creating value towards impact investing
DESCRIPTION
(2nd Innovation for Financial Services Summit – Luxembourg, 19-21 Sept. 2012) Definition & application : - Context and Definition - Value analysis - Concrete cases - Lessons learned The author, Xavier Heude has been entirely dedicated to the development of Responsible Finance by the mean of promoting Impact Investing, mainly. He is convinced that Private and Institutional investors are growingly interested in putting some part of their money in business activities or projects where they can themselves follow up the financial performance, and last but not least, the social and environmental outcomes generated. He is Co-founder of meso IMPACT Finance, a Luxembourg-based holding company aimed at taking stakes in SMEs that generate a social and environmental (measurable) impact. MIF helps them develop through a financial and extra-financial support (i.e. technical assistance). He is also Délégué Général of SAKURA Initiative, a Luxembourg-based non-profit organisation promoting social and responsible practices in the economic and financial sector, through various means such as conferences and communication. Xavier Heude founded also the “PEERS Direct Investment” – registered trademark in 2011, after having stated for many years, that there are still quite few incentives and operational frameworks and guidelines allowing and encouraging a large public to invest in socially responsible business activities or to support valuable social initiatives. A network is being built, in order to contribute to expand the mark and get it known worldwide.TRANSCRIPT
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)
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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
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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 …)
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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 [email protected]