Twelve Top-Performing Impact Investing Funds

3GCINTRO 08/05/2014 15:48:28 Page 5

twelve outstanding impact investing funds that met or exceededthe expectations of their investors.

With a commitment to concurrently delivering attractive finan-cial returns and intentional social outcomes, impact investors are atthe cutting edge of Collaborative Capitalism, operating in marketsoften smaller, younger, and more idiosyncratic than mainstreaminvestors have the stomach or capacity to tackle, and that demandcross-sector skills that many mainstream investors simply do notpossess.

As a result, successful impact investing fundmanagers are extra-ordinarily creative, nimble, and resilient—all qualities we wanted toexplore and learn from when we first culled an initial universe of350 funds to 30 that were recommended by their investors.

We then decided on the final twelve funds, which were repre-sentative of the breadth of activity in impact investing, with trackrecords of financial and social performance that were suitablyrobust and sharable. The twelve funds are listed here; their impacttarget areas are illustrated in Figure I.1. With the objective ofunderstanding the key factors that had undergirded their success,we interviewed not only fund managers but also the investors inthose funds, the recipients of investor capital, and the actors withintheir immediate peer group.

Twelve Top-Performing Impact Investing Funds

Aavishkaar Calvert FoundationACCIÓN Texas Inc. Deutsche Bank

RSF Social Finance

Bridges Ventures Elevar EquitySmall Enterprise

Assistance Funds(SEAF)Business Partners

LimitedHuntington CapitalMicroVest W.K. Kellogg

Foundation

Chapter 2 provides additional insight into the research process,which, in 2013, led to the largest-ever public release of perform-ance data in impact investing, despite the fact that most impactinvesting funds operate in private markets and, with only accred-ited investors, are under no obligation to share information pub-licly. Our top priority was building trust with the funds, and holdingfast to a detailed process of engagement that would ensure that

INTRODUCTION 5

3GCINTRO 08/05/2014 15:48:28 Page 6

financial performance was contextualized alongside the complete,detailed story of their creation, governance, strategy, deployment,and relationship with investors and investees over the entire life ofthe fund. The aggregate financial and social performance of thefunds is presented in Figures I.2 and I.3.

What we discovered was a sophisticated marketplace that ismuch less haphazard than many have thought, and a pathway ofpractice and expertise we invite you to explore in the followingchapters.

Figure I.1 Impact Targets of the Twelve Funds

6 THE IMPACT INVESTOR

3GCINTRO 08/05/2014 15:48:28 Page 7

Figure I.2 Fund Investors and Financial Performance of theTwelve Funds

INTRODUCTION 7

3GCINTRO 08/05/2014 15:48:29 Page 8

AudienceOur focus is impact investing—and practitioners in the field arecertainlyacoreaudiencethatwillbenefitparticularlyfromnewinsightsinto the structural and strategic characteristics associated with high-performing impact investing funds. However, this book also hasbroaderapplication, just as impact investing sits at theapexofCollabo-rative Capitalism. (We will discuss this in more detail in chapter 1.)

Although there are ongoing discussions regarding the natureand practice of impact investing, the concept really is quitestraightforward:

Impact investing is capital management in pursuit of appropriate levelsof financial return with the simultaneous and intentional creation ofmeasurable social and environmental impacts.

What’s important to understand is that the lessons of impactinvesting are also the lessons of Collaborative Capitalism, a largerfield of practice that encompasses everything from corporate social

Figure I.3 Aggregate Impact of the Twelve Funds


3GC01 08/05/2014 9:4:4 Page 26

Almost 50 percent of Millennial respondents believe businessleaders today think too much about the short term and are entirelyfocused on profit. And around a third of Millennials believe today’sbusiness leaders lack awareness of the wider society.9 Similar resultshave been found as Deloitte has repeated this survey over the lastthree years; in 2014 Deloitte noted, “Millennials believe the successof a business should be measured in terms of more than just itsfinancial performance, with a focus on improving society amongthe most important things it should seek to achieve.”10

The younger generation is not alone. The field of philanthropyas a whole was bitten—hard—by the business bug in the late 1990s,as Seattle and Silicon Valley entrepreneurs started to cash out andcontemplate what to do with their newfound time and money.

Figure 1.1 Primary Purpose of Business According to the Millen-nial Generation

15%

Create

wealth

36%

20%

Exchange

goods and

services

25%

Drive

efficiency

25%

Enable

progres

27%

Enhance

livelihoods

29%

Produce

goods and

services

33%

Drive

innovation

35%

Generate

profit

Improve

society

40

Per

cen

tag

e

0

35

30

25

20

15

10

5

Note: All figures are the percentage of 4,982 survey respondents in eighteencountries, all of whom had college degrees, were employed full-time, and wereborn after January 1982, answering the question, “Which of the following wordsand phrases match your own belief as to what business is for?”

Source: Deloitte Global Services Limited. (2013, January).Millennial InnovationSurvey. http://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/dttl-crs-millennial-innovation-survey-2013.pdf.


3GC01 08/05/2014 9:4:4 Page 37

Shared value (introduced by Michael Porter of Harvard in2006) builds on the concept of blended value introduced in 2000and explores a similar theme in how companies can view theirpotential for creating value as beingmore than simply a function ofpursuing shareholder returns. And operational and supply chainsustainability has been elevated as a core priority in recent years, asreflected in the work of Deloitte and others.20

The next tier in the Collaborative Capital pyramid consists ofthe investment strategies associated with risk mitigation, which wediscussed previously in this chapter: ESG integration, shareholderactivism, and positive and negative screening.

For all the diversity in risk-mitigating corporate and investmentstrategies, they share a number of key focal points: transparency,governance processes, and stakeholder engagement. In each case,a number of significant initiatives have arisen to advance theseideas.

On the issue of transparency, for example, there have beenrapid developments in the effort to have companies report on theirESG practices and performance alongside financial data, led by

Figure 1.2 The Collaborative Capitalism Pyramid

Investment

Impact Investing

Enterprise

Social Enterprise;

Public Private Partnership

Investment

ESG Integration;

Shareholder Activism; Screening

Enterprise

Corporate Social Responsibility; Shared Value;

Operational and Supply Chain Sustainability

Outcomes-Driven

Key Concepts:

• Intentionality

• Accountability

• Constituent Alignment

Risk-Mitigating

Key Concepts:

• Transparency

• Governance Processes

• Stakeholder Engagement

CollaborativeCapitalism

INSIDE COLLABORATIVE CAPITALISM 37

3GC02 08/05/2014 9:12:47 Page 67

pension funds, and DFIs. Investment recipients include smallbusinesses, social enterprises, and the myriad real estate andinfrastructure projects that seek financial and social performanceconcurrently. There are also a wide range of service providers,government actors, networks, and standards-setting bodies. Thefull scope of participants was presented succinctly in a recentreport from E.T. Jackson and Associates (see Figure 2.1).

This book focuses on a selection of high-performing impactinvesting funds, which we describe throughout. Here are someadditional examples of nonfund actors in impact investing:

Foundations—Tony Elumelu Foundation. The Tony Elumelu Foun-dation, founded in 2010 by Nigerian businessman Tony O.Elumelu, has a primary objective of enhancing the competi-tiveness and growth of the African private sector, includingthrough impact investing. In 2013, the foundation, togetherwith the Rockefeller Foundation, created the Impact EconomyInnovation Fund (IEIF). The IEIF is managed by GIIN and will

Figure 2.1 Actors in the Impact Investing Industry

Source: Jackson, E. T., and Associates. (2012, July). Accelerating Impact:Achievements, Challenges and What’s Next in Building the Impact Investing Industry.Rockefeller Foundation. http://www.rockefellerfoundation.org/blog/accelerating-impact-achievements.

RAISING THE CURTAIN ON IMPACT INVESTING 67

3GC02 08/05/2014 9:12:47 Page 73

most established investors.” According to ON, market innova-tors de-risk the generic model of an innovation or product.Some will scale; others will not be capable of doing so alone.

• Market scalers: these more mature enterprises enter a sectorafter market innovators have done their work de-risking thegeneric model. They refine and enhance the generic modeland are capable of scaling individually.

• Market infrastructure: These enterprises fulfill common industryor sector needs in collective form, “helping to build a support-ive ecosystem for entrepreneurial innovation.”

The Fund PerspectiveIn 2011, as impact investing was gaining steam, the three of usbegan discussing some key challenges that had not yet beenaddressed—most notably the limited transparency that was

Figure 2.2 Investment Continuum for Market Development

Source: Bannick, M., and Goldman, P. (2012, September). Priming the Pump: TheCase for a Sector Based Approach to Impact Investing.Omidyar Network, http://www.omidyar.com/sites/default/files/file_archive/insights/Priming%20the%20Pump_Omidyar%20Network_Sept_2012.pdf.


3GC02

08/05/20149:12:47

Page76

Figure 2.3 The Impact Investment Ecosystem

Source: Bryce, J., Drexler, M., and Noble, A. (2013, September). From the Margins to the Mainstream: Assessment of the Impact InvestmentSector and Opportunities to Engage Mainstream Investors, p. 12. http://www3.weforum.org/docs/WEF_II_FromMarginsMainstream_Report_2013.pdf.

76THEIM

PACTIN

VEST

OR

3GC02

08/05/20149:12:48

Page79

Figure 2.4 A Model of Fund Performance and Growth

Source: Clark, C., Emerson, J., and Thornley, B. (2012, October). A Market Emerges: The Six Dynamics of Impact Investing. http://www.pacificcommunityventures.org/uploads/reports-and-publications/The_Six_Dynamics_of_Impact_Investing_October_2012_PCV_CASE_at_Duke_ImpactAssets.pdf.

RAISIN

GTHECURTAIN

ONIM

PACTIN

VEST

ING

79

3GC02

08/05/20149:12:48

Page82

Table 2.1 The Twelve Funds: Size and Strategy

Fund Location Size Strategy

Aavishkaar: IndiaMicro Venture CapitalFund

Mumbai, India $9,428,270 Equity fund targeting early-stage ruralenterprises

ACCIÓN Texas Inc. San Antonio, TX, USA $29,782,042 Community development financialinstitution providing microloans

Bridges Ventures:Sustainable GrowthFunds I and II

London, UK $184,575,000 Equity fund targeting high-growth, high-impact businesses

Business PartnersLimited: SouthernAfrican SME RiskFinance Fund

Johannesburg, SouthAfrica

$331,300,000 Equity and debt fund targeting small andmedium-size enterprises

Calvert Foundation:CommunityInvestment Note

Bethesda, MD, USA $242,000,000 Fixed-income security available to retailinvestors that channels capital tocommunity development in United Statesand abroad

Deutsche Bank:Global CommercialMicrofinanceConsortium I

New York, NY, USA $80,600,000 Structured fund providing direct loans andother financial products to microfinanceinstitutions

3GC02

08/05/20149:12:48

Page83

Elevar Equity: UnitusEquity Fund andElevar Equity II

San Francisco, CA, andSeattle, WA, USA;Bangalore, India

$94,000,000 Equity funds supporting essential servicesfor the “bottom of the pyramid”

Huntington Capital:Huntington CapitalFund II, LP

San Diego, CA, USA $78,000,000 Mezzanine debt fund

The W.K. KelloggFoundation: MissionDriven Investments

Battle Creek, MI, USA $100,000,000 Diversified strategy including a portfolio ofdirect investments in impactful enterprises

MicroVest: MicroVestI, LP

Bethesda, MA, USA $48,500,000 Hybrid low-income financial institutionfund

RSF Social Finance:RSF Social InvestmentFund

San Francisco, CA,USA

$101,000,000 Social enterprise loan fund

Small EnterpriseAssistance Funds:Sichuan SMEInvestment Fund, LLC

Washington, DC, USA;Chengdu, China

$22,512,500 Equity fund targeting small and medium-size enterprises

3GC02

08/05/20149:12:49

Page95

Table 2.2 The Twelve Funds: Financial and Social Performance

Fund Financial Performance Social Performance

Developed Market Equity and Hybrid Funds


Successful exits havegenerated multiples rangingfrom 1.6 to 22×.

Has placed over 80% of portfolio in underserved areas,catalyzing more than £435M in investment and creating morethan fifteen hundred jobs (40% in underserved areas).


13.78% net internal rate ofreturn (IRR) at March 31,2013

352 total jobs created; of the 2,811 total portfolio companyemployees at December 31, 2012, 78% reside in low- tomoderate- income areas; nine of sixteen portfolio companies(56%) are owned or operated by an ethnic minority individualor female.


Two realized exits out of sixtotal direct investments,delivering IRRs of 46% and65%.

The MDI program’s investments support WKKF’s theory ofchange, which addresses social conditions, such as improvingthe quality of and equitable access to food, education, andhealth care for vulnerable families; 53,300 vulnerable kids weresupported through direct investments, which accounted for75% of the MDI total.

Emerging Market Equity and Hybrid Funds

Aavishkaar: IndiaMicro VentureCapital Fund

20% IRR on investments and13% IRR net of fees. Sixcomplete exits: three withIRRs between 12% and 39%and three at discount toprincipal; two partial exitswith 45% and 63% IRRs andthree write-offs.

Varies by company. Highlights include 101,817MT of CO2

emissions reduced; 10.5 million dairy farmers with increasedincomes; 145,500 people with disabilities gaining access tocomputer/web services; and 344,925 people accessing financialservices through rural ATMs.

3GC02

08/05/20149:12:49

Page96

Table 2.2 (Continued )

Fund Financial Performance Social Performance


In excess of 2.5× originalcapitalization returned toshareholders via dividendsbetween 2005 and 2013; 7%average ROE from 2003 to2013

Since 1981, total of over $1.5 billion invested in more than69,500 SMEs, creating or sustaining more than 550,000 jobs.


Targets met for all investors(3%–7% IRR) in 2010,except Class B Equity (3.5%IRR, met in 2012, below 12%IRR target)

Active clients served by investees: 2.6 million. Estimatednumber of loans to entrepreneurs: 732,146.

Elevar Equity:Unitus Equity Fundand Elevar Equity II

UEF: 21% realized IRR, netto LPs

Sixteen companies introduced more than twelve essentialservices to eleven million households.

MicroVest:MicroVest I, LP

7.6% net IRR to LP investors,within 7.5% to 8% IRRtarget; full interest paid tonote/debt investors

Clients receiving financial services (at MV I’s largest size):roughly 3.5 million microentrepreneurs. Women clients forLIFIs in the MicroVest I portfolio: 52% on average.

SEAF: Sichuan SMEInvestment Fund,LLC

11.38% net IRR and 22.73%gross IRR as of June 30, 2013

21% average annual increase in employment and 17% averageannual increase in wages at each portfolio company since SSIFinvestment; 58% of jobs created for low-skilled workers.

3GC02

08/05/20149:12:49

Page97

Social Debt Funds

ACCIÓN Texas Inc. 2%–3% return to investors Since inception, the organization has made over 13,400 loanstotaling $145 million, and has preserved or created thirteenthousand jobs. In 2012 alone, ATI disbursed 919 loans totaling$18 million.


Investors select fromavailable rate and termcombinations, currentlyranging from one year at0.5% to ten years at 3.0%.100% principal and interestrepayment to more than13,500 investors over twentyyears.

Since 1995, more than 13,500 investors have invested nearly$1 billion in the portfolio of nonprofits and social enterprisesworldwide. Metrics are tracked through IRIS and CARS.

RSF Social Finance:RSF SocialInvestment Fund

1.26% average interest rate(2009–2013). No investor haslost money, and the loanfund has less than 2% defaultrate over twenty-eight years.

Impact differs within each focus area, but overall, borrowerimpact increased by a normalized average of 7 points on the BImpact Rating System from 2011 to 2012, meaning theyincreased their impact even as they expanded their business asa result of loans received from a mission-aligned lender.

3GC02 08/05/2014 9:12:49 Page 100

Fund Landscaping

1. Capital in: Who are the fund’s investors? What do they tell us about themarkets in which the funds are operating?

2. Capital out: Do the funds invest in earlier-stage or later-stage businesses?What does this tell us about thematurity of themarkets inwhich they operate?

Table 2.3 describes each of the funds according to the compo-sition of its investors and the nature of its investees.

Table 2.3 The Twelve Funds, Capital In and Capital Out

Fund Capital In:Investor Base

Capital Out:InvestmentRecipients

Aavishkaar: IndiaMicro VentureCapital Fund

• Primarily individuals• Some tax-advantaged

foundations• One investment from a

government entity latein the day

Early stage

ACCIÓN Texas Inc. • Government (throughsubsidies provided to CDFIs)

• Banks motivated by regulation• Large investments and

significant grant supportfrom private foundations

Early stage


• Seed investment fromgovernment

• Institutional and foundationcapital, deployed indepen-dently, but also motivatedby government partnership

• Individuals

Growth stage


• Seed investments fromgovernment, philanthropy,and corporations

Early stage


3GC02 08/05/2014 9:12:50 Page 101





• Core investments fromthousands of individuals

• Many faith-based,foundation, and otherinstitutional investments

Growth stage


• Catalytic support from DFIs• Institutional investors as

senior noteholders• Foundations and individuals

in high-risk equity tranches

Growth stage

Elevar Equity:Unitus Equity Fundand Elevar Equity II

• Foundations• Individuals• Endowments• Emerging Markets Funds

Early andgrowth stage


• Core of institutions makingeconomically targeted invest-ment, including pensionfunds, and banks motivatedby regulation

• Foundation mission-relatedinvestments

Later growthstage


• Capital sourced entirelyfrom the foundation’sendowment

Later growthstage

MicroVest:MicroVest I, LP

• Core of private foundation,individual, and commercialinvestors

• Late investment from aDFI in senior notes

Later growthstage

RSF Social Finance:RSF SocialInvestment Fund

• Core of individual investors• Associated philanthropic

resources

Early to growthstage


3GC02 08/05/2014 9:12:50 Page 102

The landscape takes shape when we place the funds on a simplechart, as shown in Figure 2.5. The vertical axis represents capitalin—that is, the investor base of the funds, ranging from individualsand institutions that are entirely driven by public policy to investorsdriven entirely by private interest. The horizontal axis representscapital out—the investment strategy of the funds, ranging from“blueprint,” the earliest stages of a company’s development, to“scale,” the later stages of a company’s initial growth.





• Core investor base includesone DFI and one institutionmotivated by policy-orientedeconomic developmentobligations

Growth stage

Figure 2.5 Investor Base and Investment Strategy of the TwelveFunds

Public Policy Driven

Private Interest Driven

ScaleBlueprintINVESTMENT STRATEGY

INVESTOR BASE

Aavishkaar

BPL

ACCIÓN TX

Calvert

SEAF

Huntington

RSF

MicroVest

Elevar

WKKF

AC

Bridges Ventures

Deutsche Bank


3GC02 08/05/2014 9:12:50 Page 102

The landscape takes shape when we place the funds on a simplechart, as shown in Figure 2.5. The vertical axis represents capitalin—that is, the investor base of the funds, ranging from individualsand institutions that are entirely driven by public policy to investorsdriven entirely by private interest. The horizontal axis representscapital out—the investment strategy of the funds, ranging from“blueprint,” the earliest stages of a company’s development, to“scale,” the later stages of a company’s initial growth.





• Core investor base includesone DFI and one institutionmotivated by policy-orientedeconomic developmentobligations

Growth stage

Figure 2.5 Investor Base and Investment Strategy of the TwelveFunds

Public Policy Driven

Private Interest Driven

ScaleBlueprintINVESTMENT STRATEGY

INVESTOR BASE

Aavishkaar

BPL

ACCIÓN TX

Calvert

SEAF

Huntington

RSF

MicroVest

Elevar

WKKF

AC

Bridges Ventures

Deutsche Bank


3GC02 08/05/2014 9:12:50 Page 103

The chart allows us to readily compare the funds. MicroVest,for example, is worlds apart from ACCIÓN Texas Inc. (ATI);whereas MicroVest makes larger investments on behalf of primarilycommercial, privately driven investors, ATI provides microloans tostart-up businesses, supported by significant subsidies from thepublic and philanthropic sectors.

The analysis becomes more useful, however, when we general-ize the landscape and create four quadrants of funds, each with itsown unique set of characteristics, as Figure 2.6 illustrates. Let’sexamine each fund “type” in turn.

First Responders

First responders like ATI and Business Partners Limited (BPL)operate in underserved, generally low-income markets that havebeen relatively devoid of mainstream capital. More important,due to endemic market failure and the associated lack of businessskills, economic infrastructure, networks, experience, and datathat make capital markets function effectively, mainstream inves-tors are unlikely to play a direct role in providing needed capitalanytime soon.

Figure 2.6 The Four Types of Investment Funds


3GC03 08/05/2014 9:21:20 Page 119

afterschool program). These include not only the processes thatlead to a sale of a product or service but all the processes thataffect outside stakeholders.

• Outputs, which are the measurable results that an associatednonprofit or project manager can measure or assess directlythrough his or her operations. Outputs for an afterschoolprogram, for example, could include the number of childrenparticipating in the program, the percentage who drop out,and the percentage enrolled in the following year.

• Outcomes,which are the ultimate changes the funds are trying tomake in the world. For the afterschool program, desiredoutcomes could include higher self-esteem or higher educa-tional achievement for participants. Outcomes are alwaysexpressed as an increase or decrease in some social systemvariable, such as income, educational achievement, GDP, dis-ease prevalence, and the like. Commonly the organizationrunning the program may not have the expertise or resourcesto evaluate whether all outcomes have been achieved at thebroader community level, but that organization should be ableto define desired outcomes and figure out which internal

Figure 3.1 Impact Value Chain/Logic Model

Source: Adapted from Clark, C., Rosenzweig, W., Long, D., and Olsen, S. (2004).Double Bottom Line Project Report: Assessing Social Impact in Double Bottom LineVentures, http://www.riseproject.org/DBL_Methods_Catalog.pdf.

IMPACT DNA 119

3GC03 08/05/2014 9:21:20 Page 122

investments and started to track the tenure and turnover of peoplewho were given new jobs at its investee companies. The fund foundreally high turnover in the first year, even among employees whowere performing very well. It spot-surveyed the employees andlearned that the number-one reason for quitting the job amongwomen was lack of adequate, low-cost child care. Coastal set uppartnerships between investee companies and child-care providersand watched its own outputs and outcomes improve.

A plan to create outcomes through the practice of investingand a strong theories of change analysis are the building blocks ofan impact investing thesis. Of course, they are not all you need.Successful funds of any sort have to make a case to potentialinvestors about the overall strength of their investment thesis.The investment policy, or stated investment strategy, is fundamen-tally an agreement between fund intermediaries and their inves-tors, although there have been efforts to better standardize that

Figure 3.2 Theories of Change Example, Constructed forGrameen Bank


3GC03

08/05/20149:21:20

Page126

Table 3.1 Investment Thesis of Change Examples

SocialObjective

Source ofCapital

InvestmentApproach

InvestmentTargets

Outputs Outcomes

Aavishkaar Improve thequality of life inrural andunderservedcommunities inIndia

Primarilyindividuals andsociallymotivatedinstitutions

Early-stageequity

Enterprises inagriculture,health, waterand sanitation,education,informationandcommunicationtechnology

Production ofgoods andservices; hiring

Varies bycompany:creating locallivelihoods, andproducts andservices thatreduce thevulnerabilitiesof low-incomeand ruralpopulations

DeutscheBank

Attractfiduciaryinvestors tomicrofinance

Public sector,impactinvestors, andinstitutions

Structuredproduct toreduce risk,makingprimarily directloans

Balancedportfolio ofmicrofinanceinstitutions atdifferent stagesof growth andin differentplaces

Loans tounderservedentrepreneurs

Access tocapital inunderservedcommunities;proof ofconcept forLPs, throughfinancialsuccess

3GC03

08/05/20149:21:21

Page132

Table 3.2 Elevar Equity’s Core Impact Themes

Theme Question Subquestions Sample Indicative Metrics

Customer Demographics Is the business centered onthe target customer?

What percentage ofcustomers do not otherwisehave access to services orare unable to afford servicesat currently available pricepoints?

� Increase in percentage ofcustomers without creditscore/records

� Increase in average incomeof borrowers

� Increase in number ofRSBY10 insurance customers

� Increase in numbers ofunderserved districts inwhich hospitals or bank/MFIbranches have been set up

� Increase in number of cus-tomers with no priorbanking products

Customer FinancialStrength

Does the product or servicehelp strengthen thecustomer’s balance sheet?

Does it help reduceexpenses or increaseincome?

Does it help build a long-term asset?

� Reduction in borrowing,rental, and transaction costscompared to status quo

� Increase in value of asset(such as land or a building)

� Improvement in health(long-term asset creation)

3GC03

08/05/20149:21:21

Page133

Product/Service Quality (asMeasured by CustomerSatisfaction)

Does the business offersignificant improvement inquality or reduction in priceas compared to the currentalternatives?

Is the customer satisfied?

How satisfied is thecustomer as compared tonext best alternative?

How strong is demand forand uptake of products andservices?

� Increase in average tenureand occupancy levels athostels

� Increase in word-of-mouthcustomer referrals

� Increase in staff productivity(ease of customeracquisition)

Scale Is the business able to scaleand cater to large, unmetcustomer demand?

How is the number ofcustomers growing?

What is the value ofproducts sold?

What kind of presence doesthe business have, in termsof locations covered,number of units set up, etc.

� Increase in # of loansdisbursed

� Increase in # of hospitalbeds or patients treated

� Increase in # of customerswith better homes

� Increase in # of homes soldto migrant workers

Capital Leverage Are our investmentsattracting capital to thisspace?

How much debt/equitycapital has the companyraised?

� Amount raised for everydollar invested by Elevar

� Mix of commercial versussocial sources of capital

3GC03 08/05/2014 9:21:21 Page 137

• Attribution of impact to an intermediary such as a fund is alwayshard. Most funds and standard rating systems for funds dependon the rollup of metrics from investees and other stakeholders,which is a practice that needs to be communicated and agreedon up front.

• When you are not able to set the terms of impact assessment,you are often much more limited in the credit you can takefrom the work. The W.K. Kellogg Foundation’s Mission DrivenInvestment program, for example, prorates the portion of theimpact it gives itself “credit” for, as it has generally made laterstage investments in companies with clear impact propositionsfor the communities that the foundation aims to serve.

• Fund managers need to identify stakeholders who are explicitabout the level of impact reporting they want to see, and thenmeet them where they are. Some funds set up a nonprofit armto do this reporting, as their LPs actually want much moreinformation than the funds can afford to track and provide,

Figure 3.3 Impact Investing Impact Commitment Spectrum

Source: Case Foundation. (n.d). “A Short Guide to Impact Investing.” http://casefoundation.org/impact-investing/short-guide.

IMPACT DNA 137

3GC03 08/05/2014 9:21:21 Page 139

segmented and, therefore, actionable conversation. However, inrecent years, it has become clear that the objectives of investors aremore multifaceted than this initial dichotomy allowed—a realityreinforced by our fund case studies. Mission First and Last is in parta response to the limits of financial-first and impact-first as catego-ries, and representative of a more complicated blending of objec-tives throughout the life cycle of an investment.

For funds, in particular, financial and impact priorities tend toebb and flow over time, in a relatively consistent fashion, asillustrated in Figure 3.4.

The development of an ITC comes early, and recognizes theprimacy of the social outcomes that the fund is seeking. This iswhere intentionality is formulated. And impact resurges as themostimportant consideration again when the fund is reporting on itsperformance and focused on accountability. As Figure 3.4 illus-trates, for impact investing to succeed, financial discipline is para-mount. Enterprises deliver impact only if they are sustainable.

Figure 3.4 The Impact Investing Fund Life Cycle: Mission Firstand Last

Strategysetting andformation

Deal flowanddiligence

Investment Reporting

Degree

Financial Drivers Impact Drivers

StageBusinesssupports

IMPACT DNA 139

3GC04 08/05/2014 9:27:31 Page 183

respectively, which is provided to ATI. Among the policies that ATIuses directly to achieve sustainability are the SBA 504 loan guaran-tee program and CDFI Fund. The enterprises in which ATI investsbenefit from SBA’s small business development centers, whichprovide basic information on creating and operating a smallbusiness, and the SBA’s 8(a) business development program, whichhelps disadvantaged small businesses secure contracts withgovernment.

To operate as effectively as possible in the market, impactinvestors should understand the full array of policies that influencethe market and that might be harnessed to increase the probabilityof both social and financial success, not just those that act directlyon their own organization.

This is not as easy as it seems—and there are very few impactinvestors as engaged with public policy as they ought to be, given itsimportance to both individual funds and the field as a whole. Forexample, the Community Reinvestment Act (CRA) drives billions incapital to low-income areas of the United States, including throughSBICs. Investments in SBICs are automatically “CRA-qualified,”

Figure 4.1 A Policy Framework for Impact Investing

Source: Thornley, B., Wood, D., Grace, K., and Sullivant, S. (2011, January). ImpactInvesting: A Framework for Policy Design and Analysis. InSight at Pacific CommunityVentures and the Initiative for Responsible Investment at Harvard University.http://www.pacificcommunityventures.org/reports-and-publications/impact-investing-a-framework-for-policy-design-and-analysis/.

SYMBIOSIS AS STRATEGY 183

3GC04 08/05/2014 9:27:31 Page 184

meaning these investments fulfill a bank’s regulatory obligation tosupport the underserved communities where they have branches.Yet in talking with SBICs, it is clear that very few have a view on theCRAmore broadly, or are aware of the opportunities for supportingor strengthening the regulation.

There are numerous ways in which to become more knowl-edgeable about the role of government in the work you do as animpact investor. For starters, you should join sector and field-leveltrade groups, where influencing public policy tends to be a strate-gic priority (on behalf of members) and where information on thepolicy environment and its development is more readily availableand targeted specifically to an investor’s needs.

Independent research—including broadening your typicalreading list—is also critical. A selection of organizations with a(sometimes nascent) focus partly on policy in impact investing

Figure 4.2 Example of How Policy Has an Impact on a Fund andInvestees

Selection of Notable Policies

Community ReinvestmentAct: requires banks toinvest in the low-incomecommunities in which theyhave branches

Program-relatedinvestment tax laws: allowphilanthropic foundationsto make charitable

investments that counttoward their annualpayout requirement of 5 percent

SBA 504 loan program:government guaranteesfor asset-backed loansto SMEs

CDFI Fund (US Departmentof the Treasury): registersand provides subsidy tospecial-purpose institutions

committed to operatingpredominately in low-income communities

SBA Small BusinessDevelopment Centers: 900service delivery pointsproviding a wide array oftechnical assistance toSMEs

SBA 8(a) BusinessDevelopment Program:provides advantages infederal procurement to

businesses owned bydisadvantaged groupsincluding ethnic minorities

Investors

(primarily banks,

philanthropic

foundations, and

individuals)

ACCIÓN

Texas Inc.Microenterprises


3GC05 08/05/2014 9:30:21 Page 220

services, which amounted to significant savings over the life of the fund—

equivalent to over 15 percent of the total management fees collected.Seeding. Even before Mahmood began external fundraising, the first task

was to convince senior executives within Deutsche Bank to provide introduc-tions to key potential supporters, especially to several of the bank’s depart-

ments. This resulted in much of the internal, sustaining support and technicalassistance noted earlier, but also resulted in Deutsche Bank’s making a

$1 million investment in Class B shares through the Deutsche Bank AmericasFoundation. Gary Hattem, the foundation’s president and chairman of the

consortium board, reflects on the foundation’s decision to provide seedfunding for the consortium: “The consortium represented an important mile-stone in Deutsche Bank’s commitment to aligning similarly motivated investor

capital toward the goal of helping the microfinance sector not only grow butreach maturity as a responsible and client-focused industry.”

Risk-reducing. The layered structure of the fund, which Figure 5.1 illus-trates both at the point it was first created as a $50million investment and then

Figure 5.1 The Capital Stacks in Deutsche Bank’s Global Commercial

Microfinance Consortium I


3GC06

08/05/20149:41:52

Page250

Table 6.1 Sector Concepts and Quotations

Sector Priority Key Concepts Example

Public Improving thequality of life for allcitizens

� Market systems, failures, andexternalities

� Public goods� Efficacy and scale

Ben McAdams, mayor of Salt Lake County,commenting on a new United Way of SaltLake results-based financing initiative forlow-income preschool students:

“In other states where rigorous standardsand a high-quality curriculum have beenused to offer preschool to economically-disadvantaged children, the return oninvestment has been 7 to 1—that is a $7benefit to the local budget—money notneeded for special education, crime orpublic assistance as well as higher wagesfor consumer spending—for each dollarinvested. It’s the right thing to do forchildren, and the fiscally responsiblecourse for taxpayers.”5

Business andfinance

Maximizing risk-adjusted returns

� Risk mitigation and return onequity

� Efficiency� Supply and demand� Price and willingness to pay

Andrew Kuper, founder and president ofLeapfrog Investments, featured in theFinancial Mail (South Africa) discussinghis firm’s second fund:

250THEIM

PACTIN

VEST

OR

3GC06

08/05/20149:41:52

Page251

“Kuper says there is little point in selling topeople earning less than $1.25/day. Thesweet spot is from $1/25 to $10/day. Hesays Leapfrog is not the kind of privateequity fund that sacks half the workforceand then gears up the balance sheet. “Weare there to help with operations. Amongthe partners there is expertise in productdesign, distribution and regulation.”6

Nonprofit andphilanthropy

Doing good in theworld

� Theories of change� Catalytic investment andinnovation

� Articulation of demonstratedoutcomes

Molly Baldwin, founder and executivedirector of Roca, the nonprofit deliveringservices under the largest pay-for-successfinancing in the United States, aimed atreducing youth recidivism inMassachusetts:

“The Massachusetts Pay for SuccessInitiative is about changing the odds. It’sabout confronting the stubborn trends ofincarceration and poverty among justice-system-involved young men, and standingin solidarity to say to these young men,‘We will not leave you behind, you deservemore than jail or prison, and we will giveyou our time and support to help you makea better future for yourself and yourcommunity.’”7

MULTILIN

GUALLEADERSH

IP251

3GBLAST 08/05/2014 10:0:56 Page 293

Impact Investor Resource Guide

In this section, we offer a brief overview of each of the tool kits inchapters 3 through 6, providing an easy reference for readers eagerto learn the practices of Mission First and Last, Policy Symbiosis,Catalytic Capital, and Multilingual Leadership. Each of the chap-ters in question includes additional detail if a recommendationstrikes a chord. We also include a general listing of organizationalwebsites, blogs, and conferences of interest, and a catalog of all theauthors’ reports, blog articles, and case studies linked to theresearch project.

Chapter 3: Impact DNA (Mission First and Last)

“And although these funds may have been created with a moreinherently collaborative set of ‘genes’ than other funds, these genesonly mutate into organizational DNA—and create the conditionsfor success—over time. The specific practices are discernible, inother words, and can be learned.”

Table RG.1 The Mission First and Last Tool Kit

Step Strategies

Gaining clarity: use the investmentthesis of change as an anchor forunderstanding, internalizing, andcommunicating precisely the valueyou propose to add.

Think hard about how, precisely,your investment is making animpact, compared to others(through extensive research,reflection, and engagement withpeers).

293

3GBLAST 08/05/2014 10:0:56 Page 294

Table RG.1 (Continued )

Step Strategies

The investment thesis of changeincludes six elements:

• The “change,” or social out-come, that is being pursued

• The source of capital forpursuing that change

• The fund’s investmentapproach

• The fund’s investmentrecipients

• The activities (outputs) ofinvestment recipients madepossible by the provision ofcapital

• The outcomes that theseoutputs will lead to, and howthey will be measured.

Aligning internally: the way youstructure, govern, and manageyour fund speaks volumes tomission.

Think concretely aboutoperational and ownershipstrategies that will ensure that afund’s entire staff, board, and anyother affiliated parties are on thesame page and workingcollaboratively toward sharedgoals, including using thefollowing questions:

• Does your governance structureinclude a mission perspective?

• How strong and resilient areyour internal feedback loops?Do they incorporate feedbackfrom external stakeholders?

• Are there concrete opportuni-ties to embed mission incompensation strategies andthrough other operationalpolicies and practices?

294 IMPACT INVESTOR RESOURCE GUIDE

3GBLAST 08/05/2014 10:0:56 Page 295


Step Strategies

• What resources do youcommit to tracking andreporting impact? Does theeffort feel cursory orfoundational?

• What resources are availableto staff and other directstakeholders for learning,through opportunitiesincluding formal training,participation infield-building events, orpeer groups?

Aligning externally with investorsand other stakeholders: tune in tothe motivations of investors, andthe needs of a broader set ofstakeholders, including theirinvestees, the markets theyoperate in, and their users orcustomers.

Diagnose your performance inimplementing formal paths toexternal alignment. Another set ofquestions should be useful:

• Are you familiar with whatothers are doing? Which fundsare at the top of their game onalignment, and what does bestpractice look like?

• Is there external buy-in foryour internal practices andpolicies?

• Have investors rallied around arelatively targeted set of socialperformance indicators thatare consistent with yourinvestment thesis of change?

• Do investees clearly under-stand your mission, and viceversa? Are you supporting themission-oriented needs ofinvestees, and do you report toyour investors and other keyconstituencies not just on fund

IMPACT INVESTOR RESOURCE GUIDE 295

3GBLAST 08/05/2014 10:0:56 Page 296

Chapter 4: Symbiosis as Strategy (Policy Symbiosis)

“Urgently and respectfully cultivate a deep partnership withgovernment, rather than being reactionary when it is too late.The market is only now taking shape. This is the moment forimpact investors to embrace the role of public policy in theirwork.”


Step Strategies

performance—that is, socialoutcomes—but on the fundprocess of engaging externally?

• Do you actively engage in fieldbuilding and work with peerson issues related to alignment?

Tracking and reporting impact:tap a range of resources to developrobust accountabilities.

Commit to, and implement, high-quality impact evaluation, whichincludes

• Clearly established and statedsocial and environmentalobjectives

• Performance metrics and tar-gets related to these objectives,using standardized metricswherever possible

• Monitoring and managementof the performance of invest-ees against these targets

• Reporting on social and envi-ronmental performance torelevant stakeholders

Identify resources for both un-derstanding impact evaluation asa practice more broadly, and thespecific metrics and methodsavailable to apply or adapt.


3GBLAST 08/05/2014 10:0:56 Page 297

Table RG.2 The Policy Symbiosis Tool Kit

Step Strategies

Acquire knowledge: know yourmarket and the applicablepolicies.

Review the literature (and scanthe market) with the goal ofunderstanding the full array ofpolicies that might be harnessedto increase the probability of bothsocial and financial success inyour space—not just those thatact directly on your ownorganization.

Join sector and field-leveltrade groups.

Broaden your reading list.

Verify and contextualize whatyou discover in consultation withpeers, independent experts (forexample, legal advisors), andcore constituents, includinginvestors and investees, who arethemselves subject to theinfluence of policy.

Build partnerships: share yourexperiences as a leadingpractitioner and strengthenrelationships with public officialsand other constituents that makeimpact investing possible.

Be open and proactive aboutengaging with the public sector,including by considering thefollowing questions:

• Are there industry conveningswhere policymakers are notpresent? If so, why not?

• Is there more you could do tohelp policymakers?

• Do your political leaders at thelocal, regional, or nationallevel know what you do?

• Have you identified areas ofshared concern with publicofficials?


3GBLAST 08/05/2014 10:0:56 Page 298


Step Strategies

• Are there any initiatives youcould be pursuing jointly withpublic officials?

Share your insights as apractitioner with public officials:

• Blog regularly.• Maintain an active presence

on social media.• Partner with established

thought leaders.• Publish white papers and

other research reports.• Participate on conference

panels.• Participate in “advocacy days”

together with peers.• Provide formal feedback on

particular policy initiatives.

Be visionary: embrace publicpurpose as a strategic objective.

Position your small but innovativeimpact within the bigger picture ofsocial change that manypolicymakers have in mind.

Have a robust investment thesis ofchange and articulate it boldly.

Embrace the public purposein your investment thesis ofchange, and ensure that thisis confidently communicatedto public officials.

Proceed with integrity: commitpublicly to the highest ethicalstandards.

Sign on to public principles ofethical behavior.

Demonstrate and communicatethat operating with the higheststandards of integrity is plain goodbusiness.


3GBLAST 08/05/2014 10:0:56 Page 299

Chapter 5: The New Deal (Catalytic Capital)

“[Fund managers] who want to leverage Catalytic Capital will needto take the time to understand, in an engaged way that builds trustbetween parties, the real strategic interests of stakeholders and thealignment of these interests with your own.”

Table RG.3 The Catalytic Capital Tool Kit

Step Strategies

Know how: learn the tools ofstructured finance and multipartytransactions.

Study other transactions; talk tolawyers, accountants, andfinanciers; or start doing deals inthe space and learn what some ofthe variations and norms arewithin your investment area offocus.

Partner with third parties whohave this knowledge.

Know who and why: understandthe motivations of different typesof investors and the way they usetheir capital to achieve variousends.

Read and do research outside yourcomfort zone and think aboutwhat other kinds of companies,funds, or partners may actuallyhave an interest in the outcomesyou care about.

Cast a wide net and make lists ofdifferent kinds of partners basedon geographic, impact, industry,and stage interests. (Imagine asample investment in the portfolioand prepare an informal“ecosystem analysis” for thatcompany.)

Attend industry conferences,make new connections, ask a lot ofquestions, and try to figure outways to build collaborativerelationships with new parties.

Find the right anchor or seedinvestor for your own fund,


3GBLAST 08/05/2014 10:0:56 Page 300


Step Strategies

recognizing that a large portion ofyour limited partners will havestrategic, and not just financial,reasons for investing.

Think expansively: revisit strategicobjectives and approaches anddetermine whether you could beplaying a more catalytic role.

Put the spotlight back on yourselfand consider the following samplequestions:

• What kind of catalytic role doyou want to play, and whichkinds are not acceptable toyou?

• Will you structure relation-ships for a set of diverse parties,or do you prefer to let some-one else do that, and to step inwhen the opportunity seems tomatch your own interests?

• What kind of leverage is mostneeded by your stakeholders?

• What can you learn from yourinvestees or other partners aboutwhat has been tried before?

• How can you take advantage ofother experts outside of yournetworks to help build aknowledge base of best prac-tices that your fund can usegoing forward?

Invest strategically: focus yourefforts on an approach alignedwith the organization’s mission.

Hone your ideas throughinteraction; don’t assume that onesize fits all or that your plan in theabstract will work when it’s time toget detailed.

• Examples of engagementinclude meetings andnetworking, research, andcommunications.


3GBLAST 08/05/2014 10:0:56 Page 301

Chapter 6: Multilingual Leadership

“Impact investors seeking to maximize the value of MultilingualLeadership to their firmmust recognize the type of multilingual expertiseand relationships that will best enable them to reach their goals.

As investors educate themselves and build their teams, theyshould do this in a way that strategically incorporates the interdisci-plinary background of founding team members and of new hires, andcontributes to the continued learning processes of the company, as well asthose of potential partners.”


Step Strategies

Review collectively: track yourcatalytic impact individually, butalso by examining the deal and thesector holistically, assessing theway your impact has influencedand coordinated with others.

Revisit best practices in trackingperformance, with a focus oncatalytic impact. For example:

• If you were a seed investor ina deal, how much capital wasleveraged afterwards?

• If you were a sustaininginvestor, how well did thatwork for the fund orenterprise—has it met therecipient’s own sustainabilitygoal?

Don’t be afraid to work directlywith constituents, includinginvestees, coinvestors, andactors in other parts of themarket.

Seek advice and support fromthird-party experts around bestpractices in your field.

Share results and findings publiclyso that other managers can learnfrom your work.


3GBLAST 08/05/2014 10:0:56 Page 302

Table RG.4 The Multilingual Leadership Tool Kit

Step Strategies

Learn: frame your goals and workthrough the distinct lenses of thebusiness/finance, nonprofit/philanthropic, and public sectors.

Study the priorities and keyconcepts of the three sectors:

• The public sector seeks toimprove the quality of life forall citizens, in part by focusingon the concepts of marketsystems, failures, and exter-nalities; public goods; andefficacy and scale.

• The financial sector seeksprimarily to maximize risk-adjusted returns, focusing onthe concepts of risk mitigationand return on equity, effi-ciency, supply and demand,and price and willingness topay.

• The nonprofit sector seeks todo good in the world, focusingon the concepts of theory ofchange and of catalytic invest-ment and innovation, and theclear articulation of demon-strated outcomes.

Look out for articles written byrepresentatives from differentsilos—and those working hard to“bridge the divide,” such as theGlobal Learning Exchange onSocial Impact Investing, aninitiative of the UK Cabinet Office,the Impact Investing PolicyCollaborative, and the WorldEconomic Forum.

Create conditions in yourworkplace that accommodate bothformal and informal training andmentorship.


3GBLAST 08/05/2014 10:0:56 Page 303


Step Strategies

Adapt: clarify your role byidentifying core strengths andopportunities to add value.

Test your investment thesis ofchange against the following core,cross-sector elements:

• Does it address a market failure?• Is it consistent with other

(noninvestment) approachesto addressing the socialoutcome at hand?

• Is it catalytic, with the power tochange market systems andbring new actors to the table?

Identify the key government,philanthropic, and financialstakeholders that are active in yourfocus area.

Draft communicationmaterials to test knowledgeand messaging.

“Find your voice” by workshoppingideas and language internally andwith key external, cross-sectorstakeholders.

Act: operationalize cross-sectorapproaches and play a trulymultilingual role in the market.

Recruit multilingual leaders toyour team.

Invite multilingual leaders youadmire to join a board or advisoryboard.

Provide your currentemployees with a continuingeducation allowance to pursueclasses that relate to yourimpact area.

Continue to raise the bar onperformance measurement.

Advocate for policy that enablesprogress in your area of impactinvesting.


3GBLAST 08/05/2014 10:0:56 Page 304

Resources

These are the organizational websites, blogs, publications andconferences we feel may be of interest to the reader. All can befound easily through www.google.com.

Websites

Acumen

B LabBlended ValueCASE at Duke UniversityCASE i3 Initiative on Impact InvestingCase FoundationCASE Notes Fuqua blog

Echoing GreenGlobal Learning Exchange on Social Impact InvestingHuffington Post ImpactImpactAlphaImpactAssetsImpact Investing Policy Collaborative

InSight at Pacific Community VenturesMaxImpactNext Billion


Step Strategies

Volunteer with or donate toorganizations that address yourarea of impact. These groups maybe future strategic partners.

Do pro bono work that appliesyour core skills to the impact areasin question.
