Impact Investment. Allman Keith А.
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Название: Impact Investment
Автор: Allman Keith А.
Издательство: John Wiley & Sons Limited
Жанр: Зарубежная образовательная литература
isbn: 9781119009818
isbn:
Who Makes Impact Investments?
As we will come to learn later in this book, no other field within finance has a greater disparity of participants than those found to be impact investors. Impact investors differ from traditional investors in a number of ways, but the most important differences relate to return expectations, investment holding periods, and investment motivation. To understand this varied landscape, we should start by looking at some of the oldest impact investors, government institutions.
The International Finance Corporation (IFC), a member of the World Bank Group, is one of the oldest, largest, and best-known impact investors. It invests in a large range of projects, from direct and indirect private equity investments to large-scale infrastructure projects. It would be considered a government institution because it is funded by World Bank member countries. There are a number of other large-scale government funded impact investors, such as IFC, Norway's Norfund, and the UK's CDC Group. The key to these types of investors is that they have a specific mission and seek commercial-style investments, but have a very low cost of capital and longer holding periods than average, which allows them to make investments that strictly traditional investors may not make.
Similar to government-funded investors, in terms of low capital cost and long investment time horizons, are charitable organizations that make impact investments. These organizations can range from nonprofit institutions that use donation money for investment, like Acumen Fund or EnterpriseWorks/VITA, a division of Relief International, to organizations such as Soros Economic Development Fund, which utilize funding from profitable private-sector enterprises to make impact investments.
In the middle of the range of impact investors are high-net-worth individuals who provide their own capital directly into social enterprises. Often they will provide catalytic capital to early-stage ventures or fund business plans that materialize into companies. Similar to the other types of investors already mentioned, these investors have long investment time frames, low costs of capital, and personal motivations for investment that afford them a high degree of flexibility.
Finally, we move up the scale of commerciality to for-profit investors such as GrayGhost Ventures, DBL Investors, and Bamboo Finance. Each of these institutions has a varying commercial approach toward impact investing, where returns and investment horizons are more in line with traditional investors.
How This Book Is Designed
The bulk of this book is designed to guide an investor through every stage of the investment process, with a specific look in the last chapter at considerations for an investor who is creating or working for an investment fund. While there are many aspects that work universally for investors, there is a particular focus on equity investments, given that they are the predominant force in impact investing. To help immerse readers in the investment process, a fictitious company is selected amongst three potential investments. This company is then taken through each stage of the investment process. Figure 1.1 provides a graphical overview of the core chapters with a brief discussion of each section following.
Figure 1.1 This book generally follows the investment process that an investor would encounter.
Sourcing and Screening
The first phase of the investment process involves identifying potential investments. Most investors have a specific investment thesis that they, or if organized as a fund, their investors believe in. Therefore, it's imperative that the investments the investor sources fit into the investment thesis. For instance, if a healthcare investment fund is funded by high net worth individuals who have an interest in making equity level returns, while trying to address global health problems, the investor must be very careful to find healthcare related investments at good valuations that will lead to strong exits.
While sourcing and screening investments that fit an investment thesis seems relatively straightforward, time and resources constrain an investor. Time works against an investor since costs constantly accrue. The longer it takes to make investments, the longer it will be before the investment exit returns value. In order to properly place funds, resources are needed, both financially and tangibly. It costs money to undertake onsite due diligences, and to hire consultants, lawyers, or accountants. Often, an investor will hire multiple resources to help with the process. Effective investors place money efficiently and strategically, minimizing costs along the way.
Knowing how to identify regions, economies, and industries that are investable and poised for success is critical to being an effective investor. Specific to impact investing, the social mission must be fully understood, mapped out, and tested against the investors' social investment thesis. Weighing both financial and social mission viability early on is critical to selecting the right investments for due diligence.
Investment Analysis and Valuation
Sourcing and screening sets an investor on a path with a limited number of investments. The next stop on this path is vetting the company's operations, financial potential, and social mission scope. Usually, due diligence is split into two phases, with the first being a less-committed “desktop” phase, where business plans and financial statements are analyzed. This allows both an investor and investee to be efficient with their time and resources, since deal-breaking issues can sometimes be garnered from such analyses.
For equity investors, valuation discussions start early to make sure there are no significant gaps in perceived value. In order to have such discussions, an initial investment analysis is necessary since it lends to the creation of a valuation range. This range is later refined during the due diligence phase. Valuation is one area that impact investors must think carefully about. Impact investing is unique in that it brings together a range of investors with very different costs of capital and required returns. In some cases, these return expectations are not commensurate with the risk being assumed.
Due Diligence and Investment Structuring
Eventually, a company will warrant further analysis and full, onsite due diligence is executed. This entails reviewing all operational aspects, management, competitive analyses, finances, and social mission achievement and plan. Another goal of due diligence is for investors to establish their own opinions on the necessary investments structure. Debt investors will want to review all risks and mitigating factors related to cash flow or collateral value. Equity investors will want to check the assumptions made to create the valuation range and determine what investment structure might be necessary.
When a due diligence is complete and an investor is still interested in a company, negotiations around the investment structure ensue. Some investment structures can be very simple and quick to come to agreement, while others can take a considerable amount of time and develop into very complex arrangements. Debt investors will negotiate covenants to protect their priority over cash flow or collateral. Equity investors will agree to a valuation and possibly negotiate preferential rights.
Impact investors have the added requirement of ensuring that the social mission is preserved after investment. This requires properly aligning interests and making sure the structure is able to respond to changes.
Term Sheet and Documentation
Expressing the agreed-on investment structure in documentation is critical to a successful impact investment. The beginning of this phase of the investment process starts with a term sheet that covers the investment structure, preferences, and specific rights. The goal is to have a document that can be converted into a subscription agreement that defines an equity investment or an indenture for a debt investor. Additionally, for equity investors, a shareholder agreement is needed to cover shareholder rights.
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