ImpactAlpha, January 14 – Last summer, Diane Isenberg, founder of our family office Ceniarth, went public in ImpactAlpha with our firm’s pledge to shift more than $300 million over the next decade into a strategy we call “Impact-First Capital Preservation.” The portfolio of managers and direct investments that support enterprises directly serving demonstrably poor and underserved communities would only rarely (although, not never) deliver returns that would satisfy investors looking for a market-rate, risk-adjusted return.
Over the course of 2018, we committed more than $40 million into both 21 new, and renewed, fund and direct investments. Ceniarth executed on a wide range of global transactions that are all focused, in one way or another, on bringing much needed capital to underserved communities and regions. Our mission is crystal clear: to finance interventions that improve rural livelihoods primarily through the production of additional income.
A full look at our 2018 deal activity follows. But first, three key insights:
1. More comparable impact data is possible. Comparing impact efficiency across enterprises and geographie is challenging, and often produces results that do not aid in decision-making. In pursuit of more actionable data, we began a pilot with Acumen’s Lean Data team on a select cohort of our investees. In addition, we provided grant funding to the Council on Smallholder Agriculture’s Prosper Africa initiative that is seeking to more accurately validate the high costs, and the related subsidies required, to lend to small and midsize agribusinesses. We are looking to hire a full-time impact manager to join the team and pull all of this work together.
2. Impact-first pipeline is robust. When we announced our capital preservation initiative last summer, in a post on ImpactAlpha, we were still uncertain as to the breadth and quality of the pipeline we would find. Much of the mainstream enthusiasm in the sector is reserved for fund manager and enterprises seeking market-rate returns. We have been very pleased however with our initial, six month queue of funds and enterprises that fall within our target criteria. Most of them do require capital from investors seeking more modest returns, but a select few could be credibly underwritten to a market-rate standard (we do not turn down returns when they are available, we simply do not sacrifice impact alignment to achieve this). We are trying to move faster and are looking for a new investment officer to join our team in London.
3. We need radical revolution, not incremental change. We end the year proud of what we have accomplished, but also with the sober insight that our approach – our willingness to be critical, to promote transparency, and to challenge convention – may rub some the wrong way. We have been enthusiastically invited to present at a variety of niche gatherings, however, many large industry events – GIIN, SOCAP, Confluence – prefer to keep our point of view, and those of the small number of similarly minded investors, on the fringe. We remain frustrated that promoting incremental change as radical revolution seems to be in fashion.
High-risk PRI loans
Our commitments in 2018 include over $9 million in lending designated as program-related investments, or PRIS, from the Isenberg Family Charitable Foundation. As we have previously explained, this programmatic activity represents the highest risk work that we pursue. While we believe that a majority of these PRIs will ultimately return capital to us, the risk of impairment is quite real.
Our largest PRI of the year was a $3 million loan commitment to Mountain Hazelnuts, a for-profit social enterprise based in Bhutan. Mountain Hazelnuts is developing a large-scale hazelnut production supply chain that relies on trees planted on unused smallholder land in rural areas of Bhutan.
In addition to this transaction, we made a variety of other new PRIs similarly in the agricultural sector. These included a $1.2 million loan to Sarura, a commodities warehousing business in Rwanda, $700,000 in loans for capital expenditures and working capital to Good Nature Agro, a Zambian enterprise supporting farmers in the process of seed replication. We extended a $700,000 line of credit to iProcure, a Kenyan-based aggregator of agricultural inputs. We also made $250,000 pilot loans to both Kheyti, an Indian enterprise helping small farmers purchase greenhouses, and Farmerline, a Ghana-based company providing mobile information and inputs to rural farmers.
Our PRI activity also included renewing a $2 million line of credit to Pro Mujer, a network of microfinance institutions in Central and South America providing women-focused financial services, as well as renewals for working capital loans to Apollo Agriculture ($800,000), a Kenya-based company using satellite data and mobile technology to provide input loans to small farmers, and MyAgro ($400,000), a West African enterprise that similarly provides farmer inputs, but relies on layaway savings, as opposed to loans.
In support of one of our infrequent direct equity investments, we contributed an additional $100,000 to a financing for Komaza, a Kenya-based distributed forestry business that plants trees in partnership with smallholder farmers. Finally, we completed a $575,000 fund commitment, executed as a PRI, to I&P’s (Investisseurs & Partinaires) IPDEV 2, a vehicle focused on supporting new impact-focused fund managers in Africa.
Beyond our PRI activity, we committed about $32 million in new investment from other Ceniarth entities focused on our core strategy of impact-led capital preservation. This approach dictates that we lead with impact, sourcing only opportunities that have demonstrable outcomes in underserved communities, while not being bounded by market-rate return expectations. We conduct rigorous financial underwriting of these transactions, but our blended hurdle rate across this portfolio is not linked to market benchmarks, but rather simple inflation, plus expenses.
Capital preservation: Funds
Our largest commitment in this category was $7.5 million to Global Partnerships, a self-described “impact-first investor” focused on funding interventions that benefit the rural poor. This commitment was spread across the firm’s Fund 5.0 and 6.0 and included both the renewal of an existing note, as well as new lending commitments. We are nearing the completion of an additional, $3 million commitment to Global Partnership’s newest “Impact-Led Development Fund” that has helped to catalyze a $50 million allocation by the Overseas Private Investment Corp. to this vehicle.
Additional fund commitments included $3 million to Water Equity’s Water Credit Investment Fund 3, a vehicle that supports microfinance lending specifically for water and sanitation-related purchases and a $3 million to Lendable’s newest MOP 2 vehicle that finances alternative lenders in frontier markets.
We invested $4 million in TriLinc’s Global Sustainable Income Fund that makes loans, in partnership with local financial intermediaries, directly to small and midsize enterprises in developing economies and $3 million in PG Impact’s first multi-strategy (fund of funds and direct investment) fund that gives us visibility into managers and enterprises that we might not otherwise engage directly.
We backed Omnivore’s second fund focused on venture investments in agriculture, food, and the rural economy in India with $2.5 million. In addition, we made a follow-on commitment of $1 million to an existing allocation to Advance Global Capital’s flagship invoice discounting fund that finances factors in underserved markets.
Capital preservation: Direct lending
Our fund investments were complemented by a select set of direct lending transactions that met our capital preservation criteria.
We extended a $1.5 million revolving line of credit to COMACO, a Zambian producer of consumer food products with key inputs sourced through a holistically supported network of rural cooperatives.
We made a $3 million loan to One Acre Fund, a rapidly expanding enterprise delivering inputs and agronomic guidance to smallholders in multiple East African countries. After supporting One Acre Fund previously with a PRI, we now feel that they have reached a scale and success that allows us to underwrite this investment into our capital preservation category.
Capital preservation: Developed markets
Finally, the year also featured our first capital preservation investments in more developed economies. We had spent significant time in 2018 assessing the landscape of rural community development finance institutions, or CDFIs, in the United States. We expect to pursue a full slate of investments in the sector in 2019 and beyond.
We ended 2018 with our very first executed transaction, a $3 million secondary capital loan to HOPE Credit Union, a Mississippi-based enterprise providing financial services to economically distressed parts of the American Mid South. Complementing this work with CDFIs, we made a $2 million commitment to Lyme Timber’s newest fund. The fund will deploy capital primarily in rural, low-income regions where, according to Lyme CEO Peter Stein, “conservation and economic development go hand in hand.”
On the other side of the Atlantic, we inked a $1.5 million commitment to Bridges Fund Management’s new Evergreen Fund, a permanent capital vehicle making patient equity investments in U.K.-based enterprises executing on a range of mission-focused activities from working with at-risk youth to providing elderly care.