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The Coordinating Impact Capital report by the Center for Science, Technology, and Society encompasses over 10 months of surveys and analysis with more than 45 investment organizations currently …

The Coordinating Impact Capital report by the Center for Science, Technology, and Society encompasses over 10 months of surveys and analysis with more than 45 investment organizations currently working in the field of impact investing. The intent of this project was to unearth actionable suggestions for the social impact community, and identify market mechanisms that can increase the efficiency of invested capital, resulting in greater liquidity opportunities for investors. The project was generously supported by the Aspen Network of Development Entrepreneurs. The lead authors and guest experts will discuss the landscape of impact investing and a foundation for vetting future social impact investment opportunities.

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  • CALL CDOs
  • Justina plays in the PRI space. A lot of thinking going on these issues. RF is winding down the impact investing phase of their support but are looking at collaboration between supply side and demand side.

Transcript

  • 1.
  • 2. moderator
    John Kohler
    Program Director for Social Capital at the Center for Science, Technology and Society
  • 3. Venture capitalists have it easy…
    Venture investing in the developed world
    • Targets of opportunity are sourced locally
    • 4. Investment syndicate drawn from local venture capital relationships
    • 5. Results of venture capital backed product or service has a global impact
    • 6. Well-defined path of “up-round” investing
    • 7. 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
    • 8. Investment syndicate drawn from the global impact investing community
    • 9. Results of venture capital backed product or service has a local impact
    • 10. Scarce “up-round” capital available
    3
  • 11. Are there…?
    Headwinds to Efficient impact investing markets
    -Dalberg
  • 12. Horizontal Capital Aggregation Scope
    Previous Reports
    Outcomes of this study
    • Examine the requirements of capital from each source
    • 13. Suggest a model for successful syndication
    • 14. Participants across the ‘life cycle’ of SGB development
    • 15. Terms to guide a successful ‘handoff’
    • 16. Identify funding sources by mission and outcome
    • 17. Provide examples of phased financing (rural electrification)
    • 18. Suggest a template for future syndication
    • 19. Building the case for impact investing
    • 20. Study of the impact investing landscape
    • 21. Larger scope of investing in businesses in the broader developing world – BOP loosely defined
    • 22. Assertion of impact investing as an emerging asset class
    5
  • 23. 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
  • 24.
    • Primarily foundations and individuals
    • 25. Financial institutions and corporations are largely absent
    • 26. Financial first vs. impact first discussion continues
    Sources of impact capital
  • 27. Emerging use of multiple investing instruments
    • Some funds are creating horizontal aggregation internally
    • 28. Equity is tied to higher IRR targets
  • Progress in addressing the “missing Middle”
    • Capital shift to > $750K
    • 29. Multiple financing instruments used
    • 30. 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
    • 31. When asked, the vast majority of respondents do not measure target income levels of their markets
    10
  • 32. Direction of Capital
    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
    • 33. 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
    Direction of 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
    • 34. 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
  • 35. Direction of Capital
    Capacity Development Use
    • Few organizations use Capacity Development Organizations (CDOs), also referred to as Technical Assistance organizations
    • 36. “We do not know who they are in the areas where we operate”
    • 37. “They are a big added cost”
    • 38. Many organizations provide their own capacity development services (business mentoring, operational management and consulting as part of their investment)
    • 39. Redefine who CDOs are: Local business leaders, corporations, advisors and consulting firms
    13
  • 40. 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
    • 41. Sets the stage for syndication
  • Re-calibration of investment duration
    • Vast majority of respondents are adjusting their time horizon
    • 42. 75% are now expecting 5 - 10+ year holding period
    • 43. 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
  • 44. 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.
  • 45. Co-investing vs. Phased Investing
    • Although syndication is happening, it is not happening on a regular basis
    • 46. Phased investing is a much more efficient type of syndication and is not happening
    19
  • 47.
  • 48.
  • 49.
  • 50. Recommended Actions
    • Begin treating capital as ‘work in process’ - know your upstream and downstream partners and help prepare your investee for the next ‘round’
    • 51. Increase the use of local capacity development organizations
    • 52. Develop new investment instruments that reward investors from free cash flow, not valuation build-up
    • 53. Establish mechanisms for ‘mezzanine’ financing to reward the early and brave impact investor
    • 54. Work on market mechanisms that earn greater investor confidence
    Diligence and validation
    Mentoring and capacity development
    Metrics that matter
    Financial and regulatory consistency
  • 55. Researchers
    Sol Tran
    Jared Abercrombie
    Krishnan Manjeri
    Contributing Editors
    Greg Dalli
    Rachel Haley
    Project Lead
    Jessica Sawhney
  • 56. Panel discussion
    Susie Lee
    Principal, TBL Capital
    Sean Foote
    Management Team, Labrador Ventures
    Taryn Goodman
    Senior Manager, Impact Investing, RSF Social Finance
  • 57.
  • 58. Global social benefit incubator
  • 59. Download online
    Full Report Available Online
    www.scu.edu/socialbenefit/socialcapital.cfm