ImpactAlpha, July 9 – One in five impact investors are retreating – cutting back commitments – in response to the COVID crisis.
“Most investors are currently in ‘risk-off’ postures, meaning that they are trying to reduce portfolio risks and are therefore looking at fund opportunities that are either inherently low-risk (cash equivalents, fixed income, etc.) or which have built-in risk mitigants,” according to the latest brief from the Global Impact Investing Network’s Response, Recovery, and Resilience Investment Coalition.
The pullback is hurting fundraising, even for managers that had built in tranches of junior debt or first-loss protections. Commercial investors want even more coverage from such catalytic tranches, according to the R3 coalition’s survey of 40 individuals.
Among other insights:
- Reimagining risk. Market volatility has made it difficult for investors to settle on valuations and to underwrite risk. One fund manager redesigned its risk framework to reflect dependence on suppliers and local labor, the ability to function during a lockdown, and the likelihood of a quick recovery. An asset owner now requires monthly (rather than quarterly) risk assessments from entrepreneurs that include cash flows, reopening plans, and operational adaptations. Underwriting criteria set before COVID-19 are not proving useful during the pandemic, but some iInvestors are providing bridge loans and flexible debt to companies that can recover quickly after lockdowns (see, “Investors that demonstrate flexibility and patience prove catalytic in COVID crisis”).
- Due diligence. Investors are using COVID-related scenario analysis tools including Capria’s Edge platform and IIX’s COVID-19 resilience tool, and streamlining decision making with Zoom and Whatsapp calls, online applications and smaller loans sizes (see, “Redesigning due diligence for a deal pipeline in lockdown,” by Suzanne Biegel on ImpactAlpha).