Impact Investment. Allman Keith А.

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СКАЧАТЬ investors should also negotiate specialized clauses that protect the social mission and allow the investor flexibility if the social mission is compromised. As an example, a put option, where the equity investor can sell shares back to the company, might be written into the subscription agreement if the social mission deviates too far.

      Building Value to Exit

      Ultimately, an equity investment realizes value when it is exited. Debt investors technically have their exits through periodic interest and principal amortization. After the investment, but prior to exit, a value-building phase exists. Active investors will take part in board meetings to help shape the company's strategy. Passive investors will be more focused on financial and social metric reporting that is established at the end of the investment and provided periodically. At some point, exits must be completed properly to return funds to the investors at levels that are aligned with their expectations.

      Private Equity Funds

      Investors frequently establish or work for funds that utilize other entities' money for investment. Leveraging the platform of a fund can greatly increase the amount of money invested, but it brings with it a host of economic, organizational, and impact-related considerations. Most funds operate on management fees that have to be carefully managed vis-à-vis fund expenses. Organizational issues, such as the ratio and size of investments relative to investment managers, need to be carefully thought through. For impact investing private equity funds, a core responsibility is safeguarding the social mission by properly incentivizing investment managers and adhering to strict social criteria for investments.

      Impact Investment Evolution

      The concluding chapter to this book explores recent developments in the impact investing industry and thoughts on how it may evolve and scale. It's clear that there are problems unique to individual impact investments that stem from investors' disparate sources of capital, sometimes causing irrational risk/return profiles. A brunt of this book seeks to provide solutions to individual impact investment problems through a sound and rigorous investment process. Investment products are also evolving to help mitigate some of these problems and further develop the industry.

      However, when looking at a portfolio investment strategy there are contentious issues that divide market participants. Some argue that portfolios can be constructed where there is no trade off between financial and social return. Others believe that for an effective, for-profit commercial strategy to be successful there has to be compromise and capital placed in a gradient of investments, from high impact to traditional. The final chapter in this book explores such topics and takes a position on effective portfolio strategy.

      Notes from the Field

      Throughout this book, readers will notice excerpts called “Notes from the Field.” These are experiences that the authors have had that directly relate to the topic at hand. We hope that these extracts provide context to the topics.

      What This Book Is Not

      There are two important distinctions that should be made from the start regarding the focus of this book: It is not focused on microfinance nor social/green bonds. While we will reference microfinance in a number of sections and provide examples, the focus is not on how to make a loan to an individual nor solely on how to invest funds into a microfinance institution (MFI). There are many good books specifically on this topic. Similarly, social and green bonds have gained popularity, but they are also very specific forms of debt that lend to an entirely different strategy and analytical process.

      Setting Forth

      Impact investing is a unique and demanding field that requires an unusual range of skill sets. This book dives into both social and financial analyses in detail and provides online resources that readers can use professionally. Those with limited financial backgrounds will gain valuable insight into the investment process and the underlying components required to invest competently. Those with limited social impact backgrounds will learn the topics and methods necessary to evaluate and measure social impact. Most importantly, readers will learn how both the financial and social impact aspects of impact investing intertwine, creating a challenging, but highly rewarding form of investment.

      Chapter 2

      Sourcing and Screening

      Investors are in an exceptional position in that they have to do very little beyond saying that they have money to invest in order to get the attention of entrepreneurs. They will receive pitch after pitch for investment opportunities. However, for most investors, resources such as funding and employee's time are limited, and the repercussions of focusing on and choosing too many bad investments are severe. A well-planned sourcing and screening process can avert time- and resource-draining mistakes. Passive sourcing may work for seasoned investment houses whose reputations attract the best and most desirable entrepreneurs. However, for individual investors, advisers, or new funds, an active sourcing strategy is necessary to find enterprises that excel beyond their peers.

      Sourcing strategies generally focus on three critical aspects: geography, industry sector, and impact. Although the first two are common for mainstream investing, the third aspect, impact, is unique to impact investing. Impact investors seek an assurance that the investment fits their criteria and is likely to have a positive societal impact. Active sourcing can be done by trying to connect with local or foreign entrepreneurs; however, time and resources can easily be drained if the country of domicile or business operations is too risky for the investor, if the sector is outside of the investor's expertise, or if the impact is insubstantial. Of these sourcing elements, geographic appropriateness is unique in that it does not require dialogue with a prospective company to properly assess. Top-level analyses can be done to expose problems with investing in certain countries and prevent drained resources from pursuing investments that ultimately are too precarious due to sovereign risk.

      Sector appropriateness requires less analysis, but often requires at least some type of information from the prospective company and blends into the screening phase. Usually, an investment teaser or pitch is available and initial dialog is initiated with the target company. Asking the right questions at this time is essential to quickly screen away investments that are inconsistent with an investor's strategy.

      An effective screening phase focuses on key components of an investment's sector, stage, business, strategy, finances, and social impact. Deal-breaking issues should be revealed as early as possible, while primary strengths and weaknesses must be weighed carefully before moving the investment along to the next phase of investment process.

      Sourcing Strategy

      Sourcing potential investments is truly the inception of the investment process for any investor, whether impact focused or not. The methods employed and the decisions made at the sourcing stage lead to a variety of paths that often have an influential role for decisions at later stages of the investment process. A robust and effective sourcing strategy can help ensure that the paths with the highest probability of closing a strong investment in an efficient manner are taken, while paths that lead to wasted time, stalled negotiations, or eventual value declines are avoided.

      While the concept sounds relatively simple, what does it actually mean to be sourcing? Passive sourcing is a luxury of many well-established venture and private equity funds, where some of the best entrepreneurs deliver well-laid-out business plans with financial projections or early stage businesses with rapid growth that are poised for success. Many early-stage or less-well-known impact investing investors and funds will be inundated with entrepreneurs pitching business ideas, but the average quality of the investment will be lower.

      There are numerous reasons why the quality is perceived to be lower:

      1. Some СКАЧАТЬ