TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report

December 2010 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Nick O’Donohoe Antony Bugg-Levine Amit Bouri

Our research report covers six major questions ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],1 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

What defines and differentiates impact investments? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Impact investing: Our definition Two-dimensional framework 2 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S Investments intended to create positive social impact beyond financial return ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Business sectors for impact investing Means of impact

Who is involved and how do they allocate capital? Investors: Market participant examples ,[object Object],[object Object],[object Object],[object Object],Development finance institutions Corporates & HNWIs Pension fund managers Financial institutions Private foundations ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],3 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

What makes impact investments an emerging asset class? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],An emerging asset class 4 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

How much financial return are investors expecting and realizing? (1 of 4) Instrument distribution Sector distribution Geographic distribution Source: GIIN, J.P. Morgan. Source: GIIN, J.P. Morgan. Source: GIIN, J.P. Morgan. * ”Other” includes community development finance. Survey sample ,[object Object],Financial returns survey: Methodology ,[object Object],[object Object],[object Object],5 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

How much financial return are investors expecting and realizing? (2 of 4) Return expectations vs. benchmarks: Average return expectations by instrument and region Source: GIIN, J.P. Morgan. Horizontal bars: Average realized returns for benchmark and average expected returns for impact investments, gross annual IRR or yield, in USD. Vertical lines: Range of expected returns reported, gross annual IRR or yield, in USD. Note: Benchmark returns are average annual returns for: J.P. Morgan’s Developed Markets High Yield index and Corporate Emerging Market Bond (“CEMBI”) Index, over the period 2002 – 2010 (our full data history); and Cambridge Associates US Venture Capital Index and Emerging Markets Venture Capital and Private Equity Index, for vintage years over the period 1989 – 2006. Impact investment return expectations are calculated by taking an average of survey responses (each of which represents a range of expected returns for a given investment instrument in a specified region) across the population of reported investments. The number of investors who responded for each instrument, and the number of investments in the sample (respectively) are: Dev mkt HY debt = 9, 219; EM HY debt = 10, 411; Dev mkt venture capital = 6, 91; EM venture capital = 15, 119. Readers should note the low number of Dev mkt venture capital investors represented. Note that the range of expected returns for developed market debt excludes a single investment reported by one respondent with an expected range of returns of 20-25%; all other data points fall within the range shown. Both the developed market and emerging market venture capital ranges include investments with expectations of 25%+ return (the range was not specified above that level). Developed market high yield corporate debt Emerging markets corporate debt Developed market venture capital Emerging market venture capital Benchmark 11% Impact 0-5% Benchmark 9% Impact 8-12% Benchmark 28% Impact 15-20% Benchmark 10% Impact 12-15% ,[object Object],[object Object],[object Object],6 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

How much financial return are investors expecting and realizing? (3 of 4) Venture capital annualized returns in developed and emerging markets Source: Cambridge Associates ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],A note on our choice of benchmarks 7 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

How much financial return are investors expecting and realizing? (4 of 4) Respondents’ impact measurement system ,[object Object],Source: GIIN, J.P. Morgan. Number of deals per bucket; bucket sizes shown in USD mm. Investment sizes reported in USD as at time of investment. Distribution of reported investments by size Carry fees Source: GIIN, J.P. Morgan. Represents 374 investments ($582m of notional value). Source: GIIN, J.P. Morgan. Carry defined as % of fund's return retained by general partners. Represents 233 investments ($254m of notional value). ,[object Object],Source: GIIN, J.P. Morgan. Investments for which no system was reported are not included. Third party system Investees’ system Proprietary system Total # of investments = 889 Total size of investments = $1,144m ,[object Object],Management fees 8 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

How large is the potential opportunity for investments in this market? (1 of 4) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Why does the opportunity exist? Impact investments require new, innovative, sustainable and scalable business models that address underserved communities around the world 9 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

How large is the potential opportunity for investments in this market? (2 of 4) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Sizing the market – a framework Step 1: Size the potential customer base Step 2: Size the revenue opportunity Step 3: Calculate potential profit opportunity Step 4: Size capital required to generate revenue 10 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

How large is the potential opportunity for investments in this market? (3 of 4) ,[object Object],[object Object],[object Object],[object Object],[object Object],Key assumptions in sizing study 11 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

How large is the potential opportunity for investments in this market? (4 of 4) ,[object Object],Source: J.P. Morgan. Potential profit and invested capital to fund selected BoP businesses over the next 10 years Some exceptions to the framework Microfinance Agriculture Energy Technology Infrastructure ,[object Object],[object Object],[object Object],[object Object],SME finance ,[object Object],12 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

What does risk management and social impact measurement involve? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Managing impact investments 13 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

Key conclusions ,[object Object],[object Object],[object Object],[object Object],14 I M P A C T I N V E S T M E N T S – A N E M E R G I N G A S S E T C L A S S

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TBN National Conf. '11 - Nick O’Donohoe - Impact Investing Report