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  • STEVEN PRESENTS Intro Mike and Steven Intro Peter Kennedy, point him out in the room. Peter J. Kennedy , Founding Partner . Peter has over 18 years of industry and investing experience. He spent nine years at Morgan Stanley in New York and London researching and evaluating early-stage technology and telecommunications companies. At Morgan Stanley, Peter brought 11 initial public offerings ("IPOs") to market in the amount of over $1 billion and was a top Institutional Investor ranked equity analyst. Beyond his public market research, he was requested and retained by many of the larger private equity firms to evaluate new investments and restructuring opportunities. Peter has focused exclusively on the medical device and elder care markets since 2002 and is an active investor and advisor in the industry. He has been retained as an advisor to Perennial Health Care, a $50 million elder care company, and holds a board seat at Magic Wheels, a start-up medical device company. Peter also has substantial experience evaluating and structuring domestic and international investments. Before entering the financial services sector, Peter managed new business development for NYNEX International and directed over $300 million of investment into new Asian and European businesses. These investments were up over 300% when Peter left NYNEX to join Morgan Stanley. He was also involved in the early stages of the cellular industry, where he developed internal business management systems. Fulcrum management believes it can draw upon Peter's strong analytical and investment experience to select the most attractive opportunities and management teams. The Firm expects to capitalize on Peter's solid banking and private equity relationships to facilitate investment exit strategies, as well as his proven ability to quickly cultivate relationships that effectively generate quality deal flow. Peter is a member of Social Investor Network, Net Impact and is an advisor to Ashoka's planned social investment bank, based in California.
  • STEVEN PRESENTS
  • MIKE PRESENTS
  • MIKE PRESENTS TITLE: “Double bottom line, social venture capital, community development venture capital, blended value investing” are all labels that get thrown around to define the market. They all describe a manner of investing that looks beyond the financial and incorporates other social or environmental impacts… 1) Tie to CSR strategies that we’ve discussed in class…stick to core competency. Core competency of investment managers has always been very simple – strategies to make the most $$$ possible for investors 1a) Howevr, similar to what we’ve heard about consumers wanting to “shop” their value, there is also evidence that they would like to invest their values 1b)As we heard from Lloyd Kurtz, this movement has a long history in the public markets (1 in 10 dollar) 2a)However, our research indicates it is only just beginning to penetrate the private markets – of the $2.6 billion mentioned compare that to the $101 billion that was raised by the top 10 funds alone in 2006…clearly a long way to go. 2b) In our research and conversations, private equity has potential in this market – since the owners of private companies are investors, the shareholder/manager issue that faces many public companies and is the man basis for anti-CSR arguments does not have a basis. Owners=managers, which means they can operate their business according to what suits them. Sources: 1b) Nelson Capital website 2a)RISE report, Columbia University under management in the private equity double bottom line sector.
  • MIKE PRESENTS As investment managers have tried to respond to the desire for socially responsible investing, they’ve faced the challenge to have their social investment criteria/measures match up to the financial criteria and measures that have defined the industry 1a) historically – i.e. how well they track an index, the return on investment they provide 1b) If social criteria will be a major part of their investment thesis, then they need to have a similarly rigorous method to make investment decisions and track performance Thus was born the social impact assessment. Our research shows that this was originally born of the cost/benefit impact analysis that ws performed to receive federal funding as early as the 1970s/ In the double bottom line world, it is shocking the number of times we heard reference to “the holy grail” Soo….
  • MIKE PRESENTS We embarked upon our Quest…. We spoke to a number of contacts in the industry, and heard a variety of suggestions…what follows is a summary of what is being done for SIA in the industry…
  • MIKE PRESENTS TITLE: One of the most widely discussed is the Social return on Investment…this is where you assign values to social impact of your investment/company, and calculate….the NPV of social impact. Sub-title: Folks who participated in or are aware of the Global Social Venture Competition will be aware of this…it is a requirement for all entering teams to calculate their social impact based on this method Explain: use the bullets WHO?: Big proponents – SVT Consulting, REDF, some of the more foundation-type or non-profit folks…for the most part people who are not focused on achieving market rates of return Go through Pros/Cons Assumptions make the calcuation questionable
  • MIKE PRESENTS Sub-title: More of a relative scale, not focused on using $$$ to measure Explain: Who uses?: This is more something that the public SRI funds are interested in…reason is that they measure companies relative to their peers, and invest in companies that “outperform” on a social basis. Interesting insight from Lloyd Kurtz – even in the social field, it is unusual to find a Company that consistently outperforms the average for prolonged periods of time. (Starbucks leading edge, then falters…Walmart seen very negatively, then improves…Nike similarly) Pros/Cons
  • STEVEN PRESENTS Another option is to compare Fulcrum Funds to other funds Use both Stakeholder AND Social Return on Investment Has appeal but also has challenges
  • STEVEN PRESENTS Create a hybrid that incorporates all this information Company by company basis Show where a Fulcrum Funds company is relative to competitors
  • MIKE PRESENTS TITLE: As we concluded our research of the industry, there were several key insights that we felt were critical for Fulcrum to reflect on; 1: Identifying specific goals for social impact was critical in the private markets – it is not possible, credible or valuable to try to measure and quantify ALL things 2: Compare to what would have happened otherwise (with no entrants) or if another competitor operated in these markets 3: People had mixed reviews about the value of an absolute dollar or % value for social return…if only b/c an industry standard has not been developed and accepted by all parties
  • STEVEN PRESENTS Take what we learned and make it work for Fulcrum. $$$ value is important to them. Have to narrow the universe of impact.
  • MIKE PRESENTS 1) a-c: need to explain at a high level. 2 – For example, one of the key elements/differentiators that Fulcrum is considering for the “Community” impact is donating a portion of the carry earned by portfolio companies…a way for the Fund itself to give back. Other ideas that Steven and I had were potentially purchasing carbon offsets for airline trips undertaken for fund business…on the “product” perspective, perhaps holding a portion of the Fund available for investment to rural investors who might not typically qualify ****the Fund itself will also be measured on the multiple dimensions
  • STEVEN PRESENTS How do you track progress on broad goals? Look for specific indicators that can be measured Find things that have $$$ values or $$$ proxies The fire might be hard to see but the smoke is obvious. You can tell how big the fire is by how much smoke it is generating.
  • STEVEN PRESENTS Metrics that we believe capture the value created on the way to Fulcrum’s larger goals.
  • STEVEN PRESENTS Now that we have detailed metrics, want to apply them to businesses that look like Fulcrum investment opportunities Take the metrics for a test drive Using rural/underserved healthcare as the example for a deep dive on access and environmental metrics
  • MIKE TO PRESENT
  • STEVEN PRESENTS How to apply the metrics, using carbon reduction at a rural health clinic. Setting Carbon emission reduction value Using market for offsets as proxy for social value This is what people are willing to pay right now Problems- lots of disparity in price, unclear if this is a true market Early, speculative Marketing impacts price Doing the analysis Have to get information from company about what they are planning to do. Apply social value to their planned outcomes to find social return. Calculation Assuming that they are moving from a normal full sized car to a super efficent car Rural driving might not see results this good because it is highway driving Other options for adding social value here could be bio-fuels
  • MIKE PRESENTS
  • MIKE PRESENTS Discuss that our work is a preliminary step – identifying the key areas to focus on is key, but need to continue to refine specific metrics
  • STEVEN PRESENTS There is huge potential and huge challenge in this area. This is the holy grail, that people are searching for Different ways to think about it All the ripples BUT what if you are trying to measure the ripples on the face of a wave? This is just a start Wave v. ripple- wave is both more powerful and much harder to understand
  • MIKE PRESENTS
  • STEVEN PRESENTS
  • MIKE PRESENTS Phase 1: Interviews and research on what is being done by other firms Phase 2: With better understanding of what competitors are doing, figure out what makes the most sense for Fulcrum Phase 3, which is ongoing: Analyze and apply the results of our work to a current Fulcrum portfolio company to understand their impact

Slide 1 Slide 1 Presentation Transcript

  • Fulcrum Funds, LLC Social Impact Assessment Peter Kennedy, Founding Partner Final Presentation Steven Aronowitz, JD ‘08 Michael Pearce, MBA ‘08 May 2, 2007
  • Agenda
    • Overview
      • Project Scope
      • Background on the industry
    • Social Impact Assessment Options
    • Applying to Fulcrum Funds
      • Metrics
      • Illustrative example
    • Implementation and Conclusions
  • Project Overview
    • Client: Fulcrum Funds, LLC
      • Targeted $100m private equity fund focused on investments primarily in the healthcare industry
      • Currently fundraising – seeking to offer potential investors both financial and social return
    • Scope:
      • Refine methodology and criteria to measure and report on social impact of portfolio companies
  • Blended value investment
    • CSR of the investment management sector
      • Investors increasingly want to invest their values – potential strategic differentiator for managers
      • One in ten investment dollars in the US is managed in accordance with some type of social criteria (Social Investment Forum)
    • Private equity relatively uncharted territory
      • At least 59 funds with assets over $2.6 billion (RISE project)
      • Arguably a better vehicle for blended value investment since public company issues are removed
  • Social Impact Assessment
    • Investment managers historically judged only financial performance
      • How well they track an index, what return they provide
      • If they are going to have social investment criteria as part of their mandate, it needs to be done in a systematic manner
    • Desire to quantify social impact
      • Huge challenge defining standards
    You’re looking for the Holy Grail!!!
  • The Quest for the Holy Grail
  • SIA Industry Example
    • Calculate an absolute dollar value of social return on investment
      • Select specific criteria to examine
        • Company by company basis (specific product impact)
        • General metrics (environment, job creation, average wage, etc.)
      • Investment decisions based on social projections
        • Able to monitor social performance versus projections
    • Advantages
      • Provides absolute numerical value
      • Removes ambiguity
    • Disadvantages
      • Doesn’t have impact relative to similar companies
      • Many assumptions required to make calculation
    Social Return on Investment
  • SIA Industry Example
    • Analysis based on demonstrating relatively strong performance
      • Criteria :
        • Standardize categories of comparison and apply to all companies within a sector
      • Maintain baseline industry standards to measure against
    • Advantages
      • Standardizes for all portfolio companies
      • Demonstrates best-in-class versus individual performance
    • Disadvantages
      • Does not have absolute dollar value
      • Perhaps less relevant for projected social impact
    Relative Analysis: Stakeholder Quotient
  • SIA Industry Example
    • Compare Fulcrum Funds to other similar funds
      • Criteria :
        • Stakeholder Quotient and/or
        • Social Return on Investment
      • Compare with healthcare sector funds
    • Advantages
      • Apples to apples
      • Speaks directly to investor choices
    • Disadvantages
      • Difficult to get data from other funds
      • Calculation may be arbitrary
    Fund Scorecard
  • Possible Hybrid Model
    • To combine the advantages of both the absolute dollar value (SROI) and relative scorecard (SQ), calculate both
    Fulcrum Funds Average Medical Device Fund – Average of rest of industry $.6M $.9M $1.2M SROI 62 74 90 SQ Classic Wheels Hot Wheels Magic Wheels Company
  • Key Insights from Industry Research
    • Identifying specific 2 nd bottom line goals is most important initial step
      • PCV is focused on three specific criteria: capital to underserved geographies, jobs creation and minority/women-led businesses
      • CalPERS California Initiative Program has the specific goal of investing in California’s underserved areas
    • Analysis that shows social impact relative to industry norms and baseline metrics has the most credibility
      • Demonstrating why a portfolio company has superior social potential relative to peers, not in absolute terms
      • However, sourcing data about private comparables to do a relative analysis will be a challenge
    • Quantifying social impact received mixed reviews in terms of value and ability to measure
      • Absolute dollar value versus “score”
  • Linking Insights to Fulcrum’s Priorities
    • Fulcrum’s priority is to quantify impact in terms of dollars
      • Need to communicate with investors
      • Looking for corresponding value to financial return
      • Strong preference for quantitative data
    • Impact on what? Utilize first insight and identify Fulcrum’s values
      • Create strategic focus on existing core competency or develop a competency
      • Trade offs between impact goals requires clear priorities
      • Universe of potential impact is so broad it is difficult to measure
    Sara Olson, SVT Group “ You have to measure what is important to your client, any metric must have meaning for them.” Brian Dunn, Aquillian Investments “ We have to choose between solar panel companies focused on fair labor standards or focused on toxics recycling. Both are important goals but which matters most to us now?”
  • Fulcrum’s Social Impact Focus
    • Fulcrum Fund has identified three main areas to focus the Social Impact of portfolio companies
      • Product – the impact product / service
      • Environmental – sustainable operations
      • Community – employee practices,
      • donations, etc.
  • Measuring Impact on Fulcrum’s Focus
    • Identifying expected results from reaching general goals
      • Indicators of success
      • Measurable outcomes
      • Baseline comparisons
    • Deciding on specific metrics
      • Assigning dollar value to each outcome
      • Incorporate Fulcrum’s existing portfolio metrics
      • Linking to established and accepted measurements
    “ Where there’s smoke, there’s fire.”
  • Detailed Metrics
    • Product Impacts
      • Social value of access to care in previously underserved areas
        • Value of one additional Dr. visit per year
        • Value of availability of medical consultation
        • Value of hospital care being closer (a $ per mile closer calculation)
        • Value of primary physician being closer ($ per mile or $ per increased visit)
        • Value of reducing costs to Medicare
        • Value of in home care v. hospital care
      • Social value of product impact
        • Increased mobility
        • Social value of longer life
        • Social value of higher quality life
        • Novel products that are increasing quality of life, but also lowering costs short term and long term
      • Social value created by product after patent period ends – option value potential
    • Environmental Impacts
      • Reduction in carbon footprint
        • Use of environmentally sound transportation
      • Increase in recycling/reduction in waste
      • Sustainability of facilities construction and renovation
      • Smart growth land use or redevelopment (infill)
    • Community Impacts
      • Under employed population employees
        • Higher quality jobs/higher wages/better benefits than traditionally available
      • Charitable/in-kind donations
        • Company by company
      • Support for local civic activities
  • Fulcrum’s Metrics in Action
    • Rural Healthcare Facility providing
      • 5 new physicians; 10 new nurses
      • Population of 25,000 within service area
        • Within 75 mile radius from facility
      • Provides general family practice, emergency
      • care, in-home nursing care
      • $5,000,000 required investment
    • SIA Components
      • Product: Improved access to healthcare
      • Environmental: Better practices for travel
      • Community: Contribution to local economy
    Fulcrum Hypothetical Investment – Rural Healthcare Facility
  • Product Metrics – Rural Healthcare
    • Public Health Service classifies counties as primary care shortage areas if they have more than 3,000 persons per physician
    • Nationally, residents of the most rural counties have the:
      • Highest death rates for children and young adults
      • Highest mortality from ischemic heart disease and suicide
      • Higher percents of adults with chronic health conditions
      • Highest obesity rates
      • Lowest Physician rates
  • Environmental Metrics
    • Carbon emission reduction value - $7.75 per ton
      • Market price from range of carbon offset prices
    • Asses Clinic Carbon Footprint
      • Clinic Emissions
        • Energy, supplies, shipping, labs
      • Home visits by caregivers
      • Employee commute
    • Identify carbon reduction areas
      • High gas mileage vehicles for home visit staff
      • Energy efficient appliances and lighting
      • Paperless filing systems
    • Compare reduced emission rate with previous or standard carbon output and calculate value of carbon saved
  • Community Metrics
    • Rural physicians are key young professionals
      • Various studies to analyze the economic impact of additional doctors in a rural community
        • Additional jobs created
        • Economic multiplier effect of doctor/nurses salaries
  • Total SROI of Investment
    • Combine the various impacts
    • Calculate total return on investment for defensible period
      • $$$ value
      • SROI
  • Implementation Guidelines
    • Focus on refining metrics
      • Envision a “desired state,” and work backward to find the statistics that will support that goal
    • Constantly monitor and update
      • Unlike financial ROI, SIA will and should continue to evolve
    • Participate in industry consensus building
      • SVT open source database of criteria being built
    • 3 rd party auditor to validate the calculated social impact
      • Especially given the lack of transparency of the private equity market
      • Including direct conversations with portfolio companies
    • Powerful tool
      • Absolute value
      • Accurate cost benefit analysis
      • Accountability
    • Difficult to implement
      • Endlessly spreading ripples
      • Separating impact from turbulence
      • Non-dollar impacts
    • One step at a time
      • Many people are working on the problem
      • Creating database of metrics
      • This is the start
    Conclusion - Measuring Social Impact in $$$
  • Value Added to Client
    • Understanding of Competitive Landscape
      • Difficult to approach potential competitors on what might be considered a differentiating competency
    • Expert insight
      • SIA structure best suited given Fulcrum’s goals
    • New SIA in practice
      • Verifiable data to apply to portfolio companies immediately
    • New contacts
      • Like-minded professionals with a vested interest in seeing Fulcrum succeed
  • Value to Students
    • Understanding SIA field
      • Speaking with giants in the industry
      • Learning about the many models for measuring
      • Important and growing area of investing
    • Exploring early dollar valuation of SROI
      • See how knowledge builds over time
      • Joining debate over why and how to value
      • Working to establishing standards
    • Mike got an internship!!!
    “ Just another brick in the wall.”
  • Questions???
  • Appendix Project Scope - Detail Contacts Resources
  • Scope of Project / Timeline
    • The Project was divided into three phases
      • Phase 1: Survey industry trends and standards for SIA
      • Phase 2: Identify key metrics and refine existing SIA
      • Phase 3: Analyze results of new SIA with applied to current portfolio company
  • Project Scope - Detail
    • Stage 1: Research and analysis of Fulcrum’s current evaluation system.
      • Step by step breakdown of Fulcrum’s screening and forecasting system.
      • Comparison of Fulcrum to industry best practices.
      • Analyze specific key metrics that are used by social investors industry-wide
      • Analysis of purpose and effectiveness of Fulcrum’s evaluation.
      • Identify specific key metrics that are applicable to Fulcrum’s industry focus (e.g. rural or low income healthcare, clean tech)
    • Stage2: Suggestions for improvements.
      • Identify key areas of improvement for evaluation system in methodology and specific criteria.
      • Suggest modifications to improve Fulcrum’s social measurement accuracy and efficacy for specific criteria
      • Develop a methodology to approach social impact assessment that can be applied broadly
    • Stage 3: Application to an existing or potential Fulcrum investment
      • Apply improved Fulcrum social evaluation to an investment.
      • Compare improved results with results from prior Fulcrum evaluation system.
      • Analyze the impact of improvements.
      • Confirm applicability of evaluation to calculate a total social impact value for Fulcrum’s fund
    • Additional:
      • Consider organizations best suited to developing and maintaining industry-wide social impact measures
  • Contacts
    • Individual Interviews
      • Brian Dunn, Aquillian Investments
      • Lloyd Kurtz, Nelson Capital Management
      • Yvonne Lu, Long Life Clinic Network
      • Sarah Olsen, SVT Group
      • Jason Oppenheimer, Pax Water
      • Beth Sirull, et al., Pacific Community Ventures
      • Pierre Trevet, Innovest
    • Other firms – various individuals
      • Acumen Fund
      • Bay Area Equity Fund
      • Good Capital
      • REDF
  • Key Resources
    • GSVC website: http://socialvc.net/index.cfm?fuseaction=Page.viewPage&pageId=58
    • RISE Project: http://www.riseproject.org/
    • UNC: http://www.ccc.unc.edu/documents/cccDoubleBottomLine.ppt
    • REDF: http://www.redf.org/resources-general.htm#sroi