Coordinating Impact Capital

moderator
John Kohler
Program Director for Social Capital at the Center for Science, Technology and Society

Venture capitalists have it easy…
Venture investing in the developed world
Targets of opportunity are sourced locally
Investment syndicate drawn from local venture capital relationships
Results of venture capital backed product or service has a global impact
Well-defined path of “up-round” investing
Ready-made pools of “up-round” capital waiting for winners to emerge from previous financing
Venture investing in the developing world
Targets of opportunity are sourced remotely
Investment syndicate drawn from the global impact investing community
Results of venture capital backed product or service has a local impact
Scarce “up-round” capital available
3

Are there…?
Headwinds to Efficient impact investing markets
-Dalberg

Horizontal Capital Aggregation Scope
Previous Reports
Outcomes of this study
Examine the requirements of capital from each source
Suggest a model for successful syndication
Participants across the ‘life cycle’ of SGB development
Terms to guide a successful ‘handoff’
Identify funding sources by mission and outcome
Provide examples of phased financing (rural electrification)
Suggest a template for future syndication
Building the case for impact investing
Study of the impact investing landscape
Larger scope of investing in businesses in the broader developing world – BOP loosely defined
Assertion of impact investing as an emerging asset class
5

Direction
of Capital
Capital Sources
Capital Sources
Geography
Mission
Intermediary
Funding Organization
Size of Funding
Type of
Capital
Desired Liquidity
Type of SGB
SGB Organizational Objectives
Desired Outcome
Reporting Requirement
Expected Time Frame
Investment
Outcomes
Target
6

Primarily foundations and individuals
Financial institutions and corporations are largely absent
Financial first vs. impact first discussion continues
Sources of impact capital

Emerging use of multiple investing instruments
Some funds are creating horizontal aggregation internally
Equity is tied to higher IRR targets

Progress in addressing the “missing Middle”
Capital shift to > $750K
Multiple financing instruments used
The demotion of equity

Direction of Capital
Segmenting The BOP(Base of Pyramid Market)
Investors find more market rate opportunities in urban areas where income levels are higher and talent of entrepreneurs is higher, however, the majority make no preference to urban versus rural
When asked, the vast majority of respondents do not measure target income levels of their markets
10

Expected Returns: Rural Vs. Urban Focus
11
Respondents indicated that there is simply not enough development in rural areas to achieve a market rate of return
Consequently, investors seeking a market rate return may initially focus on SGBs in urban areas which posses 3x - 5x disposable income versus rural, lower customer acquisition costs and lower service costs

Intermediary Use To Deploy Capital
Expected Returns with Intermediary Use
Expected Returns WITHOUT Intermediary Use
Most investors who use an intermediary invest through debt instruments and need a local bank or partner to help deploy the loan
The majority of respondents believed they were best situated to select SGBs when they were operating “in country.” This implies that an arms-length relationship with SGBs reduces return expectations relative to a direct investment relationship
12

Capacity Development Use
Few organizations use Capacity Development Organizations (CDOs), also referred to as Technical Assistance organizations
“We do not know who they are in the areas where we operate”
“They are a big added cost”
Many organizations provide their own capacity development services (business mentoring, operational management and consulting as part of their investment)
Redefine who CDOs are: Local business leaders, corporations, advisors and consulting firms
13

Monthly contact
Non-Monthly Contact
14
Frequency of contact between investors and SGBs
Investors who practiced “high-touch” portfolio management (defined in our study as “monthly contact or greater”) reported significantly higher return expectations

Polarization of return expectations
Expectations are softening but still the debate rages
Sets the stage for syndication

Re-calibration of investment duration
Vast majority of respondents are adjusting their time horizon
75% are now expecting 5 - 10+ year holding period
Time is the enemy of IRR

The unintended consequence of IRR targets
Tight screens are used in assembling impact portfolios
Equity instruments are assumed
Creative investment instruments could align with what social enterprise can deliver

18
Phased Investing Hypothesis
Phased Investing (baton pass) – Different impact investors contributing capital at each phase of the SGBs’ development cycle. Examples of this may include:
Grant (capacity building)
Soft loan (proof of concept)
Quasi equity / equity investment (scale the business)
Debt provider (long-term, commercial loan—scale the business
Co-Investing—Multiple investors pooling capital to make one type of investment.
Internal Syndication—An organization participates in multiple phases of the same small and growing business investment cycle; i.e., providing capital in the form of a grant that is later followed by an additional investment in the form of debt or equity.

Co-investing vs. Phased Investing
Although syndication is happening, it is not happening on a regular basis
Phased investing is a much more efficient type of syndication and is not happening
19

Recommended Actions
Begin treating capital as ‘work in process’ - know your upstream and downstream partners and help prepare your investee for the next ‘round’
Increase the use of local capacity development organizations
Develop new investment instruments that reward investors from free cash flow, not valuation build-up
Establish mechanisms for ‘mezzanine’ financing to reward the early and brave impact investor
Work on market mechanisms that earn greater investor confidence
Diligence and validation
Mentoring and capacity development
Metrics that matter
Financial and regulatory consistency

Researchers
Sol Tran
Jared Abercrombie
Krishnan Manjeri
Contributing Editors
Greg Dalli
Rachel Haley
Project Lead
Jessica Sawhney

Panel discussion
Susie Lee
Principal, TBL Capital
Sean Foote
Management Team, Labrador Ventures
Taryn Goodman
Senior Manager, Impact Investing, RSF Social Finance

Global social benefit incubator

Download online
Full Report Available Online
www.scu.edu/socialbenefit/socialcapital.cfm

http://auritaquintero.wordpress.com	11
http://www.linkedin.com	5
http://www.akamido.com	2
http://myevent1371.akamido.com	1

Coordinating Impact Capital

by Center for Science, Technology, and Society at Santa Clara University

Accessibility

Categories

Upload Details

Usage Rights

4 Embeds 19

Statistics

Coordinating Impact Capital Presentation Transcript