Creating Mongolia's First Social Impact Investment Fund

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In GIFT's 28th YLP, 30 executives from 11 countries spent two weeks in Hong Kong and Mongolia, and crafted an initial blueprint for the first ever impact investment fund to be set up in Mongolia. Of the 30 participants, six came from Mongolia, holding senior level positions in organisations such as Oyu Tolgoi LLC, the Ministry of Finance, XacBank, Monet Capital and Inter Group. Other companies represented included Orix, NEC, DuPont, Bosch, DBS Bank, and BASF. The diversity in participant cultures, backgrounds, and work experience added dynamism and fresh perspectives in achieving project goals. The programme was conducted in close partnership with TenGer Financial Group, a regional family of companies leading the way in providing fair access to broad and inclusive financial services in Mongolia.

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Creating Mongolia's First Social Impact Investment Fund

  1. 1. Table of Contents1. Executive Summary2. Introduction: The Mongolia Context3. Impact Investing4. Measuring Social Impact5. Focus Sectors6. Assessment Criteria7. The Fund8. Marketing Strategy9. Conclusion & Recommendation10. Appendix2
  2. 2. 3• Mongolia is blessed with a large, fertile and resource-rich land mass, a young and highlyliterate population, and a crescendo of interest from foreign capital and technologypartners – especially in mining.• Yet, Mongolia is also a country of pressing issues and challenges around social welfare,wealth distribution, resource allocation and the environment.• Indeed, Mongolia is at a cross-roads and is faced with distinct options and choices -- thepotential consequences are significant.• Mongolia is staring at the face of the Resource Curse and Dutch Disease with all of theknowledge, tools and wherewithal to chart a distinctly positive course to the benefit ofall its citizens– so long as deliberate choices are made and appropriate actions taken.• With targeted funding and investment into its human capital, Mongolia’s Small &Medium Enterprise (SME) sector stands ready to grow dramatically, both along theMining Services Value Chain and as well as in key sectors identified in this report.Mongolia needs most everything, and this opportunity presents the potential for anelegant, impactful and broad-reaching solution to some of the inevitable socialchallenges.• To this end, impact investing focusing on social issues/opportunities may be a criticalcatalyst for Mongolia, as it can enable the country to drive development along a moreprudent, prosperous, independent and sustainable path.Executive Summary
  3. 3. Executive Summary (cont’d)• This paper highlights promising areas of social impact potential in Mongolia, includingAgriculture, Education, Healthcare, Affordable Housing and Waste Management. Whilewe are not excluding the mining supply chain, these areas are of primary importanceand present significant opportunity.• The timing is right for a Social Impact Fund in Mongolia. To be effective, the fund’ssponsor must be credible, its size must be prudent, its mission must be clear, and itsstructure must be innovative. It must be tailored for Mongolia. The criteria forinvestment selection and monitoring must be simple, clear, broad-based, specific,measurable and actionable. The Fund must focus keenly on alignment of interests,governance, and transparency.• This document provides a summary of the team’s recommendations. It represents acapstone of 35 people’s efforts over the course of two short but highly-intensive weeks.While certainly not all inclusive nor all encompassing, the analysis indicates quiteconclusively that the opportunity is promising and robust.• The authors thank our sponsors, hosts, leaders, teammates, and new friends forenabling such a tremendous journey of growth, exploration, discovery andaccomplishment. Our sincere hope is that this preliminary work will be only thebeginning of many great things to come, both in Mongolia and beyond.4
  4. 4. 52. Introduction: The Mongolia Context
  5. 5. Background: The Mongolia ContextAbout Global Young LeadersProgramme (YLP) and GIFTWhy We Are Here?The Global Institute For Tomorrow –GIFT – is an independent pan-Asianthink and do tank, dedicated toadvancing an understanding of:• The shift of economic and politicalpower from the West to the East• The reshaping of the rules of globalcapitalism• The evolving social contracts thatexist between business, governmentand civil sectorsTo develop Mongolia’s first Social ImpactInvestment Fund to improve the lives of thepeople in Mongolia• New approach for growth and long-termmaximisation to develop a vibrant,balanced economy and society• Impact investing seeks to maximise social,environmental, as well as financial returns
  6. 6. Background: The Mongolia ContextCountry InformationCapital City: Ulaanbaatar (UB)Total Area: 1,564,116 km2Population: 2.7 millionOfficial Language: MongolianLife Expectancy: 66.8yrsLiteracy: 97.5%Unemployment: 9.0%Poverty Level: 29.8%Avg. Income: ≈ USD500/monthPopulation living Informal GerDistricts ≈ 50% of totalEconomic1(1Q-2012)Real GDP: 16.7% yoyInflation: 17.3% yoyPolicy Rate: 13.25%Exports: USD 4.9 bnImports: USD 7.0 bnFX Reserve: USD 2.3 bnMNT/USD: 1,318.80Social1(1Q-2012)Environmental2(2011)Forested area: 9.1%CO2 emissions (kt): 10,894.66Agricultural Land: 74.7%Water consumption : 540m m3Desertification: 72.3% (NCCDM)1 Mongolia Quarterly Economic Update: World Bank, June 20122 Mongolian Human Development Report 2011: UNDP3 UNEP: 2011 report, National Statistics office 1Q2012
  7. 7. Background: The Mongolia ContextTransition• Since 1990, Mongolia has transitioned to afree market economy and democratic system• Private sector accounts for 70% of GDP• Generally, stable and peaceful politicalenvironment• Government signed Oyu Tolgoi investmentagreement 2009• Regulations addressing ownership of landand rightsChallenges• Landlocked with limited domestic market• Economy is poorly diversified• Heavily reliant on export of raw commodities(copper, gold, crude oil, cashmere, etc.)• Harsh climate, vast territory, limited infrastructureand distance from int’l markets• High inflation
  8. 8. Background: The Mongolia ContextSocial Issues• Unemployment• Educational Level (for skilled labor)• Housing/Sanitation• Food Safety• Traditional ways of life under threat1 Mongolia Quarterly Economic Update: World Bank, June 20122 Mongolian Human Development Report 2011: UNDPHousing Standards in MongoliaUnemployment by Education LevelRising Food Prices (YoY)
  9. 9. Social Impact Fund for MongoliaObjectivesOur Partner• Recommend setting up a Social Impact Fund of USD 50-70 million• Investments in small to medium sized enterprises (SME)• SMEs with social and environmental impact• Founded in 1999, TenGer is a regional family of companies, which includesXacBank, XacLeasing, XacSecurity, TenGer Capital, TenGer Solutions andTenGer Insurance built to provide fair access to broad financial services• XacBank is the fourth largest bank by asset size in Mongolia and itsnationwide branch network is the 3rd largest reaching all 21 provincialcapitals.• XacBank is a market leading bank in the provision of financial services toMicro businesses and SMEs throughout Mongolia.Mongolia today is the fastest growing economy in the world, but it is at the same time unable to provide forthe basic needs of all its citizens. TenGer Capital believes that the creation of this fund with a focus onenabling entrepreneurs and SMEs to develop socially oriented business will be critical in the development ofMongolia. The fund seeks to encourage investors to invest in viable enterprises, which will have both financialand significant social impact in Mongolia.Need for a Social Impact Fund
  10. 10. 113. Impact Investing
  11. 11. Social Impact Needs of Mongolia1. Povertyalleviation• Poverty level at29.8%1• Unemployedpopulation at 9%2• Human DevelopmentIndex (HDI) 0.653 vs.0.671 average for EastAsia32. Meeting basicneeds• 30.8% have access toclean water• 13% of children areunderweight• Rising food costs &weak agriculture base• 59% of pit latrines arenot sanitary in theGer areas43. Environmentalissues• UB is the capital withthe worst air qualityin the world• Solid waste collectionaccess at 3%5• 13.1% of forestdestroyed between1990 and 2010(1) 2011 World Bank Household Social Economic Survey (HSES) conducted by NSO(2) NSO Labour Survey or Q4 2011(3) Mongolia Human Development Report, UNDP, 2011(4) Hygiene and Sanitation Situation report Report, World Bank, 2006(5) Mongolia Environmental Health Country Profile, World Health Organisation, 2005Three key areas of focus…
  12. 12. Poverty: Measurement IndexHDI as a standard:• The Human Development Index (HDI) is a standard used since 1990’s to comparethe level of human development across countries, incorporating metrics forIncome, Education and Life Expectancy. It presents a more accurate picture ofpoverty than a simple measurement of the no. of people ‘below the poverty line’.1Mongolia currently ranks 110 out of 141 countries assessedTrends in Human Development IndexSource: UNDP
  13. 13. Poverty: Impact on ChildrenSource: Towards Child-Sensitive Social Protection in Asia-Pacific, UNICEF, 201280% of Mongolian children areexperiencing deprivation of some kindPoverty impacts childrenin many aspects
  14. 14. Access to Basic Needs• Poor transport links – Difficult to travelvery far to receive medical assistance11. Extract from AsiaOne: Interview of Dr Jadamba Tsolmon, Mongolias Vice-Minister for Health in Nov 20102. Hygiene and Sanitation Situation Report for Ger Area, 20063. Mongolia facing food challenges, World Vision• Rising food costs make it moreexpensive for parents to feed theirchildren3• Increased malnutrition of parents andtheir children. Some children only getto eat once a day3• People dig their own pit latrines andlack adequate knowledge on how toconstruct these latrines2• Over 83% of Cancer patients arediagnosed at very late stages1• People who live in the countryside orremote areas do not get properdiagnosis and treatment1• 10,000 cases of diarrhea recorded everyyear2• Hepatitis A incidence is seven timeshigher than the international average22
  15. 15. Access to Basic Needs: The Ger DistrictHousing Types by Census Category (%)020406080100Ger Conventional(1) PARDO report, according to2000 censusGer districts in Mongolia house approx.50% of the total population. They have nobasic sanitation and have poor heatingfacilities12
  16. 16. Environment Issues: Air PollutionAir in Ulaanbaatar shows the highestconcentration of particulatesSource: Air Quality Analysis of Ulaanbaatar, Improving Air Quality to Reduce Health Impacts, December 2011, THE WORLD BANK; and CO2 Science, United States, 2010-03-24.3Air pollution-related health costs account for 4% of Mongolia’s GDP
  17. 17. An Alternative Approach to Address these NeedsDoes not solve underlying issues norpromote necessary investment1. Direct cash payout topopulation?2. Government directed services?3. Building SMEs*?Utilising private enterprise to providemarket and social needs as well asgenerating wealth for the populationGovernment may not be the bestcandidate to fulfill all market andsocial needs*SMEs is defined as < 199 employees and < MNT 1.5 billion sales as per 2007 SME law passed by Mongolian gov’tUtilising resources to build local SMEs may be the best approach to meeting thesocial, environmental and economic needs of the people
  18. 18. Why Support SMEs?ScalabilityAvoid ResourceCurseBuilding HumanCapitalStrengthenSupply ChainValuePotential for growth and becoming aneconomic driverTrain local employees with skills to upliftthe labor forceSupport various industry supply chainsThrough diversification of the economy inMongoliaIncrease ExportsAfter scaling up, there is potential forexport to other countries in various sectorsSMEs provide wider ripple effects through communities and create role models
  19. 19. Challenges Faced by Mongolian SMEsFrom our research and interviews with local SMEs we observed thefollowing:• Lack of access to financing - high bank lending rates (Bank of MongoliaPolicy Rate: 13.25%)1combined with “missing middle” for SME funding• Limited collateral options accepted by banks, for example companiescannot borrow working capital against purchase orders• Loan tenors are too short for long-term investment needs of SMEs• Many SMEs are passionate about building Mongolia but obtainingfunding from banks/funds is proving difficult• Weak capacity for market research/business planning2• Lack of skills in management, strategy, and accounting.(1) Bank of Mongolia website accessed Aug 1st 2012(2) Improving Access to Finance for SMEs: International Good Experiences and Lessons for Mongolia, Institute ofDeveloping Economies under JETRO, 2008SMEs face many diverse issues that need to be addressed before they can progress
  20. 20. SMEs Face the “Missing Middle” in Funding• Critical financing gap between the USD500,000 to USD3 million investment range.• Below this financing range lies the realm of angel investing and microfinance; aboveit, government aid and private equity.Impact Investing provides the necessary missing capital required for growth
  21. 21. What is Impact Investing?• Aims to fund the “Missing Middle”• Must be profitable and improve the lives in the community• Neither solely profit driven or solely philanthropicImpact investing seeks to maximise both social and financial returnsSource Avantage Ventures
  22. 22. Impact Investing TrendsImpact Investing is a global phenomenonThe International FinanceCorporation (IFC), which makesmany impactinvestments, revealed theiremerging market equityportfolio has outperformedtraditional emerging marketventure capital and privateequity benchmarks forinvestment from 1989 to 2006..05001000150020002010 2020$BillionProfitCapitalImpact investing is expected to grow significantly over the next to 10 years from US$400 billion to $1 trillion in invested capitalSource: JPMorgan Impact Investments report
  23. 23. Impact Investing: The Potential for Driving Change• Blends economic, social, and financial components into “total”returns• Fills gaps left by traditional philanthropy, investment and government• Provides an alternative source of funding which potentially bypassescollateral and other constraints• Allows SMEs to have access to professionalmanagement, planning, accounting, and financial expertise in orderto grow the business• May potentially take a longer term view on developing businessesand investments compared to banks and traditional PE fundsImpact investing can deliver blended value through patient, flexible capital.
  24. 24. 254. Measuring Social Impact
  25. 25. Why Measure Social Impact?• Create the basis for future fundraising and build investor confidence• Improve program management through effective planning and evaluation• Increase understanding and transparency of impact investments• Strengthen communication of the value of the fund to ‘the people thatmatter’ (internal and external stakeholders)• Ensure fund managers are held accountable to social impact goals by havingmeasurable targets• Enhance attention to the social, economic and environmental value createdby investments11. Measuring social impact: The foundation of social return on investment (SROI)t, www.neweconomics.orgWhat is measured, is valued. Measuring and communicating positive socialimpact gives assurance to investors and stakeholders that the fund is realising itsintended results. Effective measurements can:
  26. 26. Propose to measure social impact by selecting performancemetrics, which are :• Simple and inexpensive to collect• Understandable by both communities and investors• Measurable over time• Both quantitative and qualitativeSource: Advantage VentureMeasurement Principles
  27. 27. Measurement MetricsExamples of IndicatorsMetrics IndicatorsPoverty • % change in real wages of low income demographic• % of employees coming from low income demographic or the“affected communities”• Total hours of vocational trainingAccess to basicneeds• % of people from the affected community with access toimproved drinking water sources• % of people from the affected community with access toimproved sanitation facilities• % of underweight children under five years of ageEnvironmentalissues• Health care cost of respiratory related diseases amongchildren under 16 years old• No. of school days lost due to respiratory related diseases• % of change of surface water resources due to deforestation
  28. 28. Social Impact Metrics Used InternationallyBest Alternative Charitable Option (BACO) by Acumen Fund:• Measures additional social impact of investment compared to equal amount of moneydonated to charity fulfilling similar social needs• Strives to compare apples to apples using measurable metrics (e.g.: amount of lowincome families housed through investing in SME vs. donating same amount to affordablehousing NGO)• Projected BACO can be done before investment to assess business and updated regularlyafter investment is made to measure actual impactImpact Reporting & Investment Standards (IRIS) by Global Impact Investing Network (GIIN):• Developed to provide a common reporting language for impact-related terms andmetrics. Standardises measurement of social and environmental performance.• Contains standardised metrics based on industry(agriculture, education, energy, environment, finance, medical, housing and water)• Both quantitative and qualitative, however, metrics lack depth• Metrics break down impact based on organisation, financial, operational impact, productimpact, social policies, and othersSocial metrics could be aligned with the UN Principles for Responsible Investment (PRI)
  29. 29. “Before we were involved in the Ger to Ger project we didnot have our own animals and we used to herd otherpeople’s animals to feed our four daughters. We are veryhappy now to become members of Ger to Ger. We boughtsheep, few cows and horses. We can even send our twodaughters to University.”Chuluuunhuu, Nomadic HerderTouristsApplicable indicators:• Increase in averagehousehold income of theinvolved community• Total number of traininghours and total numberof people trainedDundgobi TrainingSource: www.gertoger.com,“Ger to Ger – A Social Venture in Mongolia“*Ger to Ger is a travel enterprise which manages and promotes culturalGeoTourism initiatives of the nomadic herder groups in MongoliaCase Study: Ger to Ger*
  30. 30. 315. Focus Sectors
  31. 31. 32Mongolia’s growth vision:• Diversified economic growth• Human development• Improve living standardsAgriculture EducationAffordable HousingThe proposed industry sectors are based on acareful balancing of the country’s urgent needswith immediate social impact considerationsHealthcareWasteManagementAspirations of The FundSocial and economic reality:• Fast but imbalanced growth• Prosperity vs poverty• Heavily reliant on miningSocial impact goals of The Fund:• Reduce poverty• Meet basic needs of people• Address environmental issuesMiningSupply Chain
  32. 32. Agriculture: Market Background, Growth OpportunitiesCurrent Industry Overview Challenges• Herd sizes are generally small, ~6% ofherders have >500 head, 39% of themhave < 100 head.*• Most farmers are isolated and have verybasic processing capability resulting inlow value added products & wastage• ~50,000 km of roadways but over46,000km(93.4%) are unpaved.• Lack of technology and facilities topreserve meat and dairy leads tosignificant waste. Estimates vary that50%-97% of milk produced is wasted.Huge opportunity exists to moderniseagricultural processes and reduce waste( *) THE REPORT Mongolia 2012 by OXFORD BUSINESS GROUP• Agriculture accounts for around 20% ofMongolia’s GDP and 35-40% of employment.*• Livestock accounts for ~80% of agriculturalproduction, the rest are crops. Most of thelivestock sector’s produce is food.• The most lucrative businesses has beencashmere wool, the 2nd largest in the worldafter China.*• Meat and dairy products the main remit offarms around UB with 85-95% of all meatproduced being consumed domestically.33
  33. 33. Agriculture: Commercial / Social Impact of The FundThe Fund’s value-add is as follows:• Capital for possible scale-up, integration, technology upgrades and skill improvement• Novel mechanism and approaches to enable changes across the industry value chain• Leverage agricultural management know-how through fund’s global networkCommercial benefits:• Efficiencies through economies of scale in localproduction and possible industry integration could createa more sustainable production business• Waste reduction through better processing of meat/dairyproducts and leather• Increase exports to reduce dependence on miningSocial impact:• Food security and safety• Increased income for herders• Create employment through increased processing• Technology transfer in processing & supply chain34Capital and know-how can bring a new face to the local agriculture industry
  34. 34. Agriculture: Potential Business Model for InvestmentCommunity-based food processing capabilitywith vertical & horizontal integrationVertical integration• Build up aggregate association of livestockproduction from herders• Use modern technology and facilities to enableefficient food processing• Establish reliable storage and supply chain topreserve freshness of meat & dairy productsHorizontal integration• Expand current processing capability to covermultiple outputs from local farmers includingmeat, dairy products, leather, other by-productsConventional herder-basedmodelHerdingSmall sizeFood processingMeat - limited dairy productsTransportationUnstable - short distance35Changing existing structure and supply chain can significantly improve efficiency
  35. 35. Education: Market Background, Growth Opportunities• Basic education is widely accessible• 178 colleges and universities, of which42 are public• Recent explosive growth in industrysectors such as mining has drivendemand for skilled labour• Existing education system lacks capacityto provide vocational training to meetthis increase in demand• It is estimated that 30,000 peopleannually need urgent training forimmediate employmentneeds, especially in mining andconstruction sectors020406080100Pre school Primary SecondatyGrossenrolment ratio,2010/ 11,(%)Source: NSOCurrent Education Overview Surging needs in the new era36
  36. 36. Education: Commercial and Social Impact of The Fund• Provide for growing industries• Skilled and experienced workforce• Stable labor supply• Customised and skill-based training• Return to the service providers• Service fees for training, recruiting andworkforce management• Premiums on expertise, customisation andhustle-free one-stop-shop serviceCommercial benefits Social impact• Improve the labour force’s vocational skills• Reduce unemployment• Improve income• Enhance knowledge transfer• Inspire more creativityand entrepreneurship• Improve social stabilityThe Fund can provide• Capital to establish training facilities, materials and educators• Academic, technical and vocational know-how through a global network• Management and capacity building to run a first-rate educational institute37
  37. 37. The FundIndustries (customers)Education: Potential Business Model for Investment• Labor recruitingReach out to rural and urban areas to recruit peoplewho want to get employed thus promoting themindset for skill development• Vocational trainingPlan with companies and partners to understandspecific training needs, develop training programmesand train people• Workforce contractingProvide skillful workforce for companies andpartners on a long term basis and manage attritionrates• Workforce managementProvide all the above services as well as consultancyand planning for customers on HR managementVocationalWorkforceManagement38
  38. 38. Per capita total expenditureon health is low incomparison with regionalaverage1 23 4Low life expectancy Quality and capacity offacilities and equipmentRegional disparity Human resourcesHealthcare: Market Background, Growth Opportunities39• Men’s life expectancy is low in comparisonwith regional average• Under-five and maternal mortality ratio ishigh• Adult mortality rate is very high incomparison with global average• Many health centres would not bedefined as such in Western systems• Many small local clinics have only handfulof inpatient beds• While Ulaanbaatar has a ratio of onedoctor for every 248 people, the westernregion has less favorable statistics, withone doctor for every 616 people• little opportunity to participate in trainingprogrammes to obtain new knowledgeand technologies
  39. 39. Potential business modelActivitiesCapital leasingEquipment playProviding facilities and equipment- Establish new hospitals, clinics, etc- Provide medical and other equipment,Professional andvocational trainingTraining doctors and medical support staffEstablishing world-class programmes nationwideEducationCommunity serviceDisease prevention- Immunisation, health check, preventivemedicine, giving information to citizens aboutpersonal / family healthcarePromoting hygienic environments- Maintaining infrastructure such as sanitationand waterIntegrated real estatedevelopment project40Healthcare: Ideas for Impact Investment
  40. 40. Affordable Housing: Market Background, Growth Opportunities• City population has increased by 60% over the last decade• Estimated 170,000 families settled in the Ger district• Average cost of affordable housing is US$31K–$43K• Less than 20% of home owners have mortgage loans• Lack of skilled and experienced workforce for construction• Lack of infrastructure• Construction materials are mainly imported• Low income families cannot afford to purchase a homeand/or lack access to financing• No institutional systems to provide low-cost housing formiddle and low-income households• Launched the 100,000 HousingConstruction Policy in 2011 toaddress critical systematicdeficiencies in housing financeand affordabilityMarket background and growth opportunity:Challenges:Government Policy:Government policy alone may not fulfill the housing needs of the people
  41. 41. • Sprawling of metropolitan area• Urban infrastructure planning• Healthy neighborhood planning• Government role in basic social welfareUrban planning issues to be considered carefully:Affordable Housing: Social / Environmental Considerations
  42. 42. • Capital leasing• Equipment leasing• Sub-contractingEquipment play• Organise building equipment:Provide cost effective equipment and relatedmaintenance and service• Productioninvestment• Material tradingMaterial play• Produce good quality and low cost buildingmaterial locally• Introduce green building material• Professional andvocational trainingTraining• Provide profession and vocational training toconstruction workforce, such asarchitects, engineers and operators• Technology transferConstructioncontractor• Utilise most efficient constructiontechnology, know-how and managementsystems• Specialist developerPropertydevelopment• Develop real estate projects with a good balance ofprofitable portfolio and low income housingproducts• Equity and debtinvestmentFinancing• Provide financial resource to preferred developerswho meet social impact requirements• Provide financial resource to supply chain parties• Provide special mortgage through financial institutionsto low income families with conditionsPotential business modelActivitiesAffordable Housing: Ideas for Impact Investment
  43. 43. On average 210‐260 thousand tons of waste is being disposed of per year in Ulan Bataar• Apartment residents generate approx. 0.235kg/day• GER area residents generate approx. 0.956kg/dayThe type and quantity of waste generated varies by season. In the summer season more wasteis generated due to construction and in the winter it is due to ash from burning wood, coal,paper and cardboard.WinterData Source: B.Delgerbayar, Director of Environment pollution and Waste management departmentSummer44Waste Mgmt: Market Background, Growth OpportunitiesImpact investing in waste management is crucial to the well-being of Mongolia
  44. 44. WaterApprox. 100 water treatment plants processing about 130million m3 per year - less than half the waste generated.VehiclesOver 200,000 registered cars with 50% over 11 years oldand 30% from seven to ten years oldSolid WasteEight open dumpsites and no waste paper treatment plantAshGer households burn 200,000 tons of coal and 160,000 m3tons of wood annually. Waste is dumped on the streets.• Lack of capital to conduct feasibilitystudies and to establish wasteprocessing plants• Limited access to technology• Need for trained workers to managecollection and disposal of waste• Absence of a system to collect andprocess waste e.g. collect and processash from the Ger districtMunicipal waste management report: Status Quo and Issues in Southeast and East Asian Countries (AIT/UNEP RRC.AP)Mongolia, Environmental Health Country Profile (WHO)Managing Wastes in Asia: Looking at the Perspectives of China, Mongolia and the Philippines (Kevin Roy Serrona, Jeong-soo Yu and Jia Che, Department of Interregional Environmental System,Graduate School of International Cultural Studies, Tohoku University)45Waste Mgmt: Potential Areas to Explore FurtherCurrent Waste Management Capacity Challenges
  45. 45. Priority for investmentconsiderationPossibleinvestment sizeTypicalcompany size$0.5~1MTBDKey socialimpacts46HealthcareWastemgmtIntensiveagricultureVocationalTrainingAffordablehousingHighHighLowMediumMedium$2~5M$0.5~1M$5-20M$0.5~5MTBD$0.2~0.5M$1-10M$0.2~2M• Farmer income• Employment• Skills• Employment• Worker income• Living condition• Sanitation• Environment• Livelihood• EnvironmentMiningsupply chainTBD TBD• Employment TBDSnapshot of Investment Pipeline
  46. 46. Vertical &horizontalintegration47Leveraging local agricultural co-opsPotential Pipeline Candidate: UB Beef Jerky Producer
  47. 47. 486. Assessment Criteria
  48. 48. Overview and Fund EthosCompetitive returns on investments and making a positive impact on society andenvironment are not mutually exclusiveBusinesses can – and should – profit from delivering social and environmental good andprofits could be reinvested in social impactsThe Fund will commit itself to upholding the highest professional and ethical standardsThe following assessment criteria have been carefully chosen to aid the investmentscreening process, ensuring that The Fund achieves its objective of blended value: themaximisation of both social and financial returns in our chosen sectorsFinding an alternative to philanthropy and purely commercial investments
  49. 49. Assessment Categories1. FinancialViability2. Management andGovernance3. PovertyAlleviation4. Meeting BasicNeeds6. Potential for Scale, Replication5. EnvironmentalIssuesThe business should achieve investors’ desired financial returns through excellent:It should also have a measurable positive social impact on:Ideally, the business model should have high:
  50. 50. Assessment ProcessIncoming proposalsFirst round interviewsSecond interview Scorecard (see appendix)All remainingproponentsassessed andrankedDO NOT INVESTTHIS TIMEREFER TO TENGER FOUNDATION FORDEVELOPMENT; CONSIDER FOR FUTUREFUND POOLSINVESTDUE DILIGENCEmost attractiveQuestions sent to proponentDetailed questions arising from firstinterview; queries to prepare forsecond interviewFails to meetminimumstandards, orviolates non-negotiabledisqualificationcriteriaNeeds improvement+ site visits+ identify andconnectportfoliosynergies
  51. 51. Assessment Criteria: Financial ViabilityCurrent Financial Performance• Ensure availability of financial data and assess the following factors:• Profitability• Cash flow / liquidity• Debt repayment capacity and collateral sufficiency (for debt issuance)• Assessment to be made based on audited financial statements where applicable• Perform cash flow analysis based on bank statements, should audited financialstatements not be available as is the case for many SMEsFuture Financial Performance• Business investment plan• Revenue and cash flow projections including sensitivity analysis on variousfactors (demand fluctuations, currency fluctuations, etc.)1Financial benchmarks and other assessment criteria will differ based onindustry, portfolio balance at the given time, potential social impact, and otherfactors determined by the fund manager.
  52. 52. 53Sub category Proposed Indicator 1. Poor 2. Modest 3. Satisfactory 4. GoodCurrent FinancialPerformanceEfficiencyEBIT margin(%)*EBIT=Earnings Before Interest, Taxes< 0% =< 0%, < 8% =< 8%, < 16% 16% <=EBIT on Tangible Assets (%)* Tangible Assets = Total Assets - IntangibleAssets< 0% =< 0%, < 6% =< 6%, < 12% 12% <=FinancialPolicyDebt/Capital(%) > 85% 50%=<, < 85% 30% =<, < 50% < 30%Debt/EBITDA (x times)*EBITDA=Earnings Before Interest, Taxes,Depreciation and Amortisation> 6 x 3.5x =<, < 6x 1.75x =<, < 3.5x < 1.75xFinancialStrengthEBIT/Interest (x times) < 1.5x 1.5x =<, < 4.0x 4.0x =<, < 9.0x 9.0 =<Cash from Operation/Debt (%) < 5% 5% =<, < 20% 20% =<, < 40% 40% =<Free Cash Flow /Debt < 0% 0% =<, <6% 6% =<, <18 % 18% =<1 Assessment Criteria: Financial ViabilitySample of the financial assessment scorecard** For full version please see appendix
  53. 53. Stakeholders• Proven track record of relationship with suppliers and buyers• Favorable payment terms for both suppliers and buyers• Support of the community and governmentProducts• Production process• Dependencies (e.g. Raw materials, skilled workers, etc.)• Percentage contribution to the total revenue for each line of business or productIt is important to build strong relationships with key stakeholders, as they will have significant impacton businessAssessment Criteria: Financial Viability1Suppliers, buyers, and operational issues can significantly impact growth
  54. 54. Management and Governance• Management structure should be effective and sustainable• Adequate measures should be taken from a Corporate Governance standpoint onissues such as tax adherence, labor laws, environmental standard etc.• For sole proprietor, a clear succession planning and delegation of authority• For joint ventures, clear management and ownership structures• Decision makers (proprietor or manager, whichever is applicable) should be qualifiedand experiencedLegal Environment• Ownership of necessary business licenses• Robust legal environment preferred for developing SMEs and allowing foreigners toparticipate in the development of the economy by bringing in capitalAssessment Criteria: Management and Governance2
  55. 55. Public Engagement• Level of business consultation with local communities• Community participation in decision making of key business activities• Level of willingness to engage with regulators to raise social andenvironmental standardsAssessment Criteria: Management and Governance II2
  56. 56. 57Assessment Criteria: Social Impact• Assessing social impact of different SMEs that serves differentneeds means using different social metrics• Social metrics are unique to each industry/business,, many will notcover all aspects of social impact (e.g.: sanitation company mayhave little impact on poverty alleviation).• Potentially hard to consistently find SMEs with both high financialand social returns, therefore fund manager should have discretionto choose investments as long as there is some form of minimumsocial/financial targets• Portfolio may contain SMEs with high financial return with lowsocial return or vice versa, overall portfolio should be balanced.Minimum floors should be set for both financial and social returns
  57. 57. Assessment Criteria: Poverty AlleviationHuman Development Index, UNDP, 2011: http://hdr.undp.org/en/statistics/hdi/3Broader than measuring only the number of people ‘below the povertyline’, the following criteria (based on the Human Development Index metrics)assess SME contributions to alleviating poverty in Mongolia.Income• New employment and improved wages – especially for low-incomegroupLife Expectancy• Improved health and well-being for people in the communityEducation• Deliver education and vocational skills to local communitiesUse of Local Resources• Establish local supply chains to provide for businesses• Promote energy independence and domestic food securityInvestments contribute to Mongolia’s Human Development
  58. 58. The following criteria will be used to assess whether the SME contributes tothe fulfillment of basic needsBasic needsassessmentLess Fit MoreNo. of low incomebeneficiaries150 or less 150-250 500 or moreLevel of socialgoods/services tofulfill basic needsDestructivepracticesNo harmfulpracticesGoodsocial/environmental practicesType of socialimpactIndirect Direct BothTimeline of impact Long term(Education)Medium term Immediate (Incomegeneration)Assessment Criteria: Meeting Basic Needs4The Fund empowers the most disenfranchised groups
  59. 59. Assessment Criteria: Environmental IssuesSMEs will be assessed for performance in each of the followingenvironmental priorities.• Pollution reduction or prevention – air, water, soil• Resource conservation – water, forests, grassland• Material waste management• Protecting sensitive ecosystems and species - biodiversity• Greenhouse Gas (GHG) emissions5Protecting our shared environment and reducing our footprint
  60. 60. Assessment Criteria: Potential for Scale / ReplicationScale• Business that can achieve economies of scale butare constrained due to lack of access to additionalgrowth capital and know-howReplication• Ability to standardise businesses that can bereplicated in a reliable manner, producing qualityproducts and services, across the country• Diversify any supply chain risk without impactingcost structures and quality6Priority should be given to businesses with potential for scaleand replication which results in greater financial and socialimpact growth potentialBusinesses should be scalable and replicable in similar environments
  61. 61. 627. The Fund
  62. 62. Fund Summary63Target Size USD 50 ~ 70 million (USD 100 million hard cap)General PartnerCommitment10% of Fund size (USD 5 ~ 7 million)Asset classes• Debt: Long term loans, subordinated loans (Mezzanine debt)• Equity and Hybrid Equity (Convertible Debt)Tenure• 10 Year Term with Annual Extensions by Majority LP Vote• 5 Year Investment PeriodTarget Returns• Net Internal Rate of Return (IRR) 10 ~ 15%• Hurdle rate : 8% + Social metrics achievedFees• Management fees :Budget Based & Reviewed/Agreed Annually• Carried Interest : 20%• 10% of Net Carried Interest Dedicated to the FoundationDiversification• Maximum of 15% of Fund in any one Investment• Maximum of 25% of Fund in any one SectorLimited PartnerRightsCo-investment option in deals over USD 3M
  63. 63. Mongolia’s First Social Impact FundCommerciallyOriented, AlignedInterests & Open ForBusinessDriven At Its Core ByKey Social ImpactPrinciplesTargeted At SpecificSocial Needs inMongoliaExperienced, Professional Sponsor &TeamSustainableAdvantage• Fund Size of $50-70mm;$100mm cap• Targeted returns of 10-15% IRR• GP Commitment of $5mm• Focus on SMEs• Promote SMEs delivering positivesocial & environmental impact:Agriculture, VocationalEducation, AffordableHousing, Healthcare & WasteManagement• Drive real, measurable socialimpact in Mongolia• Vocational training, technologytransfer, best practice sharing• Support an entrepreneurialculture & equity mindset• Clear vision for a sustainable Mongolia• Proven track record in private equity, fundmanagement & social impact• Extensive local deal sourcing networks &operational expertise• Limited competition, better pricing & moreopportunity, as other funds centered on mining• Demonstrate to policymakers & investors that socialimpact investing is real & viable• Attract like-minded investors who are mission-aligned: ‘doing well by doing good’64
  64. 64. Fund Structure: Improving the Traditional PE Model65ImprovementsHolistic view capturingexternalities & socialimpact; Creation of GPfunded foundationBudget-basedtransparencyBroad-based:technologytransfer, vocationaltraining &developmentPatient Capital. Derivedfrom the underlyingopportunity in the corebusinessImprove the humanconditions in Mongoliathrough commerciallyviable activityBroad-basedstakeholders withdiversified expertise(e.g. non-profit)1. Incentives2. Fees3. Engagement4. Timeline5. Impact6. InvestmentCommittee3Grants ToBeneficiaryFundManagerFundInvesteeCompaniesFoundationGeneralPartnersLimitedPartners1234,5,6TraditionalPurely profitfocusedMisaligned profitcenterFinancially focusedArtificially imposed byfixed investmentperiod & fund lifeCreation of jobs;expand tax-baseComprised offinancially orientedrepresentatives> Overview
  65. 65. 66Aligning GP/LP Interests Around Value CreationFund TeamDevelopsBudgetBudgetReviewed &Agreed withLP’s YearlyFees Charged& BilledQuarterlyBudget versusActual Trued-up Annually(1) Aligns GP and LPs around fees and expenses.(2) Concentrates focus on true value added and value creation.(3) Acknowledges start-up fees generally higher than ongoing feesand expenses.> Fees: Aligning interests with Budget Based FeesFund Structure: Improving the Traditional PE ModelBudget based management fees enables a true alignment of interest
  66. 66. 67Accounting & TaxLegal & AdvisoryDeal SourcingTechnology Transfer&Vocational TrainingSocial ImpactMaximise The Reach of The Fund’s Impact• Explore partnership with top accounting firms for duediligence, accounting, tax and portfolio company CFO services.• Develop relationships with major law firms. Negotiate pro-bono and public service contracts for reduced rate services.• Leverage networks of suppliers, customers, bankers,multilaterals, etc. to drive deal flow.• Develop relationships with universities, traininginstitutes, development/aid organisations (USAID) to provide ahigher standard of care, development and nurturing forinvestments.• Partner with GIFT to develop, implement, monitor and publishsocial impact metrics for the Fund and its portfolio.> Engagement: Partnerships to Drive ImpactFund Structure: Improving the Traditional PE Model
  67. 67. 68ManufacturingDistributionFinanceSourcingHREtc…Create A Self-Reinforcing Ecosystem For Best Practice SharingFORUMForBestPracticeSharing• Leverage the power of the network• Best practice sharing across teams• Cross-Pollinate relativestrengths/capabilities• Forum for sharing ideas & resolvingissues> Engagement: Creating a Consortium of Investee CompaniesFund Structure: Improving the Traditional PE Model
  68. 68. 69Broad-based Stakeholder Representation –Ensure Social Impact is integral to the Investment ProcessFinance• Financial industrybackground and skills• Financial Advisor toportfolio companiesSocial Impact• Experience in NGO/ NPO• Assessment of potentialsocial impacts ofinvestmentsEnvironment• Assess and advisecompanies onenvironmental issuesOperations• Actively engage with companymanagement to constantlyimprove operationsStrategy• Act as a consultant to deviselong-term growth strategy forthe companyTechnology /Training• Assist companies toupgrade technologiesand improve workerskills> Investment Committee: Rethinking the mixFund Structure: Improving the Traditional PE Model
  69. 69. AlignmentThe Fund will Adopt Best In Class Governance70Governance TransparencyBroad Recognition & Adoption of “ILPA” Private Equity Principles for GP/LP partnerships• Carry/Waterfall• Management Fee andExpenses• Term of Fund• Fee Income Offsets• GP Commitment• Standard for MultipleProduct Firms• Team• Investment Strategy• Fiduciary Duty• Changes to the Fund• Responsibilities of theLPAC• Management andOther Fees• Capital Calls andDistribution Notices• Disclosure Related tothe General Partner• Risk Management• Financial Information• LP InformationCreating an impact investing gold standard in Mongolia
  70. 70. Five Key Areas of Governance Focus71TeamFiduciaryDutyInvestmentStrategyFund ChangesLPACResponsibilities• Strict Time & Attention Standard• Strict Key Man Provisions• Immediate Notification of Changes to LPs• Strictly Defined In The Context of Social Impact• Broad Product Definition to Provide Highest Impact• Clear Carve-Outs & Restricted Sectors• Prompt & Detailed Conflict Disclosure• High Standard of Care• Annual External Audit• Amendments Require 50% LP Majority Vote• Termination of Commitment Period: 2/3 Majority Vote• Termination of Fund: 3/4 Majority Vote• Address & Resolve Conflicts• Platform for Ongoing LP/GP Dialogue• Conduit for Disseminating Information
  71. 71. The Tenger Foundation: an option for consideration• Demonstrate a higher level of commitment of delivering realsocial impact in Mongolia via a wide range of capital includinggrants• Initial funding of US$0.5-1MM• Supported by 10% of Net Carried Interest from GPs• Separate governance board• Support schools, hospitals & clinics in village areas directlyconnected to investee companies• Make investments, provide grant capital & provide technicalsupport to small firms that may create future Fund opportunities• Create virtuous circle of positive impact, publicity andreinforcement for Fund activities• Create a deeper level of engagement & benefits for firms,communities & investorsRationaleUse OfProceedsFunding &Set-upBenefits
  72. 72. Exit Strategy and Target Returns73Fund TenureTargetReturnsExitStrategy10 yearsNet IRR15~20%FinancinginstrumentDuration and Exit OptionsImplications for SocialEnterprisesLong-term LoansHigh risk Long-term Loans(Mezzanine)EquityHybrid Equity(Convertible debt)Duration: 3 to 5 yearsExit: Interest and Principal repaymentDuration: 3 to 7 yearsExit: Interest and Principal repaymentDuration: 5 to 10 yearsExit:- Buyback of shares by management- IPO on Mongolian Stock Exchange- Sale to strategic investor- Access to long-term capitalbased on future cash flows- No dilution of ownership- High entrepreneurial flexibilityin the use of capital- Flexible repayment terms- Flexibility in raising further debtdue to increased equity base- Option to buyback shares in thefuture to retain ownership- Access to experienced directors
  73. 73. The Fund Should Target a size of USD50-70M74USD MillionSource: http://www.impactassets.org/files/IA%2050(3).pdfAverage DealSizeNo. ofPortfolioCompaniesTarget FundSizeUSD 3 ~ 5mm12 ~ 15 across4-5 sectorsUSD 50 ~ 70mmUSD 50 ~ 70 million fund size looksappropriate as per available dealsVarious Social Impact funds focused onsingle geography as benchmark01020304050607080Fund Size (Actual / Lower end) Fund Size Higher end)
  74. 74. 758. Marketing Strategy
  75. 75. A Unique Mongolian Proposal• New type of investment fund which benefits not only the investors butalso the Mongolian society and environment• Tapping into a unique market opportunity• Focus on local SMEs to fill in the “Missing Middle” financing gap• Targeting non-mining SME sectors to address the “Resource Curse”and foster an entrepreneurial spirit• Creating a new asset class for investors to create social impact• Emphasis on incorporating best international practices, as well asproposing new ones, with regard to social investment assessment andmeasurement• Strong management team with a ‘new DNA’• Proposing an ‘improved’ Private Equity model tailored to impactinvestments76“Big Sky Thinking: Mongolia’s First True Social Impact Investment Fund”
  76. 76. Management TeamEducationExperienceSkillsCommitmentTeamworkPassionDefining a new type of DNA• Top schools in Mongolia and abroad (orequivalent vocational experience)• Banking, Industry, Multi-lateralOrganisations, Vocational Training• Demonstrated commitment to social impact• Technical, financial, interpersonal, social impact• Team oriented, broad minded & collaborative• Demonstrated passion for driving social impactprogramsReputation • Good reputation for honesty and integrity77
  77. 77. Marketing DocumentationFull pack of necessary documents as deliverables78Pitch Book• Clear mission statement and ethos• Tailored to the audience• Attractive to investors• Analysis of investmentconsiderationsPrivate Placement Memorandum (PPM)• Terms of interests of shares offered to investors• Details of the General Partners or members ofthe board of directors• Information about the investment advisor andthe management agreement• Material risk factors, etc.Frequently Asked Questions (FAQ)• Constantly updated• Comprehensive and addresses all aspects ofThe Fund for consistent messagingDue Diligence Pack• Contains all critical informationregarding material aspects such asfinancial, legal, management etc.• Outline approach to due-diligenceCreate credibility through professionalism
  78. 78. Prioritised Targeting of Key InvestorsFocused & Systematic Approach to FundraisingMiningCompaniesMongolianCorporates/High NetWorthMultilateralOrganisations& ImpactInvestorsGlobalChina/Russia”3rd Neighbour”InvestorsWho?Why?ExamplesPositive imageDeveloping MongoliaGrow/Support supplychainOyu TolgoiTavan TolgoiProphesyInvest in futureGive backGrow/Support supplychainPositive imageNewcomBodi GroupShunklaiGencoDevelopment mandateAligned objectives andinterestsSupport MongoliaEBRDIFCADBEuropean multilateralsRockefeller FoundationDiversificationSupport growing trendEmerging Market ExposurePositive imageFinancial InstitutionsEndowments/FoundationCorporatesPensionsFund of fundsAnchor Investors Other InvestorsKey motivator for anchor investors is more social impact than pure financial return
  79. 79. Some sample of current funds in the market with a Mongolian themeinclude:• Firebird Mongolia –focuses on both listed and traditional PE• Silk Road –focused on listed Mongolian stocks, PE, and real estate• Mongolian Opportunities Fund – PE focusing on miningservices, infrastructure companies and other high growth industriesOthers include Origo Altai, Korea Mongolia Resources Fund, etc.80Current players in the Mongolian fund space and their positioningFund Positioning – Current Market PlayersA positioning based solely on a “Mongolia angle” may not be enough to differentiate
  80. 80. Impact/Social investment funds in the market tend to have positioningfocus based on geographic region, sector, specific social mission or acombination.Examples:• Renewal2 – green solutions PE fund focused in US/Canada• Core Innovation Capital – financial services for under-banked in US• Acumen Fund – social mission focused, less financial focus• Mindful Investors – traditional PE fund that focuses onhealth/sustainability themed consumer products companies.81The impact investing fund spaceFund Positioning – Impact Investing FundsNeed clear focus and social mission that is distinct to appeal to target anchors
  81. 81. • It is recommended that the fund have both a geographic and social impact focus, but notnecessarily a sector focus.• Therefore the fund should position itself as Mongolia’s first impact investment fundwhose mission is to seek balanced economic growth that benefits all Mongolians.• Social impact angle should be front and center in positioning in order to preventgrouping as “just another Mongolian PE fund”• Mongolia at a cross-roads in development, should stress the urgency of an impactinvestment fund at this moment in time• Balanced financial and social returns possible and desirable82Positioning should appeal to anchor investor’s key motivationin addition to differentiating from current market playersFund Positioning – RecommendationA balanced positioning with social mission in addition to financial returns a must
  82. 82. Fund Raising Stage•Create investor list by category•Seek governmentengagement/support•Screen investors for valuesalignment•Prioritise, organise &prepare pitch•Evaluate placement agent•Leverage networks to anchorslike OT (GIFT, local chambers& assoc., etc.)•Tracking system(clients, investorsize, probability ofinvesting, etc.)•Utilise social media to buildbuzz in NGO circles/publicOperations Stage•Advertise The Fund to localentrepreneurs•Hold forum to allow localSMEs to take part in aselection competition fortarget projects•Open applications online forlocal entrepreneurs to submitbusiness plans forconsideration•Coordinate with Xacbank onmarketing as well as companyreferrals from their client base•Joint workshops with NGOs forbusiness capacity building toenhance profileImpact Realisation Stage•Highlight investor’scontributions to positive socialimpact•Generate awareness ofsuccess stories via mass mediaboth locally and globally•Liaise with portfoliocompanies to set up a publicaffairs function and develop aPA strategy to promote further•Short YouTube video seriesthat highlight successfulinvestments in SMEs and thesocial impact that resultedOngoing Marketing Plan83
  83. 83. 84• Local anchor investors can be approached directly using relationships and networks .• For other potential investors (such as pension funds, fund of funds, foundations andfamily offices) with no presence in Mongolia, placement agents with access can beconsidered.• Placement agent generally charge ~1% commission on amount raised, however as this isimpact investment fund discounts may be secured.• Funds that closed in Q3 2011 took an average of 17 months to fundraise vs. 20.4 monthsin 2010 and 11.4 months in 2007*.• A social impact fund positioning may reduce this time by appealing to more classes ofinvestors that have more than pure financial focus.Both direct placement and agencies should be considered* Source: Preqin Global Private Equity newsletterDistribution and Fundraising Period
  84. 84. Sky Wolf Fund85The wolf is worshipped in Mongolia as asymbol of the nomadic spirit.
  85. 85. 869. Conclusion and Recommendations
  86. 86. 87Mongolia is at a critical crossroad for sustainable growth• Massive potential for SME growth• Diversification from the mining sector• Irreversible environmental harm must be avoided• Crucial to have local ownership and local community involvement• Highly educated and under-utilised workforce• Government engagement is criticalA quantum leap in the social impact investing space• Sound basis for a new impact fund structure proposal• Creation of a new asset class for investors to create sound impact• Need for a fully encompassing and progressive set of social impact measurements andassessment criteria• Attract a new breed of players in business, government and civil society• Fund size target USD 50-70 million, hard cap 100 million• Focus sectors: Agriculture, Education, Affordable Housing, Healthcare, WasteManagement, Mining Supply ChainConclusions and Recommendations
  87. 87. 8810. Appendix
  88. 88. “A citizen or legal entity in Mongolia engaged in smalland medium business operations that generatesrevenue of MNT 500 million to 5 billion and employs upto 200 people. At minimum it must be able to provide acrude financial statement and governance structure.”-Impact Fund purposeMongolian Government Definition:“small and medium enterprises are those having less than 199 full-time andcontracted personnel and up to MNT 1.5 billion in sales.”-SME Law of Mongolia89Source: Government of Mongolia, 2007, SME Law of Mongolia, Ulaanbaatar, Mongolia.Definition of SMEs

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