Creating Value towards Impact Investing

Definition and application

Xavier Heude Co-founder of meso IMPACT Finance

Concept-designer of PEERS Direct Investment

- Context and Definition - Value analysis - Concrete cases - Lessons learned

2nd Innovation for Financial Services Summit – Luxembourg, 19-21 Sept. 2012

Funding (debt, equity)

Activities (at local level)

Global economic situation

A relation of cause and effect

2

The socio-economic context

Impact

The scope of challenges facing society today can no longer be solved with a purely philanthropic approach : - threat of possible climate change - poverty leading to major political instability - human rights issues - supply change management (e.g. food security) - scarcity of primary resources - demographic challenges - etc …

3

The socio-economic context

Bamboo workshop (Vietnam)

No standard definition … Source : Monitor Institute

4 key-characteristics of Impact Investing - Profit as an objective - Intentional, pre-determined social impact - Positive correlation between the intended social impact and the financial return of the investment - Measurable social impact

“Any profit-seeking investment activity that intentionally generates measurable benefits for the society” *

* « An unconventional perspective on Impact Investing », IESE Busines School - 2011

4

Conceptual definition of Impact Investing

Environment : - Biodiversity conservation - Carbon sequestration Social : - Community development

(cooperatives, inclusive finance, housing, health …)

- Increase in jobs - Better living conditions

Agriculture and rural

development

Community-based

renewable energy

Technological products

& services

Clean transportation

solutions

Services to the elderly or disabled people

Education and health

Investment themes Expected results

5

Conceptual definition of Impact Investing

(derived from Monitor Institute)

Rational behavior

Emotional behavior

6

Conceptual definition of Impact Investing

Investment targets

Microfinance

Medium to large companies

SMEs

Profile : - startups - going concerns

Investment needs : 200.000 to 2.000.000 €

Mesofinance (the missing middle)

7

Conceptual definition of Impact Investing

applicable whatever : • the location (worldwide) • the activity (industry – agriculture – services) • the business development’s step (start-up – going concern)

Appraisal process : 1. a conventional Due Diligence-process (101 questions) 2. a scoring system 3. a set of criteria to comply with for Labelling (…under development …)

8

Value analysis in Impact Investing

Methodological approach …

2 processes of VALUE CREATION

Monitoring process : • social-environmental Key Performance Indicators (…under development …) • a technical assistance plan (applicable on a case by case basis)

Corporate overview Operating Model

Market - Competition

Financial statements

Social – Environmental Initiatives

An in-depth analysis … (101 questions)

Financial return

Social- environmental

return

Check … tracking risk (4 categories)

Operational

Reputation

Financial

Legal

Operational

Reputation

Financial

Legal

Operational

Reputation Financial

Legal

Operational

Reputation

Financial

Legal

9

Value analysis in Impact Investing

Conventional Due-Diligence process

Clear strategic vision

1 2 3 4

Poor

Very good Satisfactory Below standard

Weighting’s system :

Neutral

Weighted notes

Risk’s intensity

Feature of the case / situation

appraised

Scales of notes

N (negative) Average

to High

Case / asset / situation making neither compromise nor significant advantage, whatever it occurs. Negative to neutral impact (at best)

- 5 1 2 = should be the case to reach

D (double sided)

High to Low

Case / asset / situation having negative or positive advantage, depending on the action taken

- 5 1 2 3 4

P (positive) Average

to Low

Case / asset / situation having neutral to positive advantage (can never be negative)

3 4 = minimum requirement to

reach

- 5

Significant warning !

(average note)

Value analysis in Impact Investing

Scoring system

11

major NEGATIVE weighting major POSITIVE weighting

LEGAL Incorporation Business in an early stage

Corp. management Some weak management / business skills ?Mission statement Clear written mission statementStakeholders Strong support of the local actors

OPERATING Operational capacity Strong potential of growth (securised land)

MODELOrganisational structure Efficient channels of reporting set up

Innovation & Dvlpt Good command of technology

HR management Jobs creation

Training, annual assessment, compensations ….

MARKET Customers Customers diversification

Focus on the local demand

& COMPETITIONQuality / Reputation Good products quality and diversification

Market Large market with strong growth

Competition Strong pressure from cartels ?

FINANCE Financial statements Sound financial projections

Insurance Some uninsured risksExternal factors Political instability

SOCIAL & ENVIRONMENTAL INITIATIVESInternal / external initiatives Good to high social / environmental impact

Local dialogue

Value analysis in Impact Investing Exam

ple

of an

agri-bu

sine

ss case in

Africa

7 main intervention areas (applicable on a case-by-case basis)

1 Client database

2 Internal training

3 Internal organisation (procedures)

4 Human resources policy

5 Internal control / MIS

6 Business development (clients) & networking

7 External communication

Goal : - enhance organisation of the business owners - mitigate risks identified through Due Diligence-process

Monitoring process …

Value analysis in Impact Investing

13

Key-success factors in this project : 1) Animal sourcing and crossbreeding : the capacity to set up a scalable livestock 2) Training, monitoring and coaching of the farmers (= microfinance techniques) 3) Export sales

Buffalo husbandry’s business …

(Philippines)

Empowerment of the rural communities, with developing a competitive national milk industry

14

Innovative concept – Social Gaming : - Introducing the general public to microcredit through a fun and entertaining medium - Raising awareness of the potential impact of this type of developmental tool. - Impacting some of the most vulnerable people in the world

(France)

Social game …

What surveys say … … what we are experiencing

15

Lessons learned

(Source : Investing for Social & Environmental Impact, Monitor Institute, 2009) 16

What surveys say …

Lessons learned

(Source : INSIGHTS AND INNOVATIONS: A Global Study of Impact Investing + Institutional Investors, 2012)

Recommandations to accelerate the growth of Impact Investing : - Increase the talent pool of investment professionals

- Collaboration is essential for finding quality deal flow, sharing knowledge, increasing

learning an developing new investment vehicules

- Not waiting for perfect metrics on social / environmental impact to invest

17

Lessons learned

What surveys say …

The 4 golden rules

1st rule : Scarcity lies in the good investment opportunities, not in the investment flow

- Secure the projects sourcing, with building strong networks - Maintain strict due-diligence standards

2nd rule : Dialogue with the business owner / stakeholders never stops

- Share common values (not just check professional skills & financial projections) - Cross-check information steadily

3rd rule : Emotion is – in a certain extent – part of the decision-making process to invest

- Tell the story and report thoroughly - Get investors involved …

4th rule : But … at the end of the day, financial performance comes first

- No philanthropy 18

What we are experiencing …

Lessons learned

Impact Investing is not « investment as usual ». It requires :

• social / environmental awareness • opened dialogue between the parties • patient capital (mini. 5 years) • risk-taking mind

Main asset classes fitting for Impact Investing : - Fixed income (including private debt and mezzanine financing) - Venture capital / Private equity - Real assets (including real estate, commodities, timber, etc …)

19

Lessons learned

What we are experiencing …

Family offices … address a range of challenges (climate change, poverty …) Clients of leading private banks … provide them with more choices than just traditional investment and philanthropy Private foundations … making investments in areas related to their social mission Private equity funds … provide growth capital Mutual funds … dedicate a portion of their assets to social / environmental income generating businesses Pension funds / sovereign wealth funds … deploy capital in ways that benefit the communities they serve Corporations … improve the lives of the poor while creating profitable products & services Governments … support economic development in poor areas

Investors appear to be more cautious how their money is used …

20 (Source : Investing for Social & Environmental Impact, Monitor Institute, 2009)

Lessons learned

21

Some resources

• In search of gamma. An unconventional perspective on Impact Investing - IESE Business School, University of Navarra, 2012

• Industry Survey of Financial Advisors on Sustainable and Impact Investing, 2012 - www.gatewaystoimpact.org • INSIGHTS AND INNOVATIONS - A Global Study of Impact Investing + Institutional Investors, 2012

www.correlationconsulting.com • The Power of Advice in the UK Sustainable and Impact Investment Market – Bridges Ventures Research, 2012 • WORLD INVESTMENT REPORT 2011 - NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND

DEVELOPMENT, UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD) • European SRI Study 2010 – www.eurosif.org • Investing for Social & Environmental Impact - Monitor Institute, 2009 • Impact Investments, an emerging asset class – J.P.Morgan Global Research, Nov. 2010

• « PEERS Direct Investment » website : www.peersdirectinvestment.com

Contact Xavier Heude xh@peersdirectinvestment.com