Category Archives: CSR

DEVELOPMENT OF AN IMPACT INVESTING INDUSTRY

These are issues that I believe impact investment professionals will grapple with for the foreseeable future:

Impact Measurement. There is still no clear consensus on how to measure the social impact of impact investments. A number of methodologies have been developed, each seeking to create a standard that can be used across a wide range of investments.

  • IRIS is a catalog of impact metrics managed by the Global Impact Investor Network. IRIS is intended to provide a common language for measuring social, environmental and finance performance.
  • GIIRS ratings, developed by B Analytics uses the B Impact Assessment to rate the impact of a given investment or portfolio. The GIIRS rating includes an Overall Impact Business Model Rating, Overall Operations Rating and a Fund Manager Assessment.
  • The UN Global Compact measures companies’ performance in meeting universally recognized standards of human rights, labor, the environment, and anti-corruption. The Global Compact also encourages alignment with the UN Sustainable Development Goals.

In addition, several organizations have their own impact measurement methods tailored to suit their specific circumstances. Impact investors and social enterprises will need people who can sort through these methodologies, and understand how to apply them to their organizations.

Mainstreaming” of Impact Investments. When will impact investing become the norm? Will companies ever report social results alongside financial results as a matter of course?

Based on my experience at the IBL workshop, much of impact investing mirrors the startup world, involving relatively young and small companies whose value proposition includes some form of groundbreaking innovation. One sign of mainstreaming will be when we see larger, institution-sized impact investments. In addition, one wonders if we will see established, Fortune 500 companies reporting social impact results. These are companies that have tremendous influence on the global economy, the global workforce, and on communities and municipalities. They usually discuss their interactions with stakeholders in their annual reports, but that is not the same as an objective measurement of impact. How will impact influence executive compensation? Firm value? Corporate governance? Professional recruitment? These questions are being asked and discussed but the answers are still some distance away.

Tagged , , , , , , ,

Reflections on the UN Climate Talks (Guest Post)

The pledges are a good sign if followed up with action. Meanwhile there is a role for the private sector in promoting and implementing renewable energy, as well as energy saving and monitoring products and services. This is a huge opportunity for impact investors to achieve measurable, tangible results.

caribbeanclimate

Indi Mclymont-Lafayette (L), Journalist and the Regional Director of Panos Caribbean Indi Mclymont-Lafayette (L), Journalist and the Regional Director of Panos Caribbean

COP 20 wrapped up in Lima, Peru last week and many attendees are reflecting on the negotiations. Today Caribbean Climate features a review by Indi Mclymont-Lafayette, a Journalist and the Regional Director of Panos Caribbean – a non-government organisation that focuses on development communication.

Soo… what has been achieved after two weeks of talks?

That was the question one of my friends whatsapped me – knowing that I was attending the 20th United Nations Climate Talks in Lima, Peru from December 1-12.

I hesitated before answering.

Truth to tell, if you followed the achievements highlighted by the United Nations – then a lot had been done. The achievements included:

  • Country pledges to the Green Climate Fund (GCF) pushing it past a US$10 billion start up target.
  • Germany pledging and giving 55 million Euros (roughly US$68 million) to the Adaptation…

View original post 352 more words

Tagged , ,

How Anti-World Bank Activists Misunderstand Business

I was recently made aware of Interoccupy‘s (link) protest against the World Bank at their fall meeting in Washington. What follows is my reaction to what I feel is Interoccupy’s misunderstanding of the arena in which most businesses operate:

I have followed the history of problems with World Bank lending. Economist Joseph Stiglitz has written extensively about the issue. I find that the World Bank is torn between its role as a bank–it does after all make loans and its business model depends on loans being repaid–and its role as a development institution. When countries fall behind on a loan the World Bank behaves as banks usually to, telling the debtor to cut back on anything not directly related to loan repayment, which sometimes means cutting muscle as well as fat out of public budgets.

Interoccupy’s complaints revolve around the World Bank’s Doing Business rankings and the Bank’s alleged encouragement of large land acquisitions by agribusiness corporations. I take issue with Interoccupy’s charge that the rankings are only about serving the interests of multinationals. The countries that score high on this and similar rankings by the World Economic Forum have been the best performers in recent years not only in GDP growth but in income growth and lifting their people out of poverty. Furthermore the rankings also serve the interests of smaller businesses who do not have the ability to influence governments. The rankings are based on surveys local businesses which in the developing world will be mostly small and mid sized. Among the survey topics are Starting a Business, Getting electricity, Enforcing Contracts, and Getting Credit.

What would really change the game is if a group like Interoccupy developed their own doing Business ranking based on a concept of profitable and responsible business. Organizations like the Global Impact Investor Network (www.theGIIN.org) are developing tools to measure social impact that they would find useful. If they then cited examples of commercially successful companies that followed these principles they would have a strong case for reform.

Tagged ,

EMERGING MARKET INVESTING PART III – 5 KEY TAKEAWAYS FOR THE ENTERPRISE

For managers and entrepreneurs seeking private investment to fund an enterprise, the current environment is challenging, though still an improvement compared to prior decades. In Part III of our series, we offer 5 takeaways from 2013. These are concepts that are particularly appropriate to current market conditions and sensible in any period in the cycle.

1. Be mindful of the investing environment. We recall from Part I that private equity activity was down somewhat in 2013. Deals were down 7% and fundraising down 19% from the previous year. We know that the BRICS and other emerging economies have slowed down. So for the time being at least the emerging markets have lost some of their luster. All this has affected investor’s attitudes. Yet the long term outlook still looks good which is the message we stick to and the reason emerging economies still attract investor interest.

2. Owners and management should have a realistic understanding of the value of their enterprise, and where it fits into the spectrum of potential investments. They should also have thought through carefully their mission and objectives for the enterprise, for themselves, and for their communities.

3. Demonstrate the strength of the business model including evidence that the business or project can provide consistent cash flow. Examples include:

  • Signed contracts for current and future sales
  • For housing developments, a significant proportion of homes pre-sold either to residents or a large employer buying for its staff.
  • Offtake agreements for energy and power projects
  • Infrastructure projects that can collect tolls or user fees

4. Government support never hurts. Although most developing countries have improved business and political climates, they are still relatively difficult places to do business. It is therefore desirable to be on good terms with the relevant government bodies so. When everyone’s interests are aligned the red tape can be minimized.

The extent to which government backing is needed varies with the type of deal. For small startups it may not be necessary at all. In some cases the government is the customer then of course the company must be in a position to win a contract. In lieu of a contract, an MOU or government guarantee may be sufficient.

It should be noted that while government support is crucial, companies should avoid any activity that can be construed as corrupt as it will be an immediate turnoff to the investor. US investors are especially wary of running afoul of the Foreign Corrupt Practices Act. Any investor not appropriately concerned is probably one to avoid.

5. Strength of the management team. Investors look for relevant experience, a level of professionalism and an understanding of international performance standards. Most important, management and founders/owners should be prepared to act in the interest of building the value of the enterprise.

Current market conditions in emerging market PE investing indicate a plateau in deal growth. In this environment founders/owners should pay special attention to those factors that attract good investors. We think this is a short term phenomenon—a sensible pullback from the emerging market fever of the past few years. However the broader demographic, economic and geopolitical trends will continue to favor emerging markets in the long run. We believe capital will flow towards companies that have strengthened their foundations during the current slowdown.

 

Tagged , , , , ,

EMERGING MARKET INVESTING PART II – 3 VALUE ENHANCEMENT STRATEGIES

 

This 2nd installment of our private equity series looks at how investors have succeeded this past year. While these tactics are well known by major private equity institutions we also consider the smaller investor and those investors new to emerging market investing. This investor could be a family office, or an accredited individual investor or investor group that prefers direct investing over the limited partner role. [We will use the term “small investor” to encompass all of thee groups realizing that they are not always small in dollar terms] The approach we advocate comes under the general heading of value enhancement or value creation.

Successful emerging market investors contribute more than money to the success of their portfolio companies. With their own resources and by marshaling expertise in their networks they can enhance the value of these companies leading to a more favorable outcome at exit. This is typical of the large PE firms whose senior staff often have operating as well as financial experience.

Although not all investors will have this kind of expertise on staff, those with strong networks can mimic the kind of value enhancement that is standard procedure at the large institutions. There are professionals with region or sector specific expertise that can deliver on an outsourced basis what they cannot do in house.

Here are three value enhancement strategies:

1. Upgrading business processes

 

The investors’ due diligence should include an assessment of the company’s strengths as well as any challenges that would impede its ability to implement its business strategy. Process improvements can occur in any of several areas:

 

  • Distribution

  • Strengthening the management team

  • accounting/finance/risk management

  • ESG (Environmental, Social, and Governance) upgrades such as social impact measurement using IRIS, implementing a diversity strategy, or improving environmental sustainability

 

Small investor’s approach: Engage advisors with background in: the portfolio company’s industry, accounting and/or finance, ESG reporting & measurement.

 

 

2. Help portfolio companies open new markets

 

Within their region – especially important in African countries where it makes sense to combine several small country markets into larger regional ones.

 

In investor’s home market. There are companies that assist international firms in entering and selling in the US.

 

Essential for companies with small domestic markets. Opening new markets is key for Caribbean companies who need to go outside their small markets in order to scale.

 

Small investor’s approach:

 

Use investor’s network to link portfolio company to export opportunities.

 

Engage business development & marketing firms that specialize in helping foreign firms enter the US market

 

 

3. Provide constructive influence to portfolio companies even with a minority share

 

Small investor’s approach:

 

Work with companies where entrepreneurs’ managers’ and investor’s interest are aligned. Use the due diligence period to assess the mindset and culture of management. Look for:

 

  • Management teams and shareholders with a long term outlook

  • Shareholders with skin in the game, cash or mortgageable real estate for example.

  • In some cases it is feasible and desirable to have a level of decision making authority written into the deal.

 

Create alliances with like minded shareholders.

 

These are some of the ways in which a small PE investor can be helpful to emerging market portfolio companies to the benefit of all stakeholders.

 

 

Tagged , , , , ,

Emerging Market Investing – Lessons from 2013

 

 

 

Investors from large institutions to family offices are showing considerable interest in investing in emerging and frontier markets. The slowdown in emerging market growth is seen as a short term detour in a long run growth story. This post is the first of a three part discussion of private equity investing in today’s emerging markets.

 

As background we begin with highlights of private equity activity in 2013, culled from various reports from The Emerging Markets Private Equity Association, Alternative Emerging Investor, and Ernst & Young, with our particular focus on Latin America and Africa:

 

  • Total emerging market PE investing in 2013 was $224 billion in 883 deals, a 7% decrease in dollar volume from the prior year.

  • Most of the growth in capital deployed occurred outside the BRICS—on the so-called frontier. Several of these deals were in East Africa and Latin America (not including Brazil). These economies are growing during a time of relative sluggishness in the BRICS.

  • One non-BRIC, Mexico reached a five year high in capital deployed in 2013. Mexico was also the scene for Axis capital’s buyout of Oro Negro for $200 million, one of the ten largest emerging market deals of the year.

  • One fast growing sector within the private equity universe is venture capital. VC investing made up 43% of the deal activity in 2013 vs 17% in 2009. Many of these deals were in emerging Asia where the tech sector is more developed and more connected to the western tech ecosystem. Most of the major investors have been US based firms like Sequoia Capital and other familiar names from Boston and Silicon Valley. That said, one of the biggest emerging market VC deals was online language school Open English of Panama. A burgeoning tech sector is also developing in Africa with hubs in Kenya, Nigeria and Ghana. We discussed the growing African startup ecosystem in an earlier post. Many of the companies are of a type that can scale across borders and would be attractive to VC investors.

  • 2013 Deal volume in Africa reached its highest level in five years, up 43% to $1.6 billion according to EMPEA.

  • In Africa these industries saw the most deal activity in 2013:

  • Oil & gas
  • Electric power
  • Financial Services
  • Telecommunications

 

One sector where we do not see a large private equity presence is housing and property. Yet there are vast housing shortages in the most attractive countries. One possible reason could be the emphasis on affordability which requires holding prices down which would of course depress potential returns to investors. We have nevertheless seen that with the right mix of properties, a project can be structured in a way that satisfies investors and contributes to the availability of housing. Investors with a model oriented toward project financing should find attractive deals in the housing and property sector.

 

It has also been noted that African deals have tended to be smaller than those in other regions. It is possible that the bigger PE shops are passing on deals simply because they are too small or have less opportunity to scale or to grow a pan-African enterprise. For this reason we believe there is an opening for smaller PE firms, family offices and other direct investors.

 

In the next post we will explore the lessons from 2013 from the investor’s perspective, focusing on the smaller direct investor in a family office or small fund.

 

 

Tagged , , , , ,

Sustainability Measurement and Reporting – IRIS

 

IRIS DEFINED

IRIS, Impact Reporting & Investment Standards, is a reporting language developed under the auspices of the Global Impact Investing Network to encourage a common methodology for social impact reporting.

WHO USES IRIS AND WHY?

IRIS was designed for investors and organizations seeking investment. IRIS was born as a spinoff of an organization of investors and therefore reflects an impact investor’s perspective. It is useful to several types of investors including:

  • Investors in funds that may or may not focus on social investment
  • Direct investors in companies
  • Companies raising capital

One could also make the case for additional use of IRIS metrics by exporters seeking to participate in global supply chains.

MEASUREMENT CATEGORIES

  • Organization Description – the organization’s mission, business model, and location
  • Product Description – description or the organization’s products, services, and target markets
  • Financial Performance – standard financial statements and ratios plus other metrics related to micro enterprises and community service
  • Operational Impact – metrics that describe the organization’s policies, employees, and environmental impact; this is where sustainability is measured as well as other social metrics such as diversity
  • Product Impact – the performance and reach of the companies products and services; these metrics address the extent to which the venture contributes to the local or national economy and to quality of life indicators

The IRIS website also contains a glossary of terms used in impact measurement.

SECTOR METRICS

Most IRIS metrics are relevant to the organization across sectors. Some have particular relevance to organizations whose activities impact a certain sector.

IRIS identifies eight specific impact sectors:

  • Agriculture
  • Education
  • Energy
  • Environment
  • Financial Services
  • Health
  • Housing/Community Services
  • Water

IRIS is a useful tool for measuring social impact in a developing country context. International organizations and development financial institutions such as the International Finance Corporation often require companies seeking funding to show the economic, social and or environmental impact of their venture. IRIS can be used for making the case for investment in a given company, product or service, or project, even when it does not maximize returns on a purely financial basis. It is also useful for tracking progress against goals and reporting to stakeholders.

I would encourage all businesses operating in emerging and frontier markets to begin measuring the sustainability and social impact of their activities. This is especially true for exporters. These indicators are growing in importance not only for investors, but also for larger corporate and government buyers facing pressure to demonstrate corporate social responsibility. These companies will look to their supply chains to help boost their CSR scores. If the expertise does not exist in-house, seek out professionals with the technical and financial expertise to get the job done.

 

Tagged , , , , , , , ,