by Christian Kingombe
As part of 4IP Group’s knowledge sharing activities especially our involvement as co-editor of a forthcoming Compendium on Impact Investing in collaboration with the Graduate Institute Geneva, Managing Partner, Christian Kingombe, as a member of the Swiss Impact Investing Association (SIIA) took the “train” [not the car nor the plane to minimize 4IP’s Carbon footprint], all the way (4 hours) from French-Speaking Terre-Sainte, Canton de Vaud, up to the idyllic city of Zug located at the picturesque Zugersee in the German speaking part of Switzerland.
SIIA’s newly elected board consisting of Deniz Erkus, Michael Mosimann, Svetlana Baurens, and led by its new President Ben Banerjee, who replaced my compatriot Klaus-Michael Christensen at SIIA’s General Assembly in the spring, had concocted an excellent programme over two days all of which I shall not attempt to summarize in this article. I would not be able to do justice to the many interesting and important “impact” related activities presented by the many speakers ranging from Ocean-Climate Change, to Success in Asset Management through Transparent/ESG Investments Driven by Fintech Solutions via DeRisking Investments in the Blue Economy, to Creating Sustainable Impact In India and the Conversion of the Asset Management Industry, all in the morning session of day one of the event. Let me instead refer to the full Summit programme on SIIA’s website.
Instead let me attempt to extract some of the key messages from the Panel Discussion on the 2nd day focusing on Impact Investing – Insights from Assets Owners, which I believe is of the highest interest to 4IP Group’s clients and followers as well as our on-going Impact Investing Compendium project.
The panel was moderated by Gustavo Montero who also moderated most of the sessions during the entire event.
SIIA Panel Discussion – Challenges and Opportunities in Fundraising
SIIA had assembled a very interesting panel of Asset Owners starting with Aygen Yayikoglu (AY) (Managing Partner at Crescent Capital, Turkey); Steffen Bauke (SB) (CEO at Belvoir Capital, Switzerland co-sponsor of the SIIA event along with the main sponsor Prager Dreifuss), who the day before had given an interesting talk about how his own family office had been converted towards impact investing two years earlier after 13 years of operating as a conventional investor with no regards to the purpose of their activities except to preserve the wealth of their high net worth clients. The only female on the panel was Daniela Herrmann (DH) (Founder / President at Topan, Switzerland), but her remarks probably left the strongest and most lasting effect in the audience, which in reaction to her interventions provided her with the loudest acclamations for her thought provoking and at time radical suggestions as we will dwell into in this article. Finally, Kostis Tselenis (KT) (Investment Partner at Quadia, Switzerland), who is a co-author of a chapter which will feature in our Impact Investing Compendium also provided a series of very interesting contributions based on more than 10 years operating in the industry with clients such as HNWI, Family Offices (FOs) and Institutional Investors.
Crescent Capital represented by AY is focusing on green energy investments such as investing in infrastructure such as power plants, hydropower, wind and solar assets in Turkey and surrounding regions. AY has been operating in the space of clean energy for the past 10 years with a natural progression towards impact investing. He believed that after more than 10 years of Impact Investing – that there are still not enough deals out there on the marketplace?
AY believed that the recent interest generated eventually will allow institutional money to flow towards impact investing by using a framework and impact which are useful to catalyse and bring institutional investors into the Impact Investing space. However, he also acknowledged that there has been a lot of repackaging of businesses under the name of impact. The counterfactual case is that there probably in any case would have been investment in renewables and waste management, which today are being repackaged or rebranded by the impact industry.
AY’s perception of the current state of affair was rather pessimistic in the sense that he believes that there is a need for a massive acceleration to be done in order to deal with the current pressing issues in the sense that we are pressured for time if we are to reach the tipping point within the next two years as advocated also by Sir Ronald Cohen. AY’s believed that the areas to invest in are massive but also that there is enough money available. The next step is a need to brainstorm on the way forward which was one of the objectives of the SIIA event, namely what can minds do from a wider perspective?
Kostis Tselenis (KT) addressed the fact that there has been a lot of interest from capital owners. However, he questioned whether we have enough quality deal flow – including repackaged impact investing. With the increasing interest and involvement this will inevitably lead to a shrinking in the high-quality impact.
Steffen Bauke (SB) argued about at what stage impact investors should enter the cycle – from the Venture Capital (VC) path towards Private Equity (PE) towards the public Capital market. In other words, investors need to decide where to step in and what risk to take, something that 4IP Group has addressed via our ESG tool kit mainly intended for Family Offices.
So, while there is a lot of deal flow, SB’s believed that not enough people are converted yet (cf. SSF’s annual report on the state of Swiss Sustainable Finance). SB highlighted that of the around US$100 Trillion if AUC, US$30 Trillion could be labelled as ESG of which almost only 1% is considered as impact investing. Of these $30 Trillion, $20 trillion is just about excluding bad businesses (tobacco, armament, gambling and prostitution) – but can’t be considered neither ESG nor impact. Hence, there is a lot of room for expansion.
As with AY, SB shared the sense of urgency by alarmingly stating that we only have around 1 year left given the fact that the ice at the North and South poles are increasingly melting. Hence, SB’s recommendation was that we need to convert people faster and bring the good deals out there to motivate people to invest or what he called carrying out economically sensible investment by making money while disrupting the industry.
It was a real revelation to be introduced to and listen to Daniela Herrmann (DH), not least because my own wife is working in the male dominated financial industry, albeit in the back office, which seems to make a huge difference when mirroring her experience with what DH had to go through as an investment banker. She started by stating that “People are still thinking about vacation homes when their children perhaps is without a future.” Despite the scientific facts most people in Switzerland are still ignoring these daunting SDGs and COP21 issues. Hence, like her fellow panellists (AY & SB) she also urged for the need to speed up the process and start finding the companies to put their behaviour into place as happened when the EC forced Switzerland to abandon its Banking Secrecy, which actually happened quite quickly. However, currently, we are still far too slow in terms of what we are facing she regretted. The only solution is that the investment attitude of investors have to change completely, as is being studied by Prof. Giuseppe Ugazio, another contributor to our Impact Investing Compendium! From Topan’s own experience, and that of 4IP Group, she was fully aware of the huge deal flows existing in emerging regions such as MENA, SSA and LATAM. However, the problem is that we won’t get there until the investment industry starts going away from a transactions focus only towards value creation. Moreover, there is already a lot of talent inside the investment industry, which theoretically should be able to make value while also contributing to the developing countries wealth creation process through the creation of value and impact. Through that process the investors necessarily have to accept higher risk. DH argued that you need to engage when there is great talent, great ideas and great tech solutions. The US has already realized this by flying into MENA picking software talent. The Europeans as usual don’t see these opportunities. 4IP Group fully subscribe to her suggestion that Asset managers in Europe to a much larger extent than hitherto need to embrace the world and make it happen given the tight time constraints.
Along those line Kostis Tselenis (KT) also advocated for the need to re-educate the investor community. Quadia’s has a 50% of its portfolio directed towards in the EU and the other towards the Developing Countries DCs. KT is more optimistic in the sense that he believes that this change can happen in the short term. He emphasized that we also need to do Impact Investing in the OECD. Its not that 4IP Group doesn’t agree with this view, we have just decided to oriented our own forthcoming Infrastructure Impact Fund towards Asia (50%), Africa (30%) and Asia (20%).
He cautioned that the investment community can’t consume too much time with every single deal, its important that we put the money to work, as the DFIs such as the AfDB also have realized by optimizing their internal decision-making processes. To this end, he recommended that we need more structures that can facilitate the current lack of talent in impact investing – and people who are willing to roll up their sleeves in order to make the projects/enterprises impact investing ready.
The good thing is that the Venture Capital Funds (VCFs) have done this already for decades, but we can’t rebuild the companies to invest in. There are a lot of construction sites available to make the impact investing ready for this.
Daniela Herrmann (DH) alluded to Financial Engineering – for example, if you develop a derivative that could feed into the impact investing market. She believed that its not possible to convert the guys in the trading desk. There is a need for indexes, allow me to draw the readers attention to the pioneering work to that effect by iGravity, which was presented by Remo Oswald in the previous session.
Similarly, Quadia has carried out an innovative approach in Switzerland. But we need several of those in order to go make it go viral or reaching the tipping point!
Steffen Bauke (SB) emphasized that beyond encouraging each other already operating within the impact investing industry and attending closed industry event such as SIIA’s Impact Summit, which unfortunately and surprisingly wasn’t as well attended as in China where events about Impact Investing now draw crowds that fill the auditorium to its capacity limit. Hence, we in Switzerland need to talk to the non-converted, that is the conventional traders and traditional investors, which is the most important thing to do in order to scale the movement.
Main challenges to invest in impact investing assets
According to Steffen Bauke (SB) its about “the liquid stuff”. Inevitably we have to carry out Due Diligence (DD), however, it is difficult to do so, because there are so many variables, besides the issue of how to define impact without existing MSCI standards. Moreover, the DD of the team, business plan, the deal sourcing and the legal issues all takes time.
This was somewhat countered by Daniela Herrmann (DH) who firmly believed that investors don’t have to sell their soul to everyone! They just need to do it. They should not want to get bogged down by the difficulties listed by SB. DH was seconded by Aygen Yayikoglu (AY) who also believed that what is being done now is simply not enough. AY believes that we need to reach more than 1 billion people – both through a combination of using carrots and sticks. The idea of using the gaming community as presented by Sergey Sholom, Founder of GNation in Serbia, during his earlier SIIA presentation “How to Maximize Impact 10 Times from Every EURO Invested” in order to push the corporate to funds massive amounts of initiatives, AY thought was is a great idea. Engaging 1 Bn gamers to put government and corporates under pressure might do the trick, especially as he mentioned fossil fuel is still the most government subsidized commodity in the world! AY suggested that we put corporate on some sort of shaming list. For example, it could be a pollution list whereby the political conscious consumer could punish the corporates for polluting by shaming them and not buying any of their products. Governments could be lowly ranked for not putting a ban on plastic bags. Government still can do a real change via regulation, but the majority of them are not doing it or not fast enough. Hence, pressure through public ranking and limelight in theory will make a big difference! In other words, AY’s proposes that the role of NGOs/CSOs should be to focus on the creation of a large-scale carrot and sticks system: In other words, a list where everyone can see who the polluters are.
SB bought into this idea by suggesting that we could rate the companies on who is doing good and those who are not yet out there. He sticks his hope on the current analysis of companies’ capital market performance which demonstrate that there is already a discount on companies – e.g. chemical companies, which have not been performing that well in the last five years: Not only have chemicals lagged the total stock market since 2011 in their total returns to shareholders (TRS) performance but the industry’s return on invested capital (ROIC) performance has flattened, and for some chemical subsectors, decreased signalling the end of the golden era.
On the other hand, SB’s highlighted that both Fintech and Agritech companies are outperforming the overall capital market due to the premium on their future strategies.
SB’s also suggested that many asset managers don’t allocate their money correctly. Hence a bottom up approach from investors and the community side should be exerted – by banning and pushing investment manager to changing the world.
Where to go to find impact investment products
According to Kostis Tselenis (KT) he honestly admitted that he has been going to impact conferences for the past 10 years always meeting the same community. Notwithstanding that the Impact Investing industry is growing at a rate of 35% p.a., the industry is still very tiny with no chance of solving the SDG financing gap any time soon. Hence, he suggested that the SIIA community needs to stop saying how wonderful Impact Investing is! Instead, SIIA should lead a new approach which consist of bringing the leading players around the table, as we (IIX Chapter Lusaka founded by 4IP Group Managing Partner, Christian Kingombe) is doing in Zambia through the establishment of a GSGII National Advisory Board for Impact Investing, in order to identify and in turn address the 100s of challenges, which the industry is confronted with, if we want the Impact Investing industry to grow bigger. KT suggested that this could be done through:
- Financial innovation such as the IGravity Impact Investment Index presented at the SIIA event by Remo Oswald, which gives Direct access to a diversified impact investment portfolio selected on the basis of both financial performance and social impact.
- Examined what is done in the listed work – is there a list of impact or green washing for every asset class?
- The need to find alternatives to put more money in the right direction.
KT mentioned that deal flows were different both 10 and 5 years ago, and today there is a need to build a network in order to get the right quality deals in place for the impact investors. He mentioned that one of the difficulties with building a deal flow Database is the fact that there are so many asset classes. There is also a need to distinguish between VC deals and PE deals. In short, its very difficult to build a deal flow database where impact investors can go to find deals such as e.g. the GIIN Impactbase, which is the searchable, online database of impact investment funds and products designed for investors. Consequently, according to KT the Co-investors – currently get the best deals. Also in line with the other panellists he also argued for the need to be out there in the field and not only sitting behind the computer. To this Daniela Herrmann (DH) mentioned that Topan, has 10 staff based in Europe and another 12 staff placed in the MENA region. Its crucial she pleaded to have staff on the ground, as we at 4IP Group also have in Zambia and elsewhere on the African continent.
She again bemoaned that the largest contributors can’t be educated because their whole DNA doesn’t get what we were discussing at the SIIA Summit, because their careers are built on the conventional two dimensional (return-risk) investment approach and they have KPIs that they need to comply with to get their bonusses. This pessimistic outlook led her to a rather radical remark that we instead need to wait for the next kind of environmental accident or disaster to happen so that “they” can be fined or hurt via the monetary/capital market.
Any consolidation in the industry – M&A coming?
Steffen Bauke (SB) mentioned that most HNWI when they inherit their money most of them if not everyone want to found their own philanthropic foundation in their own name. The problem with this egocentric approach is that one foundation can’t do enough philanthropic alone. In fact, most foundations only do very small things!
Likewise, in the Impact Investing industry everyone is also trying to establish his own business advisory, venture and asset management boutique. To my own excuse 4IP Group was established because most of the Impact Investing players in Geneva are founded by people with either Investment Banking, Wealth Management / Private Banking background, some of which responsible for the Global Financial Crisis in 2007-2008, didn’t want to recruit people like us with a Development Finance background (believe me I knocked on most doors here in Geneva after I left the AfDB), which reveals that the financial return still is valued higher than those of us who possess real expertise on the ESG dimensions of the Impact Investing equation. Hence, perhaps it is their Human Resources Departments which need to be properly educated so that the best and brightest talents on the labour market, independently of their educational and professional background, can be recruited by the Impact Investing industry, which as everyone on the panel acknowledge is not yet the case, a fact that I personally can subscribe to! Consequently, the Impact Industry in its current form won’t get anywhere either as is the case with the Philanthropic industry.
Contrary to these dwarfs, BlackRock is the largest independent asset management firm in the world currently managing USD5.98 trillion which was achieved by recruiting a lot of asset managers accumulating outstanding market knowledge with over 1900 investment experts in 135 teams across 30 countries spread over 70 offices and 28 investment centres and clients in more than 100 countries. That’s because today’s investors need a partner that plays a leading role around the world. Only firms at this size can manage the growing complexity and high level of volatility in the investment markets, as well as the increasingly stringent regulatory requirements, and realise their investors’ strategies and goals.
To Black Rock’s suggest could be added that yesterday Blackstone, the world’s largest private equity firm, has raised the largest ever private equity fund by collecting USD26 Bn for Blackstone Capital Partners VIII (more than 30 times the size of their first private equity fund in 1987). The fund is just over 5% larger than Apollo Global Management’s 2017 vintage Appollo Investment Fund IX, the previous record holder! Schwarzman writes that he did not make a single presentation to investors when raising his latest BCF VIII fund! What more is that investors who have committed to the fund include institutional investors such as California Public Employees’ Retirement System and the California State Teachers’ Retirement System with $750 Mn each and the Florida Retirement System Trust Fund which committed $100 Mn. Blackstone expects more than $100 Bn in capital inflow this year. Total AUM increased to $545.5 billion, up 24% year-over-year. Within that, private equity increased to $171.2 Bn, up 43% from $119.5 Bn the previous quarter.
This consolidation should be repeated in the Impact Industry in order to be able to do achieve the objectives as discussed at the SIIA Impact Summit!
DH recognized that there is beginning to be greater engagement of larger foundations, which are moving in the right direction. And there are big foundations now starting to focus on e.g. Ocean and other areas where they can’t engage politically. In other words, according to DH, the last 10 years has seen some progress.
In order to accelerate this positive trend, KT argued that whatever that is similar should consolidate! He mentioned that many fund managers come to Quadia with nice fund proposals and some with open ended proposal, however their fundraising starts to struggle at $35 Mn. Therefore, KT proposes that those who are doing similar activities, they should instead be lumped together and work together in the impact investing industry instead of separately as is still the order of the day.
Let me use this article to signal to the Impact Infrastructure industry that whoever is interested in helping us set-up our Impact Infrastructure Fund and who would want to cooperate with us in delivering our proposed ESG Services through our unique ESG toolkit, we are open to putting SB and KT’s recommendations into action – by walking the talk!
However, consolidation should also happen on the non-investment (demand-) side of the ecosystem:
- Clean tech companies are merging;
- ESG Advisory Services: The providers should put their work together, since 4-5 people will convince institutional investors much better than 2 managing partners as we currently are at 4IP Group.
AY highlighted that fundraising is both a time consuming and very inefficient process which may take years. There are too many unsuccessful attempts, something we at 4IP Group also has experienced with a client last year who attempted with our support to establish an investment fund for the development, construction, financing and operation of solar photovoltaic power projects throughout Sub‑Saharan Africa. It failed despite an excellent market analysis, strategy and proposed value creation, experienced fund management team and very promising asset pipeline e.g. in terms of both IRR, development status, commercial milestone, PPA tariff and debt financing available!
But to facilitate the fundraising process having a back office platform available where the Fund Management Team can plug in while benefiting from an existing platform to avoid hiring their own expensive lawyers and accountants which easily in Luxembourg can cost you up to $250,000, which is a potential barrier for a number of early-stage companies such as 4IP Group. A new plug in structure or platform could circumvent this binding constraint, especially since not every entrepreneur is a good lawyer, tax expert nor accountant as I realize very quarter when 4IP Group has to submit our VAT returns.
Daniela Herrmann (DH) further complained about the existing old-fashioned Private Equity Investment (PEI) structure whereby Private equity investors usually have an investment horizon of 5-7 years and plan to exit after that after making a substantial profit on their investment.
In her radical approach to the current state of affairs DH also finds that the notion of Series A, B, and C funding rounds, these terms are referring to this process of growing a business through outside investment, which are necessary ingredients for a business that decides “bootstrapping,” or merely surviving off of the generosity of friends, family, and the depth of their own pockets, will not suffice. The approach is pure non-sense!
The panel debate also included the idea of making illiquid market liquid by setting-up platform such as the Sustainable Finance Geneva (SFG) Swiss Social Stock Exchange for social enterprises along the UNCTAD, the UN Global Compact, the PRI and UNEP-FI driven Sustainable Stock Exchanges Initiative, which in the best of all worlds will help us put impact in the right direction.
AY emphasized that a lot of pension funds has an allocation problem. He illustrated this by referring to the impact investing fund launched in 2018 and managed by KKR. Global Impact is KKR’s dedicated lower-middle market private equity strategy established to invest in businesses delivering solutions to significant societal challenges. KKR align its efforts to the UN Sustainable Development Goals (“UN SDGs”). The problem as identified by AY is that the KKR 8 Bn Global impact fund has so huge ticket sizes that KKR can’t do what they wanted to do! The model is deficient from multiple angles.
We learned that Sweden has made it legal as an asset manager need to invest into impact. Apparently, the public will use AI to screen independent of asset manager to find out if there is any layer of their portfolio which is in conflict with the new regulation. This new trend has not yet arrived in Switzerland where you can’t pro-actively select pension fund offering because the institutional scenario is behind. Hence the panellist recommended the beneficiaries of the Swiss Pension Schemes instead to talk to or engage with the institutional investors.
There was little confidence amongst the panellists that a lot could be achieved by engaging the Governmental level on the other hand. Most of the civil servants working in central government are not proactively involved to change the current state of affairs in the Swiss asset management industry. There was a general consensus that it will have to be the grass roots which will make a difference.
It was argued that we have already missed the train when it comes to trying to convince the public decision makers to introduce an exclusion list. It was agreed that Governments in any case almost always follows the market.
One constructive suggestion was “How to use Impact Investing as a risk management tool to diversify risk in investment portfolios.” This argument should be used much more going forward. If we can prove this is the case rather than to push the government to force the pension funds to allocate x% of their allocation towards impact investing, then that might do the trick, it was agreed.
Because of the inertia of Government, saving the planet, despite the power of regulation and fines in moving the corporate world, it was agreed that the power of the corporate world is the only way forward. And this will only happen via viral grassroot movement putting pressure on corporates which only then subsequently is translated into legislation by the government. The challenge is that we don’t have 10 years at our disposal, but we have only until end of 2020 to reach the tipping point.
To quote the Swedish youth climate action activity Greta Thunberg, when she arrived in New York after having crossed the Atlantic Ocean “Let’s do it Now.”
I was informed by the SIIA Board that for those who didn’t attend the SIIA event a selection of photos and videos from the event will be available on the SIIA website.