentation.

Looking ahead

Impact investing is clearly moving toward greater institutional participation; however, the structural constraints identified by ILPA—including limited performance data, scale challenges, and gaps in liquidity infrastructure—continue to shape the market. In the interim, legal frameworks (i.e., LPAs, side letters and managers’ policies) will remain central to addressing these uncertainties. Carefully structured disclosure, reporting obligations, and investment policy provisions can help allocate risk appropriately while supporting the continued maturation of the impact investing ecosystem.