Greetings Agents of Impact!
In today’s Brief:
- Pooling loans to scale the Greenhouse Gas Reduction Fund
- An impact-linked investment to scale impact-linked investments
- Investing for the manufacturing “super cycle”
- Reflections on investing for justice
Featured: Deploy!
Adapting ‘pooled loan funds’ to scale financing for greenhouse gas reduction projects. The Environmental Protection Agency is finalizing agreements with awardees of its $27 billion Greenhouse Gas Reduction Fund, or GGRF, before the money is expected to start flowing next month. The awardees – intermediary coalitions made up of nonprofit lenders and green banks – will then distribute the funds through local lenders to consumers, schools and small businesses for green retrofits, EV charging, community solar and other green projects (see, “How green banks are blending finance for community infrastructure and greenhouse gas reduction”). The goal is to leverage GGRF funds with additional capital and recycle the proceeds for a perpetual green lending ecosystem. “Pooled loan funds,” a mainstay in public finance, may offer inspiration, say Matt Posner of Court Street Capital Group and James McIntyre of Inclusive Prosperity Capital. Pooled loan funds aggregate loans from multiple borrowers, creating a diversified pool that can enhance credit quality and reduce borrowing costs. Such funds are “gaining traction with municipal and state agencies to fund initiatives aimed at reducing greenhouse gas emissions,” Posner and McIntyre write on ImpactAlpha.
- Leveraging capital. Pooled loan funds have been used by municipal entities such as state housing finance agencies and bond banks. MassHousing, Massachusetts’ housing finance agency, has issued multi-million-dollar bonds backed by pools of single- and multi-family mortgages. Housing bonds feature leverage ratios of up to 10:1. State bond banks, often tapped by smaller municipalities, consolidate loans for local infrastructure projects and pool them under a state-level entity. The Vermont Bond Bank is helping school districts decarbonize their buildings and convert their bus fleets to electric.
- Green funding ecosystem. The mounting consequences of climate change were already spurring a new ecosystem of lenders before the GGRF. State-level green banks and infrastructure banks were operating in 26 states as of 2021, up from zero in 2009. Their mandates vary, but nearly all are prepared to engage in the GGRF and are well positioned to pool green loans, argue Posner and McIntyre.
- Success factors. The success of pooled loan funds hinges on standardized underwriting to homogenize credit risk. Also critical is credit enhancement, which could include over-collateralization (issuing bonds for less than their total value); subordinate, or first loss, positions; reserve funds to cover losses; and insurance mechanisms to collectively buffer investors from potential defaults.
- Keep reading, “Adapting ‘pooled loan funds’ to scale financing for greenhouse gas reduction projects,” by Matt Posner and James McIntyre on ImpactAlpha.
Dealflow: Impact Incentives
Roots of Impact inks impact-linked investment… for itself. The German catalytic capital manager known for designing financial structures that tie compensation to impact performance has raised its first round of growth capital from several mission-aligned investors. Roots secured the kind of capital it advocates for: Embedded in the terms are financial incentives for the firm to continue growing the market of impact-linked finance. The Delta Fund, European Social Innovation and Impact Fund, and BMH, a German public investment group, are supporting Roots’ growth with profit-share agreements and subordinated debt. Roots will get a reduction on the share of profits it repays based on how many new impact-linked finance practitioners it brings into the market and the effectiveness of transactions it supports. “I am glad that we were able to show how impact-linked finance can easily be applied to ourselves, even though we are anything but a standard case,” Roots of Impact’s Bjoern Struewer told ImpactAlpha. “Rewards for impact can be built into any type of financing.” Roots did not reveal how much capital it had raised.
- Social impact incentives. Roots of Impact recently released learnings from impact-linked finance since its first “social impact incentive,” or SIINC, deal eight years ago with Mexican healthcare provider Clinicas del Azucar. SIINCs use “bonus payments” as a way of incentivizing companies to deepen and broaden their impact as they grow or their business environments change. The Swiss Agency for Development and Cooperation, an early supporter of SIINCs, provided Roots of Impact with a results-based grant to build out new impact-linked finance services. “We position ourselves as a market enabler and will only focus our growth in areas that we consider strategically essential,” said Struewer.
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Blackhorn raises $150 million to invest in digital infrastructure for the low-carbon transition. Denver-based Blackhorn Ventures backs early stage tech companies addressing industrial resource efficiency. The firm sees a $1.7 trillion opportunity as new manufacturing and AI “super cycles” kick off and economies are rewired for a low-carbon future. With its second Industrial Impact Fund, Blackhorn is looking to fund ventures at the point when “they’re commercializing [and] thinking about the pathway to scale,” Blackhorn’s Micah Kotch told ImpactAlpha. The venture capital fund has made 20 seed and Series A investments, and plans to make another five in the US and Europe (see, “The Liist”). It is targeting “founders at the forefront of industrial AI, addressing critical labor shortages, and delivering scalable decarbonization solutions,” added Blackhorn’s Melissa Cheong. About half of the fund will be used for follow-on investments in existing portfolio companies.
- Outperformance. Blackhorn’s portfolio includes Seattle-based Electric Era, which has developed a high-speed EV charging system; and EcoWorks, a German startup retrofitting apartment buildings with prefabricated facades that improve properties’ energy efficiency. There have been several mark-ups across the portfolio, Kotch said. “Nine out of the 20 companies have either raised subsequent capital or received term sheets for up-rounds or round extensions.”
- Strategic LPs. Investors in Blackhorn’s Industrial Impact Fund include the Grantham Foundation, Jonathan Rose Companies and family office Caprock, as well as corporate investors Mitsubishi Electric, Mercuria Energy and Westlake Corporation. The LPs have “reach, domain expertise, scale, and a real interest in startup innovation,” said Kotch. Blackhorn’s goal is to leverage LP relationships that could become customers of portfolio companies to accelerate the pathway to scale.
- Keep reading.
Dealflow overflow. Investment news crossing our desks:
- The African Export-Import Bank provided $80 million to CBZ Bank, Zimbabwe’s largest bank, for on-lending to small business financial institutions. (Afreximbank)
- Austria’s Prewave raised a €63 million ($67.4 million) Series B funding round to help businesses meet sustainability requirements, like the EU’s upcoming Deforestation Regulation, which goes into effect next year. (Tech.EU)
- Oslo-based Fortifai, meanwhile, raised €502,000 ($537,000) to help companies automate ESG regulatory reporting and compliances. (EU-Startups)
Impact Voices: Returns on Inclusion
Kataly finale: Why deep reflection is a prerequisite when investing for justice. Over a year ago, Kataly Foundation decided to divest from Wall Street. In a series of posts on ImpactAlpha, Kataly’s chief investment officer Lynne Hoey has explored the spend-down foundation’s investment goals and priorities, determined what is “enough” for the foundation, wrestled with the financial system’s structurally racist history, recounted the challenges it faced allocating capital, and described the foundation’s ultimate investment strategy in pillars of community finance. That transition might be harder for a bigger investor. “Harvard’s endowment alone is larger than the GDP of 120 nations,” notes Hoey. To divest even 1% of its capital, asset managers would need new financial products to absorb the $5 billion. “People want solutions now,” Hoey acknowledges in her conclusion to the series. But she counsels patience. “When people move directly to solutions and do not unpack the root cause of the problem or understand history,” the solutions are likely to be fleeting, or even harmful, she says.
- Less risk, more value. By sharing Kataly’s journey and ultimate strategy, Hoey hopes to demonstrate that “investing in communities and justice is possible, and presents less risk to investment portfolios [than] traditional investment philosophies would have you believe.” Before jumping into solutions building, she suggests asking the following questions: “How are your portfolios currently invested? What is your assessment of risk? How are you considering diversity and justice in your investments? Are you prepared to make investment decisions that are values aligned, even if it means less return?” And, “What is your enough?”
- Keep reading, “Why deep reflection is a prerequisite when investing for justice,” by Kataly Foundation’s Lynne Hoey on ImpactAlpha.
Agents of Impact: Follow the Talent
Criterion Institute’s Joy Anderson, the late Suzanne Biegel of Catalyst at Large, and Jackie VanderBrug of Putnam Investments receive the Joan Bavaria Award at this week’s US SIF conference for their work building the field of gender-lens investing… Kate Cochran is stepping down as the CEO of Upaya Social Ventures. AB Chakravarthy, Upaya’s India country director, and Shruti Goel, director of impact and partnerships, will become co-CEOs, starting in August.
Ballmer Group Philanthropy is hiring a chief of staff in Bellevue, Wash… Honeycomb Credit seeks a director of strategic finance in Pittsburgh… GLIN Impact Capital has an opening for an ESG and sustainability consultant… Closed Loop Partners is hiring an impact data measurement associate or analyst in New York… Clean Energy Ventures is looking for an ESG and impact manager… MassMutual’s Catalyst Fund is recruiting an impact investment associate.
👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.
Thank you for your impact!
– June 27, 2024
