TBN Members Day 2011 - Steve Beck - Changing attitudes in the fight against poverty

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Steve Beck gave an overview of the changing attitudes towards the fight against poverty, the role of the private for-profit sector in development and the growth of the Social Venture Capital sector. He also gave 3 examples of successful investments made into businesses that are directly impacting poverty.

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  • FOR THEREALLY SENIOR PEOPLE AMONG YOU WHO CAN ONLY THINK IN PICTURES AND SOUND BYTES, I’ve created an Executive Summary. So in the next 60 seconds you’ll get the gist of what I’m saying.
  • True whether we’re talking about commercial business or aid…
  • Prompting a variety of responses: anger, denial, blame-throwing and just out and out paranoia.
  • While we’re reaping the whirlwind of a mindset that maximizes the short-term bottom line at the expense of anything else,Entrepreneurs, investors… even managers… are searching for a greater sense of purpose and meaning in their work.
  • IMPACT INVESTING may just be the answer we’ve been looking for… a cool new approach – some have even called it an asset class – that integrates doing well and doing good… Except we’re not totally sure what impact investing really is.That hasn’t stopped people talking about the great exploits they are planning…
  • I could be at a conference each week… Socap has 1,500 people attending each yearExcept the same people and case studies are always presented… Talk seems to be way out ahead of the walk.
  • Impact Investing has been unleashed on an unsuspecting world to be sure… and it is a movement that is growing (like a virus)… but it’s still too early to assess its real potential or impact.OK, End of Exec Sum… really senior people should be wholly satisfied at this point.The rest of you may be asking…
  • OK, let’s double-click on these points.
  • 2005 WE HAD JEFF SACHS’ “THE END OF POVERTY” WHICH ADVOCATED FOR TOP DOWN ASPIRATIONAL GOALS FINANCED BY A MASSIVE INCREASE IN OFFICIAL DEVELOPMENT ASSISTANCE. MANY CELEBRITIES AND WORLD LEADERS GOT ON THE BANDWAGON AND HIS EARTH INSTITUTE AT COLUMBIA UNIVERSITY INITIATED THE MILLENNIUM VILLAGE PROJECTS IN VARIOUS PLACES AROUND THE WORLD. THEN, RISING UP FROM INSIDE THE WORLD BANK AND OUT OF AFRICA COME SOME OTHER MORE SKEPTICAL VOICES…ADVOCATING THE NEED TO FUEL ENTERPRISE: 2006 FIGHTING POVERTY THROUGH ENTERPRISE; 2007 WHITE MAN’S BURDEN; 2008 DEAD AID2002 SUBTITLE… WE DON’T WANT ECONOMISTS TO BE HAVING ADVENTURES AND MISADVENTURES… DOCTOR’S ADVENTURES AND MISADVENTURES IN YOUR BODY…
  • THERE IS A PLACE FOR PHILANTHROPY HOWEVER. LET’S NOT THROW THE BABY OUT WITH THE BATHWATER.LAST POINT IS PARTICULARLY TRUE OF PRIVATE PHILANTHROPY. WE’VE ALL EXPERIENCED THIS.LET’S TURN TO IMPACT INVESTING…
  • FINANCIAL RETURN: RETURN OF CAPITAL ALL THE WAY TO FULLY RISK-ADJUSTED RETURNS.ALL VERY DRY AND THEORETICAL… SHARE EXAMPLES OF 3 INVESTMENTS WE’VE DONE IN THE PAST 2 YEARS.
  • KENYA2.5X IN 18 MONTHSCOMPANY HAS RAISED MORE THAN $16M OF EQUITY CAPITAL TO DATE…
  • OPERATING PROFIT OF >$100K PER MONTH IN ETHIOPIA ALONE
  • 3 STONES AND A PILE OF WOOD = 40 CIGARETTES EACH MEAL COOKEDNEARLY 2M PEOPLE DIE EACH YEAR DUE TO INDOOR AIR POLLUTION CAUSED BY COOKING SMOKE… THESE PEOPLE ARE OVERWHELMINGLY WOMEN AND CHILDREN.40,000 STOVES IN FIRST 12 MONTHS OF OPERATION
  • POLICY CHANGE: GOVERNMENTS THAT ARE BROKE LOOKING TO UNLEASH NEW SOURCES OF CAPITAL TO ADDRESS SOCIAL PROBLEMSFOUNDATIONS LOOKING TO DEPLOY THEIR INVESTED ENDOWMENTS IN ADDITION TO THEIR GRANTS TO FURTHER CHARITABLE MISSIONNEW CORPORATE FORMS THAT PLACE A FIDUCIARY RESPONSIBILITY ON DIRECTORS FOR THE SOCIAL AND ENVIRONMENTAL AIMS OF THE COMPANY; NOT JUST MAX SHAREHOLDER VALUE.NEW APPROCAHES TO AID… SHIFTING THE DFI’S
  • EITHER A CONFERENCE OR A REPORT OUT EVERY OTHER WEEK… REALLY!
  • GIIN/ANDE/TBN?IRISImpactBaseGIIRS
  • IRIS – Social and Environmental Impact Reporting Standards – accepted taxonomy of social/environmental impactImpactBase – Searchable database for investors and > 200 fund managers – helping to make the marketGIIRS - GIIRS (which stands for the Global Impact Investing Ratings System) is a comprehensive and transparent system for assessing the social and environmental impact of companies and funds with a ratings and analytics approach analogous to Morningstar investment rankings and Capital IQ financial analytics. It seeks to spark the impact investment movement by providing a tool that is intended to change investor behavior and unlock the potential of this new asset class
  • Impact floor can be “do no harm” (negative screens like tobacco, drugs, and arms) or can be more positive (renewable energy, agriculture)Financial floor can be different for different investors (foundations starting to allocate capital as program related investments – delighted to see a bond rate of return; others looking for fully risk-adjusted returns.
  • DFIs – still biggest source of capital for frontier market impact investmentsBanks and financial institutions (Morgan Stanley, DB, LGT – interesting story)Foundations and family officesFunds of fundsInvestor Clubs200 registered managersAcumen Fund gets cited most often and have been an important pioneer but be careful: it’s a non-profit structure so they are investing grant capital without obligation to return anything to investors
  • c. 200 organizations, $450M of investments and grantsExample of a philanthropically minded family setting up a flexible structure whereby they can choose the right tool for the job.less than 1% of the capital U.S. foundations disbursed in 2007 (the last year of complete data) supported for-profit ventures. Moreover, only 4% of that 1% was invested in equity — precisely the kind of risk capital than can nurture businesses aimed at creating social good. With hundreds of billions of dollars flowing into philanthropy over the next few decades, the big urgent question will be: How can we best deploy these funds?We believe in "flexible capital" — that is, we invest financial and human resources in both for-profit and nonprofit ventures. It's not an either-or decision for us; we believe using both grants and for-profit investments can be powerfully complementary.OPPORTUNITY TO OPEN UP THE FOUNDATION ENDOWMENT ASSETS (THE 95% OR $750 BN) AND PUT MORE OF IT TO WORK NOW, RATHER THAN SEEING IT SIMPLY AS 5% ($38BN)
  • Foundation started in 2000 by the Kleissner family.In 2004, agreed to work to investing 85% of Foundation endowment assets in impact investments. In 2009, based on 5 years experience, increased that to 100% by the end of 2013.In 2010 are at 70%.Target (net of fees) performance = CPI plus 5%to enable us to continue giving 5% annually on an inflation adjusted basis, thereby keeping the giving and investment capacity of the Foundation whole over time.
  • TBN Members Day 2011 - Steve Beck - Changing attitudes in the fight against poverty

    1. 1. Changing Attitudes in the Fight Against Poverty TBN Members Day December 3, 20110 © SpringHill Equity Management LLC
    2. 2. The Executive Summary1 © SpringHill Equity Management LLC
    3. 3. Business-As-Usual Isn‟t Working…2 © SpringHill Equity Management LLC
    4. 4. …Prompting Some Paranoia…3 © SpringHill Equity Management LLC
    5. 5. …And Some Serious Soul-Searching “The figures for the last quarter are in. We made significant gains in the 15-26 year-old age group… But we lost our immortal souls.”4 © SpringHill Equity Management LLC
    6. 6. Impact Investing Bursts On the Scene Danook shows off his Swiss Army Rock.5 © SpringHill Equity Management LLC
    7. 7. Everyone Is Now Talking BIG “We have two offices throughout the world.”6 © SpringHill Equity Management LLC
    8. 8. But Lasting Impact Is Not Yet Known „Uh oh…‟7 © SpringHill Equity Management LLC
    9. 9. Where’s The Beef?8 © SpringHill Equity Management LLC
    10. 10. Questioning the Post-War Aid Model Economists’ Adventures and Misadventures in the Tropics9 © SpringHill Equity Management LLC
    11. 11. Aid Does Not Deliver Development ♦ Fosters dependency Aid and Income Growth in Africa (10-year moving average) ♦ Distorts markets ♦ Misaligns incentives 20 2.5 Growth GDP/Capita (%) 18 2.0 ♦ Rarely yields scalable, sustainable 16 impact Aid/GNI (%) 14 1.5 12 1.0 10 ♦ Fuels donors’ need to be needed 8 0.5 6 0.0 ♦ Undermines accountability 4 2 -0.5 between government and its 0 -1.0 citizens 70 73 76 79 82 85 88 91 94 97 00 19 19 19 19 19 19 19 19 19 19 20 ♦ Encourages the best and brightest Aid/GNI Growth GDP/Capita in “recipient” countries to work Source: ECIPE Analysis of World Development Indicators Online for government or international NGOs10 © SpringHill Equity Management LLC
    12. 12. Giving – Dangers & Limitations ♦ Celebrating the grant ♦ Measuring the activity ♦ Appealing to the donor’s “messiah complex” ♦ Fostering dependency ♦ Lacking sustainability ♦ Lacking scalability11 © SpringHill Equity Management LLC
    13. 13. Good Giving… ♦ Does no harm ♦ Meets emergency (temporary) needs ♦ Fuels local initiative ♦ Has the potential for local sustainability ♦ Recognizes that the giver and recipient are both benefactors and beneficiaries12 © SpringHill Equity Management LLC
    14. 14. Impact Investing Defined “ Investments intended to generate a positive social impact ” beyond financial return ♦ Investments: debt or equity capital. ♦ Intentional about positive social and/or environmental impact (not just negatively screened). ♦ Social/environmental impact is therefore measured. ♦ Financial return is expected. Source: JP Morgan & GIIN, Impact Investments: An Emerging Asset Class, November 2010.13 © SpringHill Equity Management LLC
    15. 15. Investing in Primary Education State School System  3rd quartile pupil achievement  For-profit schools @ < $4 per month  Universal “free” education is NOT free  Pupils outperforming peers by 30- ($2-5/month) 100%  30-50% of instruction time lost due to  37 schools; now opening a new school teacher absenteeism & neglect every 3 days  No accountability to parents  By 2018: 3,300 schools; 2.4m students; 36,000 teachers  Investment valued at 2.5x in Dec 2010 Series B financing14 © SpringHill Equity Management LLC
    16. 16. Investing in Mobile Information Access “Google & Craigslist” (Addis Ababa)  Less than 5% Internet penetration  Short-code SMS/MMS info portal  Lost time  Built and launched multiple applications:  Information asymmetry e.g., health management, job  More than 450 million mobile phones listing/search, news  Mobile phone is the computing  18% market penetration in 4 months platform of choice  Poised to expand to new country markets15 © SpringHill Equity Management LLC
    17. 17. Investing in Energy Efficient Stoves Traditional Stove ♦ 20-30% of income spent on wood or ♦ 50% saving on fuel (time & money) charcoal ♦ Reduce smoke & toxins by 85% ♦ Respiratory ailments ♦ Local (Kenya) manufacturing ♦ Fire hazard ♦ Target sales: > 700,000 stoves ♦ Deforestation/environmental damage ♦ Carbon offset ♦ > 30% IRR16 © SpringHill Equity Management LLC
    18. 18. Impact Investing Growth DriversMoney seeking diversificationValues driven investors andconsumers Impact WILLGrowing inequity and Investingenvironmental crisis IT is now TAKEApparent early success “locked in” OFF?Talent pushing new careersOpenings for policy change Source: Monitor Institute.17 © SpringHill Equity Management LLC
    19. 19. A Growing Movement…18 © SpringHill Equity Management LLC
    20. 20. Despite the Hype, It‟s Early Days… Uncoordinated Marketplace Value Capture Maturity Innovation Building Disparate  Developing  Growth occurs as  Activities reach a entrepreneurial activities centers of mainstream players relatively steady spring up in response to enter a functioning state activity market need or policy market  Growth rates slow incentives  Building enabling  Entities leverage the  Industry Disruptive innovators infrastructure fixed costs of their consolidation pursue new business that reduces previous investments in models in seemingly transaction costs infrastructure across mature industries  Unlocking latent higher volumes Characterized by lack of supply of capital  Organizations become competition except at top more specialized by building end of market efficient intermediation  Developing the absorptive capacity for investment Source: Monitor Institute. capital 19 © SpringHill Equity Management LLC
    21. 21. Enabling Infrastructure and Standards IRIS ImpactBase GIIRS20 © SpringHill Equity Management LLC
    22. 22. Investor Segments Impact Floor High Financial-first investors with an impact floor Financial Return Impact-first investors with a financial floor Financial Floor 0 0 High Social Impact Adapted from Solutions for Impact Investors: From Strategy to Implementation, RPA 2009.21 © SpringHill Equity Management LLC
    23. 23. A Growing Field... Investors Managers22 © SpringHill Equity Management LLC
    24. 24. ON – “Flexible Capital” Foundation LLC $239m $209m Equity & Grants PRIs“ Debt Omidyar Network is structured to support the notion that philanthropy is more than a type of funding. In its truest sense, philanthropy is about improving the lives of others, independent of the mechanism …our investing style transcends typical boundaries that separate for-profit investing and traditional philanthropy. We believe using both grants and for-profit investments can be powerfully complementary.23 © SpringHill Equity Management LLC
    25. 25. Integrated Investing… Target: 100% mission-related investments delivering net performance of CPI plus 5%.“ It does not make sense to partition our grant-making and investing, especially because our investments could potentially contradict our values. We are entrepreneurs and we always think about leverage. With limited capital and especially limited grants, what better way ” to enhance impact that using all available capital to reinforce what we believe in?24 © SpringHill Equity Management LLC
    26. 26. The Risks: Impact Investing Is… …too HARD …too EASY  Insufficient compensation for  The current financial markets risk results in lack of interest and incentives create an  There may not be enough good irresistible pull toward deals “greenwashing” and dilution of standards  Execution proves to be too difficult  The very premise of having a positive impact is undermined  Hype creates a bubble, and the industry is discredited especially from overpromising Source: Monitor Institute.25 © SpringHill Equity Management LLC
    27. 27. Summary and Concluding Thoughts… ♦ The intentional transforming impact of business is now well recognized. ♦ The impact investing field is developing rapidly and becoming more professional. ♦ But these are still early days with more talk than walk. ♦ TBN has been an early mover in ‘business as development’. ♦ How to focus and leverage TBN’s experience now?26 © SpringHill Equity Management LLC
    28. 28. Thank You www.springhillequity.com27 © SpringHill Equity Management LLC

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