Celebrating 10 year of Sustainable Finance track records in Geneva, Part 2, by Christian Kingombe, 1st of June 2019
SECA Romandie Event on Impact Investing, Thursday 23rd of May 2019, Palais de l’Athénée, Rue de l’Athénée 2, 1205 Genève
The Swiss Private Equity & Corporate Finance Association (SECA) is the representative body for Switzerland’s private equity, venture capital and corporate finance industries. SECA has the objective to promote private equity and corporate finance activities in Switzerland. On the 4th of April 2019, 4IP Group was invited by SECA to a SECA Romandie Networking Event to celebrate the Spring Season in Riverside Café (Rue du Rhône 19). We were promised that this would be an opportunity to connect with interesting people from the industry while enjoying drinks, food and music. So with that spirit, Christian Kingombe, Managing Partner 4IP Group, went ahead and joined the evening with the objective to find out how much the SECA members knew about Impact Investing and to what extent the Private Equity (PE) organizations they represented actually invested in emerging markets and thereby would be interested e.g. in 4IP Group’s investment opportunities and/or our forthcoming back-to-back investment conferences in Lusaka, Zambia, 18-20th of June 2019. After more than 3 hours of networking, investment promotion and impact investment awareness the only thing that 4IP achieved besides meeting a lot of interesting people, was an invitation to SECA’s first members event on Impact Investing. While, 4IP didn’t have anything to do with the choice of topic, it was at least somewhat of a consolation victory that SECA found it worthwhile introducing their members to this new mega trend.
So, on May 23rd 2019, 4IP decided to attend the SECA Romandie evening event at the Palais de l’Athénée in Geneva, not so much with the expectation of learning something new about What is Impact Investing? which was introduced very nicely by a short 4 min 30 seconds youtube video. However, while we at 4IP Group evidently are not new to the topic (see Part 1) the event turned out to be an interesting Impact Investing Panel Discussion on an Emerging Investment Strategy through listening to the converging perspectives of respectively Patrick Seeton, Partner at AHL Venture Partners, Guillaume Bonnel, Member Executive Office at Sustainable Finance Geneva, Alessandra Ricagno, Director and Head of Clients at Align17 and moderated by Tim Radjy, Founder & Managing Partners at AlphaMundi who since the 2009 (10 years ago, since Part 1) has been fully dedicated to the emergence and mainstreaming of impact investing.
Here are some of the most important messages, which I took away with me from listening to 4IP Group’s impact investing peers.
§ Alessandra Ricagno, Director, Head of Clients at Align17
Align17 is a private, digital marketplace start-up which she established last year through a sponsorship by UBS. Align17 brings visibility to the world’s best impact investment opportunities. It uses the UN’s 17 Sustainable Development Goals (SDGs) as a framework to present tailored opportunities to investors. Working with top institutional impact investors to source global investments, and third-party industry experts to vet them, it presents deals that both yield results and match the values of investors.
§ Patrick Seeton, Partner at AHL Venture Partners
AHL Venture Partners is one of the largest and most successful impact-focused venture capital firms in Africa, with an award-winning team on the ground across West, East and Southern Africa. AHL Venture Partners enjoys long-term support from mission-aligned investors. Since 2008, AHL Venture Partners has committed more than US $75M to 35 impact-focused businesses and early-stage equity and debt funds that operate across 27 different African countries and ranging from financial inclusion, access to energy, food and agriculture. To date, their investments have produced strong financial returns while employing over 11,000 people and providing access to improved goods and services to more than 9,500,000 people at or near the bottom of the economic pyramid. One of their best-known investment were in the KIVA Microfinance learning platform. Kiva is an international nonprofit, founded in 2005 in San Francisco, with a mission to expand financial access to help underserved communities thrive. Kiva does this by crowdfunding loans and unlocking capital for the underserved, improving the quality and cost of financial services, and addressing the underlying barriers to financial access around the world. Through Kiva’s work, students can pay for tuition, women can start businesses, farmers are able to invest in equipment and families can afford needed emergency care. By lending as little as $25 on Kiva, you can be part of the solution and make a real difference in someone’s life. 100% of every dollar you lend on Kiva goes on funding loans.
§ Guillaume Bonnel, Member Executive Office at Sustainable Finance Geneva
He mentioned that while he 10 years ago from July 2009 to June 2011 worked as a Sustainable and Responsible Investment Advisor at BNP Paribas in Geneva Area, Switzerland sustainable finance was still just considered a niche topic. He spent this time there creating and monitoring of a complete range of sustainable investment funds (Microfinance, Renewable Energies, Ethical funds, Impact investment funds) for the Wealth Management offering. He also mentioned that he left BNP Paribas to join in August 2011 Médecins Sans Frontières (MSF) as a Financial and Human Resource Coordinator for little more than year in Cameroon in Central Africa. Apparently, he spent this time there preparing annual budgets and carrying out Financial analysis to achieve a more efficient allocation of financial resources. From there he moved to Symbiotics as an investment analyst carrying out due diligence for microfinance institutions (MFIs) in Sub-Saharan Africa (SSA) (e.g. Ghana), Latin America and Asia. This experience led him to become an Impact Investment Advisor at Lombard Odier in Geneva from May 2013 – Oct 2016 where he spent his time creating and managing the first private fund of funds active in the development finance industry. He raised over USD 125mn, which was invested in 80 emerging countries, in 45 different currencies based on Due diligences of the underlying fund management companies as well as Risk and investment allocation monitoring. Lombard Odier’s impact investing product – Funds of Fund investing in impact investing aimed to promote economic development and to give investors the opportunity to invest in: Financial inclusion; Infrastructure; Education and Health. The Funds-of-Funds approach – allowed him to feel the interest from private investors and some institutional investors.
He has also been involved in tackling the climate aspect – through Green Bonds – invested in alternative energy and related to Climate Change by launching a fund in the Climate Change space. Finally, through his work at Sustainable Finance Geneva (SFG) he has been promoting Sustainable Finance and enhanced Sustainable Finance in Geneva to help create and leverage the unique ecosystem in Geneva consisting of International Organizations, the Banking sector and attempting to bridge the gap between these two worlds thereby creating unique ecosystem contributing to reaching the UNs SDGs.
The moderator Tim Radjy, Founder & Managing Partner at AlphaMundi, had no reason to envy the achievements of the three speakers. Besides being the Founder and a Managing Partner at AlphaMundi Group in Switzerland since 2008, a Board member of AlphaMundi Foundation and SocialAlpha Investment Fund (SAIF), and the fund manager of SocialAlpha-Bastion in Luxembourg since 2009, Tim Radjy has been involved in more than 100 transaction in around 35 companies.
He mentioned that during the last 10 years – The Global Impact Investing Network (GIIN) – had measured that the return of investment for the majority investors is actually at the market risk adjusted rate – and that more than 80% of the impact investors are achieving a market rate across different asset classes. Also, the Impact investing industry has seen a 20% growth p.a. The moderator rightly believes that in order to achieve sustainable development a – broad range of instruments, which don’t substitute for ODA or philanthropy, but instead should just be considered to be another instrument to promote the sustainable development model.
After these initial presentations of the speakers and the moderator a number of questions were raised by the moderator.
Question and Answers
Alessandra Ricagno mentioned that Align17 when originating investment apply strong Due Dilligence on companies. They apply traditional DD on experience, track record and performance and core of business responding to the ESG dimensions, but Align17 also looks at:
- how the impact is integrated into the investment process
- part of the mission statement of Special Purpose Vehicle (SPV), but also
- how manager is asking for KPIs to be produced by portfolio companies.
The investor shaping strategy is asking for a system of measurement – ex ante, on-going and ex-post to assess impact expected from investment – which is going beyond what the company does.
Guillaume Bonnel also talked about the complexities associated with the Measuring of impact, which includes:
- The Intention of the company – what the company is created for and what is it doing?
- How does the company do that and how its process impacts society?
- What are the outcomes of products and services – the direct impact?
- The impact per se – the total of the value chain, that is, the long-term outcome on society itself.
Mr. Bonnel also referred to the joint 2015 study by Cambridge Associates and GIIN Introducing the Impact Investing Benchmark, the first comprehensive analysis of the financial performance of market rate private equity and venture capital impact investing funds. One of the motivations behind the study is that Credible data on risk and return can help both existing and future impact investors better identify strategies that best suit their desired social, environmental, and financial criteria.
At launch, the Impact Investing Benchmark comprises 51 private investment (PI) funds. Funds in the benchmark pursue a range of social impact objectives, operate across geographies and sectors, and were launched in vintage years 1998 to 2010. Despite a perception among some investors that impact investing necessitates a concessionary return, the Impact Investing Benchmark has exhibited strong performance in several of the vintage years studied as of June 30, 2014. In aggregate, impact investment funds launched between 1998 and 2004—those that are largely realized—have outperformed funds in a comparative universe of conventional PI funds. Over the full period analyzed, the benchmark has returned 6.9% to investors versus 8.1% for the comparative universe, but much of the performance in more recent years remains unrealized.
Impact investment funds that raised under $100 million returned a net IRR of 9.5% to investors. These funds handily outperformed similar-sized funds in the comparative universe (4.5%), impact investment funds over $100 million (6.2%), and funds over $100 million in the comparative universe (8.3%). Emerging markets impact investment funds have returned 9.1% to investors versus 4.8% for developed markets impact investment funds. Those focused on Africa have performed particularly well, returning 9.7%.
Patrick Seeton also confirmed that with a market-rate of returns it is achievable to be doing good and doing well at the same time. Long-term value is created more effectively in a company creating impact. The ESG piece – intentional – negative screen – informs on what the company is doing poorly – how the company is doing things. He stated that investors shouldn’t look for concessionary return and instead look for even better than market returns.
Alessandra Ricagno mentioned that when it comes to the definition of Philanthropic Investment and Sustainable Investment – the differentiation is linked to the intention of investor when approaching investment. Impact Investors are looking for impact and positive risk-adjusted financial return. The Trade-offs between impact and Financial Return – is a choice that the clients take by deciding to become an impact investor.
Guillaume Bonnel made reference to a recent Symbiotics and GIIN report entitled The Financial Performance of Impact Investing through Private Debt (2018) to which he had provided and support and input as part of an external advisory body for this study. This report adds vital new data to the expanding base of evidence regarding the financial performance of impact investments. In general, this analysis shows that private debt funds seeking positive impact can offer very stable returns across various private debt risk-return strategies, sectors, impact themes, and geographies.
Private debt or fixed income instruments comprise the largest asset class in impact investing, accounting for 34% of impact investors’ reported assets under management (AUM). 50 Private (including microfinance) Debt Impact Funds (PDIFs) took part in the joint Symbiotics & GIIN research.
Key Findings include:
- Impact: The most frequently targeted impact themes are financial inclusion, employment generation, and entrepreneurship. Others include access to energy, health improvement, clean technology, sustainable consumption, and agricultural productivity
- Return Philosophy and Net Returns: Although a large majority of funds in the sample (representing on average more than 80% of total sample assets throughout the reviewed period) target competitive, risk-adjusted, market-rate returns, other funds in the sample, approximately one-fifth, intentionally target below-market-rate returns. By weighted average, the funds targeting market-rate returns generated a compound annualized net return of 2.6% over the five-year period under review. Funds targeting below-market-rate returns generated a compound annualized net return of −6.8%. For levered funds, interest paid to investors on issued notes averaged 3%.
It is worth noting that he highlighted that in Switzerland it is no longer considered too risky to do Sustainable Investment which can achieve a risk-adjusted return. Consequently, there has been a big shift in the mindset of Pension Funds (cf. Part 1).
Patrick Seeton emphasized that there is a difference in liquidity prospect in SSA – and that the continent is starting to see exit with short-term gains. But SSA needs to take a longer-term view.
He also stated that evolving from return to risk-adjusted return is key to sustainable development. Its important to include risk in all elements of the analysis of return. He curiously, also stated that in the presentation of PEI funds you don’t see much about the real risks and the mitigation strategies to address these risks.
EMEs and Developed Countries (OECD) markets have different structural characteristics for the capital to go into those countries. Funds are split between different themes in respectively:
- EMEs (financing education, access to financing etc.)
- Developed Markets (Artificial Intelligence; genetics; energy, food).
Patrick Seeton highlighted that SSA in general and East Africa in particular has a different macroeconomic story – being the fastest growing region in the world, e.g. with Ethiopia, Kenya and Uganda gaining a burgeoning middle class. In SSA has a lot of opportunities to bridge the development gaps e.g.– SSA has been skipping telephone landlines and leaped directly to cell phones.
Despite the demographic explosion and increasing productivity gains on the continent, Patrick Seeton rightly highlighted the on-going inefficiency in of the financial markets in the developed countries which keeps concentrating their attention on around 5,000 listed companies in OECD Stock Exchanges instead of directing capital into non-listed companies in EME which is where the SDG impact lies because a huge part of the population in these developing countries lacks everything. So, Patrick Seeton’s recommendation in terms of impact and financial return is that Impact Investors headquarters in the Developed Countries should direct more of their AUM into EMEs, fully in line with 4IP Group’s approach towards the Swiss-based Asset Managers and Owners.
One of the reasons for this sub-optimal exploitation of this major investment opportunity in EME, is that there is a lack of tools for the bigger public to get the knowledge they need to understand what is the best sector to invest in. There is a need for companies (services providers)
- that bring that knowledge and standardize that knowledge –
- that provide standardization of methodology of measuring of impact and
- how those Private Equity Investors present themselves to the market and the standardization of the flow of investment into that market.
Idea, he argued, is not to become a sophisticated impact investors – but instead there is a need to develop further the market so the necessary information is there to ensure that it can be grasped by the investors to allow them to make an informed decision. He also emphasized the need to see that this type of investment has a certain impact, e.g by using the GIIN IRIS – 600 indicators or the ISO standards of Impact. Moreover, IFC has launched the Impact Management principles to be more transparent on how they measure impact.
AHL Venture Partners follows the same approach as early-stage Venture Capitalists by using ESG as a negative screen. AHL Venture Partners has 5-6 professionals finding pipeline deals in thematic areas worth– $1-$5 Mn. They proceed through the pipeline in a normal way. Intentionality is an early screen – aligned with an impact story. The firm invests in early and growth stage SMEs capable of delivering impact at scale alongside market-rate financial returns. AHL’s primary investment themes are financial inclusion, energy access and food & agriculture. To date, AHL has made 35 investments and committed over $60 million to its portfolio of funds and SMEs across Sub-Saharan Africa.
The AHL Growth Fund is designed to give HNWI, family and foundation investors cost-effective access to a curated selection of the most exciting impact investment opportunities in East and Southern Africa. The AHL Growth Fund focuses on rapidly growing businesses that are providing essential goods and services to people living at or near the bottom of the pyramid. Investee companies must be market leaders with plans for geographic and product/service expansion through a scalable, tech-enabled infrastructure. Hence, Patrick Seeton, rightly so, was proud of having M-KOBA as one of their initial investee. M-KOPA Solar offers residential solar systems on an innovative, affordable micro-leasing platform, with an initial deposit, followed by daily payments. After completing the payments, customers own a world-class solar home system, with multiple lights, phone charging and a radio, and can finance additional product assets and lifestyle products such as television, bicycle, smart phone, energy efficient cook stove and water tank.
Alessandra Ricagno mentioned that Align17 is working with PwC on an impact assessment methodology – which will be addressing different measures per theme but also per geographies, so that the method adapts to certain characteristics of geography.
When it comes to the ranking and screening the same applies to fund investing in Africa and Asia such as whether a fund-of-funds has consolidated metrics, such as when it comes to Financial inclusion, the metrices could be:
- average loan size,
- Percentage of the population which is rural or urban;
- Percentage of women.
It is also important to look at each fund separately – when it comes to
- Impact management
- How they measure impact
They also look at case studies – e.g. looking at company in terms of what they do (i.e. their outcomes). Another example is the so-called Green Bonds which need to publish reports on the impact they are having on climate – by deriving information on the impact side and developing different methodologies.
The SDGs and IRIS+ metrics – are ways to standardize how to measure impact, however, what is lacking is data (under construction) to do the work properly. Ms Ricagno believes that an institution is lacking which could validate the investment opportunities contributing to the SDGs. However, Impact measurement is still under construction. Patrick Seeton, on the other hand, didn’t agree on the UN certification proposal.
It was mentioned that the Capital Asset Pricing Model (CAPM) has been existing for nearly 70 years, but now was the time to factor in impact into the calculation of the required rate of return for any risky asset. That will lead to a willing to pay for impact when we get the data codification into CAPM.
Pioneers vs new entries to Impact Investing Market
The panellists alluded to the expected shift in demographics between the baby boomers generation and the Millennials. By which over the next 3 decades an estimated $30 trillions in wealth will be transferred from the baby boomers to next generation. This new generation has a very different mentality and it will see many more women as capital/asset owners too.
Everyone on the panel agreed that the Pension Funds and Insurers will be the last to move towards Sustainable Finance (see Part 1).
- The First movers have been – Blue orchard and Alphamundi, Responsibility, Bamboo;
- Then came the Banks – such as Lombard Odier – intermediary banks – who were ESG Driven;
- Finally came the Big Players on board – such as Black Rocks trying to catch the train.
There was also a consensus among the panellists about ESG becoming a standard (cf. EU – integrating ESG metrics into everything in financial sphere). Impact Investing will be the next differentiator. This has led to a dramatic growth with the appetite already there across the globe.
Exit is still missing from the space. Nonetheless, VCF are already starting to look into this space and more exit are starting to happen in Africa as companies get more sophisticated, although IPOs still escape the average impact investees.
 PDIFs were identified through various networks and databases, including the GIIN’s ImpactBase database, ImpactAssets 50, LuxFlag, Fundpeak, and the Symbiotics databases of microfinance and small and medium enterprise (SME) funds. Financial Services (including Microfinance) is the most represented sector in the sample by both volume (80.4% in 2012 and 82.7% in 2016).