Your SlideShare is downloading. ×
0
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report

1,601

Published on

Nick O’Donohoe, former Global Head of Research at JP Morgan, author of their report on Impact Investments presented a summary of the report's findings, specifically how impact investing is emerging as …

Nick O’Donohoe, former Global Head of Research at JP Morgan, author of their report on Impact Investments presented a summary of the report's findings, specifically how impact investing is emerging as an asset class.

Be sure to check out the other presentations, videos and audio recordings from the conference at www.tbnetwork.org/uknc11/media

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,601
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. December 2010 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S S T R I C T L Y   P R I V A T E   A N D   C O N F I D E N T I A L Nick O’Donohoe Antony Bugg-Levine Amit Bouri
  • 2. Our research report covers six major questions <ul><ul><li>What defines and differentiates impact investments? </li></ul></ul><ul><ul><li>Who is involved and how do they allocate capital? </li></ul></ul><ul><ul><li>What makes impact investments an emerging asset class? </li></ul></ul><ul><ul><li>How much financial return are investors expecting and realizing? </li></ul></ul><ul><ul><li>How large is the potential opportunity for investments in this market? </li></ul></ul><ul><ul><li>What does risk management and social impact measurement involve? </li></ul></ul>1 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 3. What defines and differentiates impact investments? <ul><li>Basic needs </li></ul><ul><ul><li>Agriculture </li></ul></ul><ul><ul><li>Water </li></ul></ul><ul><ul><li>Housing </li></ul></ul><ul><li>Basic services </li></ul><ul><ul><li>Education </li></ul></ul><ul><ul><li>Health </li></ul></ul><ul><ul><li>Energy </li></ul></ul><ul><ul><li>Financial services </li></ul></ul><ul><li>Process </li></ul><ul><ul><li>Job creation </li></ul></ul><ul><ul><li>Energy efficiency </li></ul></ul><ul><ul><li>Facilitating asset accumulation </li></ul></ul><ul><ul><li>Utilizing BOP+ suppliers </li></ul></ul><ul><li>Products for BoP+ </li></ul><ul><ul><li>Agriculture </li></ul></ul><ul><ul><li>Water </li></ul></ul><ul><ul><li>Housing </li></ul></ul><ul><ul><li>Education </li></ul></ul><ul><ul><li>Health </li></ul></ul><ul><ul><li>Energy </li></ul></ul><ul><ul><li>Financial services </li></ul></ul>Impact investing: Our definition Two-dimensional framework 2 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S Investments intended to create positive social impact beyond financial return <ul><li>Provide capital </li></ul><ul><ul><li>Transactions currently tend to be private debt or equity investments </li></ul></ul><ul><ul><li>We expect more publicly traded investment opportunities will emerge as the market matures </li></ul></ul><ul><li>… to generate positive social and/or environmental impact </li></ul><ul><ul><li>Positive social and/or environmental impact should be part of the stated business strategy and should be measured as part of the success of the investment </li></ul></ul><ul><li>Expect financial returns </li></ul><ul><ul><li>The investment should be expected to return at least nominal principal </li></ul></ul><ul><ul><ul><li>Donations are excluded </li></ul></ul></ul><ul><ul><ul><li>Market-rate or market-beating returns are within scope </li></ul></ul></ul><ul><li>Business designed with intent … </li></ul><ul><ul><li>The business (fund manager or company) into which the investment is made should be designed with intent to make a positive impact </li></ul></ul><ul><ul><li>This differentiates impact investments from investments that have unintentional positive social or environmental consequences </li></ul></ul>Business sectors for impact investing Means of impact
  • 4. Who is involved and how do they allocate capital? Investors: Market participant examples <ul><ul><li>IFC </li></ul></ul><ul><ul><li>EBRD </li></ul></ul><ul><ul><li>OPIC </li></ul></ul><ul><ul><li>Etc. </li></ul></ul>Development finance institutions Corporates & HNWIs Pension fund managers Financial institutions Private foundations <ul><ul><li>Gates </li></ul></ul><ul><ul><li>Omidyar Network </li></ul></ul><ul><ul><li>Rockefeller </li></ul></ul><ul><ul><li>Esmée Fairbairn </li></ul></ul><ul><ul><li>Sainsbury </li></ul></ul><ul><ul><li>Etc. </li></ul></ul><ul><ul><li>J.P. Morgan </li></ul></ul><ul><ul><li>Citibank </li></ul></ul><ul><ul><li>Prudential (US) </li></ul></ul><ul><ul><li>Deutsche Bank </li></ul></ul><ul><ul><li>Storebrand </li></ul></ul><ul><ul><li>Etc. </li></ul></ul><ul><ul><li>TIAA-CREF </li></ul></ul><ul><ul><li>PGGM </li></ul></ul><ul><ul><li>Etc. </li></ul></ul><ul><ul><li>Starbucks </li></ul></ul><ul><ul><li>Danone </li></ul></ul><ul><ul><li>Etc. </li></ul></ul>3 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 5. What makes impact investments an emerging asset class? <ul><ul><li>CFA definition: </li></ul></ul><ul><ul><li>Homogenous </li></ul></ul><ul><ul><li>Mutually exclusive </li></ul></ul><ul><ul><li>Diversifying </li></ul></ul><ul><ul><li>Liquid </li></ul></ul><ul><ul><li>Our definition: </li></ul></ul><ul><ul><li>Unique set of investment and risk management skills </li></ul></ul><ul><ul><li>Organizational structures established to accommodate this skillset </li></ul></ul><ul><ul><li>Industry organizations, associations, education </li></ul></ul><ul><ul><li>Development of standardized metrics, benchmarks, ratings </li></ul></ul>An emerging asset class 4 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 6. How much financial return are investors expecting and realizing? (1 of 4) Instrument distribution Sector distribution Geographic distribution Source: GIIN, J.P. Morgan. Source: GIIN, J.P. Morgan. Source: GIIN, J.P. Morgan. * ”Other” includes community development finance. Survey sample <ul><ul><li>GIIN </li></ul></ul>Financial returns survey: Methodology <ul><ul><li>Investors’ Council </li></ul></ul><ul><ul><li>1,105 investments </li></ul></ul><ul><ul><li>24 respondents </li></ul></ul>5 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 7. How much financial return are investors expecting and realizing? (2 of 4) Return expectations vs. benchmarks: Average return expectations by instrument and region Source: GIIN, J.P. Morgan. Horizontal bars: Average realized returns for benchmark and average expected returns for impact investments, gross annual IRR or yield, in USD. Vertical lines: Range of expected returns reported, gross annual IRR or yield, in USD. Note: Benchmark returns are average annual returns for: J.P. Morgan’s Developed Markets High Yield index and Corporate Emerging Market Bond (“CEMBI”) Index, over the period 2002 – 2010 (our full data history); and Cambridge Associates US Venture Capital Index and Emerging Markets Venture Capital and Private Equity Index, for vintage years over the period 1989 – 2006. Impact investment return expectations are calculated by taking an average of survey responses (each of which represents a range of expected returns for a given investment instrument in a specified region) across the population of reported investments. The number of investors who responded for each instrument, and the number of investments in the sample (respectively) are: Dev mkt HY debt = 9, 219; EM HY debt = 10, 411; Dev mkt venture capital = 6, 91; EM venture capital = 15, 119. Readers should note the low number of Dev mkt venture capital investors represented. Note that the range of expected returns for developed market debt excludes a single investment reported by one respondent with an expected range of returns of 20-25%; all other data points fall within the range shown. Both the developed market and emerging market venture capital ranges include investments with expectations of 25%+ return (the range was not specified above that level). Developed market high yield corporate debt Emerging markets corporate debt Developed market venture capital Emerging market venture capital Benchmark 11% Impact 0-5% Benchmark 9% Impact 8-12% Benchmark 28% Impact 15-20% Benchmark 10% Impact 12-15% <ul><ul><li>Return expectations vary substantially, from competitive to concessionary </li></ul></ul><ul><ul><li>Average expectations for EM debt and equity impact investments appear competitive against traditional benchmarks while expectations for DM debt and equity suggest some trade-off </li></ul></ul><ul><ul><li>But these results depend on our choice of benchmarks (next slide) </li></ul></ul>6 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 8. How much financial return are investors expecting and realizing? (3 of 4) Venture capital annualized returns in developed and emerging markets Source: Cambridge Associates <ul><ul><li>Benchmarking performance is always challenging, even more so when benchmarking return expectations against realized returns </li></ul></ul><ul><ul><li>For debt, we chose the US High Yield and Corporate Emerging markets indices over the period 2002-2010 (our full data history) </li></ul></ul><ul><ul><li>For equity, recognizing the early stage nature of many impact investments, we selected the Cambridge Associates US Venture Capital Index and Emerging Markets VC/PE Index for vintage years 1989-2006 </li></ul></ul><ul><ul><li>The choice of time frame of vintage years has significant impact on the benchmarks: if we look only at vintage years post-dot com bubble (1999 -2006 vintages) the return for US VC is only 0.2% and for EM VC/PE over 14% </li></ul></ul><ul><ul><li>Additional five and ten-year VC returns are provided below </li></ul></ul><ul><ul><li>If we choose to benchmark equity return expectations instead against what we believe new managers target (net 15-20%), then impact investors’ expectations on DM equity appear competitive and EM equity concessionary </li></ul></ul>A note on our choice of benchmarks 7 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 9. How much financial return are investors expecting and realizing? (4 of 4) Respondents’ impact measurement system <ul><ul><li>Investment sizes remain small making costs high </li></ul></ul>Source: GIIN, J.P. Morgan. Number of deals per bucket; bucket sizes shown in USD mm. Investment sizes reported in USD as at time of investment. Distribution of reported investments by size Carry fees Source: GIIN, J.P. Morgan. Represents 374 investments ($582m of notional value). Source: GIIN, J.P. Morgan. Carry defined as % of fund's return retained by general partners. Represents 233 investments ($254m of notional value). <ul><ul><li>While investment sizes remain small, and costs are high, funds’ fees do not appear significantly higher than for traditional funds </li></ul></ul>Source: GIIN, J.P. Morgan. Investments for which no system was reported are not included. Third party system Investees’ system Proprietary system Total # of investments = 889 Total size of investments = $1,144m <ul><ul><li>Impact measurement systems are overwhelmingly proprietary </li></ul></ul>Management fees 8 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 10. How large is the potential opportunity for investments in this market? (1 of 4) <ul><ul><li>Operational challenges to developed business models </li></ul></ul><ul><ul><ul><li>Access to finance </li></ul></ul></ul><ul><ul><ul><li>Logistics and infrastructure </li></ul></ul></ul><ul><ul><ul><li>Variable and unpredictable cash flows </li></ul></ul></ul><ul><ul><li>Traditional businesses do not target BoP populations </li></ul></ul><ul><ul><ul><li>The example of mobile phones </li></ul></ul></ul><ul><ul><li>Government and philanthropic solutions are limited </li></ul></ul><ul><ul><ul><li>Lack of government provision forces BoP to inefficient private providers </li></ul></ul></ul><ul><ul><ul><li>Impact investment complements rather than replaces grants and aid </li></ul></ul></ul>Why does the opportunity exist? Impact investments require new, innovative, sustainable and scalable business models that address underserved communities around the world 9 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 11. How large is the potential opportunity for investments in this market? (2 of 4) <ul><ul><li>Remove lowest income segment </li></ul></ul><ul><ul><li>Select case study </li></ul></ul><ul><ul><li>Determine income brackets of market customer base </li></ul></ul><ul><ul><li>Limit to urban or rural </li></ul></ul><ul><ul><li>Identify population in each income bracket, factoring in population growth </li></ul></ul><ul><ul><li>Estimate a penetration rate </li></ul></ul><ul><ul><li>Identify average price per unit </li></ul></ul><ul><ul><li>Estimate growth in customers </li></ul></ul><ul><ul><li>Estimate revenue opportunity </li></ul></ul><ul><ul><li>Estimate operating margin </li></ul></ul><ul><ul><li>Estimate sales / invested capital ratio </li></ul></ul>Sizing the market – a framework Step 1: Size the potential customer base Step 2: Size the revenue opportunity Step 3: Calculate potential profit opportunity Step 4: Size capital required to generate revenue 10 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 12. How large is the potential opportunity for investments in this market? (3 of 4) <ul><ul><li>Business models transfer across regions </li></ul></ul><ul><ul><li>All potential businesses can be impact investments </li></ul></ul><ul><ul><li>Investments made over 10 years </li></ul></ul><ul><ul><li>Operating margin (EBIT) is the key profitability metric </li></ul></ul><ul><ul><li>Sales to invested capital is a constant </li></ul></ul>Key assumptions in sizing study 11 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 13. How large is the potential opportunity for investments in this market? (4 of 4) <ul><ul><li>Established market, assumed 20% target penetration </li></ul></ul>Source: J.P. Morgan. Potential profit and invested capital to fund selected BoP businesses over the next 10 years Some exceptions to the framework Microfinance Agriculture Energy Technology Infrastructure <ul><ul><li>Multiple distinct markets, no obvious single case study </li></ul></ul><ul><ul><li>Wide array of product and business types; clean energy market in India alone estimated to be US$2.1 billion per year (IFMR/WRI) </li></ul></ul><ul><ul><li>Large overlap with other sectors </li></ul></ul><ul><ul><li>Not considered as a discrete subset of impact investment, an enabler in many areas </li></ul></ul>SME finance <ul><ul><li>Required annual investment of $900 billion per year (WEF) </li></ul></ul>12 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 14. What does risk management and social impact measurement involve? <ul><ul><li>Legal and reputational risks </li></ul></ul><ul><ul><ul><li>What is a reasonable profit for a BoP business? </li></ul></ul></ul><ul><ul><li>Financial risk </li></ul></ul><ul><ul><ul><li>Company </li></ul></ul></ul><ul><ul><ul><li>Country </li></ul></ul></ul><ul><ul><ul><li>Currency </li></ul></ul></ul><ul><ul><li>Social impact risk </li></ul></ul><ul><ul><ul><li>Resource intensive and difficult to execute </li></ul></ul></ul><ul><ul><ul><li>Tension between feasibility, credibility, and cost </li></ul></ul></ul><ul><ul><ul><li>Complex impact inter-relationships </li></ul></ul></ul><ul><ul><ul><li>Cross sector comparisons difficult </li></ul></ul></ul><ul><ul><ul><li>Different investors have different priorities </li></ul></ul></ul>Managing impact investments 13 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S
  • 15. Key conclusions <ul><ul><li>Impact investing is emerging as an asset class; investors need to organize accordingly </li></ul></ul><ul><ul><li>The potential size of the market is huge: our framework suggests up to $1 trillion of capital may be required and up to $667 billion of profit may be generated over the next 10 years </li></ul></ul><ul><ul><li>Benchmarking returns is difficult but the evidence from our survey suggests a wide range of expectations with many investors expecting commercial or near commercial returns </li></ul></ul><ul><ul><li>Investment infrastructure is developing but more work is required on taxonomy, benchmarking, product accessibility and social impact metrics </li></ul></ul>14 I M P A C T   I N V E S T M E N T S   –   A N   E M E R G I N G   A S S E T   C L A S S

×