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Coordinating Impact Capital


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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 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.

Published in: Economy & Finance, Business
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Coordinating Impact Capital

  1. moderator<br />John Kohler<br />Program Director for Social Capital at the Center for Science, Technology and Society<br />
  2. Venture capitalists have it easy…<br />Venture investing in the developed world<br /><ul><li>Targets of opportunity are sourced locally
  3. Investment syndicate drawn from local venture capital relationships
  4. Results of venture capital backed product or service has a global impact
  5. Well-defined path of “up-round” investing
  6. Ready-made pools of “up-round” capital waiting for winners to emerge from previous financing</li></ul>Venture investing in the developing world<br /><ul><li>Targets of opportunity are sourced remotely
  7. Investment syndicate drawn from the global impact investing community
  8. Results of venture capital backed product or service has a local impact
  9. Scarce “up-round” capital available </li></ul>3<br />
  10. Are there…?<br />Headwinds to Efficient impact investing markets<br />-Dalberg<br />
  11. Horizontal Capital Aggregation Scope<br />Previous Reports<br />Outcomes of this study<br /><ul><li>Examine the requirements of capital from each source
  12. Suggest a model for successful syndication
  13. Participants across the ‘life cycle’ of SGB development
  14. Terms to guide a successful ‘handoff’
  15. Identify funding sources by mission and outcome
  16. Provide examples of phased financing (rural electrification)
  17. Suggest a template for future syndication
  18. Building the case for impact investing
  19. Study of the impact investing landscape
  20. Larger scope of investing in businesses in the broader developing world – BOP loosely defined
  21. Assertion of impact investing as an emerging asset class</li></ul>5<br />
  22. Direction<br /> of Capital<br />Capital Sources<br />Capital Sources<br />Geography<br />Mission<br />Intermediary<br />Funding Organization<br />Size of Funding<br />Type of <br />Capital<br />Desired Liquidity<br />Type of SGB<br />SGB Organizational Objectives<br />Desired Outcome<br />Reporting Requirement<br />Expected Time Frame<br />Investment<br />Outcomes<br />Target<br />6<br />
  23. <ul><li>Primarily foundations and individuals
  24. Financial institutions and corporations are largely absent
  25. Financial first vs. impact first discussion continues</li></ul>Sources of impact capital<br />
  26. Emerging use of multiple investing instruments<br /><ul><li>Some funds are creating horizontal aggregation internally
  27. Equity is tied to higher IRR targets</li></li></ul><li>Progress in addressing the “missing Middle”<br /><ul><li>Capital shift to > $750K
  28. Multiple financing instruments used
  29. The demotion of equity</li></li></ul><li>Direction of Capital<br />Segmenting The BOP(Base of Pyramid Market)<br /><ul><li>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
  30. When asked, the vast majority of respondents do not measure target income levels of their markets</li></ul>10<br />
  31. Direction of Capital<br />Expected Returns: Rural Vs. Urban Focus<br />11<br /><ul><li>Respondents indicated that there is simply not enough development in rural areas to achieve a market rate of return
  32. 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</li></li></ul><li>Intermediary Use To Deploy Capital<br />Direction of Capital<br />Expected Returns with Intermediary Use<br />Expected Returns WITHOUT Intermediary Use<br /><ul><li>Most investors who use an intermediary invest through debt instruments and need a local bank or partner to help deploy the loan
  33. 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</li></ul>12<br />
  34. Direction of Capital<br />Capacity Development Use<br /><ul><li>Few organizations use Capacity Development Organizations (CDOs), also referred to as Technical Assistance organizations
  35. “We do not know who they are in the areas where we operate”
  36. “They are a big added cost”
  37. Many organizations provide their own capacity development services (business mentoring, operational management and consulting as part of their investment)
  38. Redefine who CDOs are: Local business leaders, corporations, advisors and consulting firms</li></ul>13<br />
  39. Monthly contact<br />Non-Monthly Contact<br />14<br />Frequency of contact between investors and SGBs<br /><ul><li>Investors who practiced “high-touch” portfolio management (defined in our study as “monthly contact or greater”) reported significantly higher return expectations</li></li></ul><li>Polarization of return expectations<br /><ul><li>Expectations are softening but still the debate rages
  40. Sets the stage for syndication</li></li></ul><li>Re-calibration of investment duration<br /><ul><li>Vast majority of respondents are adjusting their time horizon
  41. 75% are now expecting 5 - 10+ year holding period
  42. Time is the enemy of IRR</li></li></ul><li>The unintended consequence of IRR targets<br />Tight screens are used in assembling impact portfolios<br />Equity instruments are assumed<br />Creative investment instruments could align with what social enterprise can deliver<br />
  43. 18<br />Phased Investing Hypothesis<br />Phased Investing (baton pass) – Different impact investors contributing capital at each phase of the SGBs’ development cycle. Examples of this may include:<br />Grant (capacity building)<br />Soft loan (proof of concept)<br />Quasi equity / equity investment (scale the business) <br />Debt provider (long-term, commercial loan—scale the business <br />Co-Investing—Multiple investors pooling capital to make one type of investment. <br />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. <br />
  44. Co-investing vs. Phased Investing<br /><ul><li>Although syndication is happening, it is not happening on a regular basis
  45. Phased investing is a much more efficient type of syndication and is not happening</li></ul>19<br />
  46. Recommended Actions<br /><ul><li>Begin treating capital as ‘work in process’ - know your upstream and downstream partners and help prepare your investee for the next ‘round’
  47. Increase the use of local capacity development organizations
  48. Develop new investment instruments that reward investors from free cash flow, not valuation build-up
  49. Establish mechanisms for ‘mezzanine’ financing to reward the early and brave impact investor
  50. Work on market mechanisms that earn greater investor confidence</li></ul>Diligence and validation<br />Mentoring and capacity development<br />Metrics that matter<br />Financial and regulatory consistency<br />
  51. Researchers<br />Sol Tran<br />Jared Abercrombie<br />Krishnan Manjeri<br />Contributing Editors<br />Greg Dalli<br />Rachel Haley<br />Project Lead<br />Jessica Sawhney<br />
  52. Panel discussion<br /> Susie Lee<br />Principal, TBL Capital<br />Sean Foote<br />Management Team, Labrador Ventures<br />Taryn Goodman<br />Senior Manager, Impact Investing, RSF Social Finance<br />
  53. Global social benefit incubator<br />
  54. Download online<br />Full Report Available Online<br /><br />