Creating Value towards Impact Investing

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(2nd Innovation for Financial Services Summit – Luxembourg, 19-21 Sept. 2012) …

(2nd Innovation for Financial Services Summit – Luxembourg, 19-21 Sept. 2012)

Definition & application :
- Context and Definition
- Value analysis
- Concrete cases
- Lessons learned

The author, Xavier Heude has been entirely dedicated to the development of Responsible Finance by the mean of promoting Impact Investing, mainly. He is convinced that Private and Institutional investors are growingly interested in putting some part of their money in business activities or projects where they can themselves follow up the financial performance, and last but not least, the social and environmental outcomes generated.
He is Co-founder of meso IMPACT Finance, a Luxembourg-based holding company aimed at taking stakes in SMEs that generate a social and environmental (measurable) impact. MIF helps them develop through a financial and extra-financial support (i.e. technical assistance).
He is also Délégué Général of SAKURA Initiative, a Luxembourg-based non-profit organisation promoting social and responsible practices in the economic and financial sector, through various means such as conferences and communication.

Xavier Heude founded also the “PEERS Direct Investment” – registered trademark in 2011, after having stated for many years, that there are still quite few incentives and operational frameworks and guidelines allowing and encouraging a large public to invest in socially responsible business activities or to support valuable social initiatives.
A network is being built, in order to contribute to expand the mark and get it known worldwide.

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  • 1. Creating Value towards Impact Investing Definition and application - Context and Definition - Value analysis - Concrete cases - Lessons learned Xavier Heude Co-founder of meso IMPACT Finance Concept-designer of PEERS Direct Investment 2nd Innovation for Financial Services Summit – Luxembourg, 19-21 Sept. 2012
  • 2. The socio-economic context Funding (debt, equity) Impact Global economic Activities situation (at local level) A relation of cause and effect 2
  • 3. The socio-economic context The scope of challenges facing society today can no longer be solved with a purely philanthropic approach : - threat of possible climate change - poverty leading to major political instability - human rights issues - supply change management (e.g. food security) - scarcity of primary resources - demographic challenges - etc … Bamboo workshop (Vietnam) 3
  • 4. Conceptual definition of Impact Investing No standard definition … Source : Monitor Institute “Any profit-seeking investment activity that intentionally generates measurable benefits for the society” * 4 key-characteristics of Impact Investing- Profit as an objective- Intentional, pre-determined social impact- Positive correlation between the intended social impact and the financial return of the investment- Measurable social impact * « An unconventional perspective on Impact Investing », IESE Busines School - 2011 4
  • 5. Conceptual definition of Impact Investing Expected results Investment themes Agriculture and rural Environment : development Services to the - Biodiversity conservation elderly or Community- - Carbon sequestration disabled based people renewable energy Social : - Community development Clean (cooperatives, inclusive finance, transportation Education and solutions health housing, health …) - Increase in jobs Technological - Better living conditions products & services 5
  • 6. Conceptual definition of Impact Investing Rational behavior Emotional behavior 6 (derived from Monitor Institute)
  • 7. Conceptual definition of Impact Investing Investment targets Medium to large companies MesofinanceProfile : (the missing middle)- startups- going concerns SMEsInvestment needs :200.000 to 2.000.000 € Microfinance 7
  • 8. Value analysis in Impact InvestingMethodological approach … applicable whatever : • the location (worldwide) • the activity (industry – agriculture – services) • the business development’s step (start-up – going concern) 2 processes of VALUE CREATION Appraisal process : 1. a conventional Due Diligence-process (101 questions) 2. a scoring system 3. a set of criteria to comply with for Labelling (…under development …) Monitoring process : • social-environmental Key Performance Indicators (…under development …) • a technical assistance plan (applicable on a case by case basis) 8
  • 9. Value analysis in Impact Investing Conventional Due-Diligence process An in-depth analysis … … tracking risk Check (101 questions) (4 categories) Legal Operational Corporate overview Clear strategic Operating Model  vision Market - Competition Reputation Financial Reputation Financial Legal Financial statements Financial Operational  Financial return Legal Reputation Legal Operational Social- Social – Environmental Initiatives Financial Reputation  environmental return Operational 9
  • 10. Value analysis in Impact Investing Scoring system -5 1 2 3 4 Neutral Below Satisfactory Very good Significant warning ! Poor standard   (average note) Weighting’s system : Weighted Risk’s Feature of the case / situation Scales of notes notes intensity appraised N (negative) Average Case / asset / situation making neither -5 1 2 = should be to High compromise nor significant advantage, the case to reach whatever it occurs. Negative to neutral impact (at best) D (double High to Case / asset / situation having negative or -5 1 2 3 4 sided) Low positive advantage, depending on the action taken P (positive) Average Case / asset / situation having neutral to 3 4 = minimum positive advantage (can never be negative) requirement to to Low reach
  • 11. Value analysis in Impact Investing Example of an agri-business case in Africa major NEGATIVE weighting major POSITIVE weighting LEGAL Incorporation Business in an early stage Corp. management Some weak management / business skills ? Mission statement Clear written mission statement Stakeholders Strong support of the local actors OPERATING Operational capacity Strong potential of growth (securised land) MODEL Organisational structure Efficient channels of reporting set up Innovation & Dvlpt Good command of technology HR management Jobs creation Training, annual assessment, compensations …. MARKET Customers Customers diversification Focus on the local demand & COMPETITION Quality / Reputation Good products quality and diversification Market Large market with strong growth Competition Strong pressure from cartels ? FINANCE Financial statements Sound financial projections Insurance Some uninsured risks External factors Political instability SOCIAL & ENVIRONMENTAL INITIATIVES Internal / external initiatives Good to high social / environmental impact 11 Local dialogue
  • 12. Value analysis in Impact Investing Monitoring process … Goal : - enhance organisation of the business owners - mitigate risks identified through Due Diligence-process 7 main intervention areas 1 Client database (applicable on a case-by-case basis) 2 Internal training 3 Internal organisation (procedures) 4 Human resources policy 5 Internal control / MIS 6 Business development (clients) & networking 7 External communication
  • 13. Key-success factors in this project :1) Animal sourcing and crossbreeding : the capacity to set up a scalable livestock2) Training, monitoring and coaching of the farmers (= microfinance techniques)3) Export sales Empowerment of the rural communities, with developing a competitive national milk industry Buffalo husbandry’s business … (Philippines) 13
  • 14. Innovative concept – Social Gaming :- Introducing the general public to microcredit through a fun and entertaining medium- Raising awareness of the potential impact of this type of developmental tool.- Impacting some of the most vulnerable people in the world Social game … (France) 14
  • 15. Lessons learned What surveys say … … what we are experiencing 15
  • 16. Lessons learned What surveys say … (Source : Investing for Social & Environmental Impact, Monitor Institute, 2009) 16
  • 17. Lessons learned What surveys say … Recommandations to accelerate the growth of Impact Investing : - Increase the talent pool of investment professionals - Collaboration is essential for finding quality deal flow, sharing knowledge, increasing learning an developing new investment vehicules - Not waiting for perfect metrics on social / environmental impact to invest (Source : INSIGHTS AND INNOVATIONS: A Global Study of Impact Investing + Institutional Investors, 2012) 17
  • 18. Lessons learned The 4 golden rules What we are experiencing … 1st rule : Scarcity lies in the good investment opportunities, not in the investment flow - Secure the projects sourcing, with building strong networks - Maintain strict due-diligence standards 2nd rule : Dialogue with the business owner / stakeholders never stops - Share common values (not just check professional skills & financial projections) - Cross-check information steadily 3rd rule : Emotion is – in a certain extent – part of the decision-making process to invest - Tell the story and report thoroughly - Get investors involved … 4th rule : But … at the end of the day, financial performance comes first - No philanthropy 18
  • 19. Lessons learned What we are experiencing … Impact Investing is not « investment as usual ». It requires : • social / environmental awareness • opened dialogue between the parties • patient capital (mini. 5 years) • risk-taking mind Main asset classes fitting for Impact Investing : - Fixed income (including private debt and mezzanine financing) - Venture capital / Private equity - Real assets (including real estate, commodities, timber, etc …) 19
  • 20. Lessons learned Investors appear to be more cautious how their money is used … Family offices … address a range of challenges (climate change, poverty …) Clients of leading private banks … provide them with more choices than just traditional investment and philanthropy Private foundations … making investments in areas related to their social mission Private equity funds … provide growth capital Mutual funds … dedicate a portion of their assets to social / environmental income generating businesses Pension funds / sovereign wealth funds … deploy capital in ways that benefit the communities they serve Corporations … improve the lives of the poor while creating profitable products & services Governments … support economic development in poor areas 20 (Source : Investing for Social & Environmental Impact, Monitor Institute, 2009)
  • 21. Some resources• In search of gamma. An unconventional perspective on Impact Investing - IESE Business School, University of Navarra, 2012• Industry Survey of Financial Advisors on Sustainable and Impact Investing, 2012 - www.gatewaystoimpact.org• INSIGHTS AND INNOVATIONS - A Global Study of Impact Investing + Institutional Investors, 2012 www.correlationconsulting.com• The Power of Advice in the UK Sustainable and Impact Investment Market – Bridges Ventures Research, 2012• WORLD INVESTMENT REPORT 2011 - NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND DEVELOPMENT, UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD)• European SRI Study 2010 – www.eurosif.org• Investing for Social & Environmental Impact - Monitor Institute, 2009• Impact Investments, an emerging asset class – J.P.Morgan Global Research, Nov. 2010• « PEERS Direct Investment » website : www.peersdirectinvestment.com Contact Xavier Heude xh@peersdirectinvestment.com 21