Beats | March 20, 2020

How impact investors can help their portfolio companies survive the COVID-19 crisis

Maya Winkelstein and Caroline Bressan
Guest Author

Maya Winkelstein

Guest Author

Caroline Bressan

ImpactAlpha, March, 18 – As impact specialists in the “everyday emergency room of impact” borrowers tend to come to our organization, Open Road Alliance, when they are facing a capital crisis.

For example, when closing an investment round is suddenly delayed another three months due to unexpected government approvals or when surprising election results cause a delay in accounts receivables on a large contract.

Our organization was founded eight years ago to help social enterprises and non-profits overcome unexpected funding gaps that occur from everyday obstacles. While COVID-19 is far from an everyday occurrence, we have, nonetheless, found ourselves on the front lines working with impact organizations that have already been affected.

Given our role, we wanted to share some of what we’re hearing from the impact marketplace in dealing with the fallout from COVID-19 and propose some suggestions on how fund managers, investors and impact organizations might approach the crisis.

What We’ve Seen and Heard So Far

We received our first COVID-related email just 14 days ago. Since then, we’ve had over 45 inquiries from the field asking to speak about the COVID crisis. These organizations are facing tough decisions and are confronted with both short and medium-term issues. Common themes will probably not surprise you:

• Having to choose between reducing people to partial salaries or cutting headcount.
• Trying to anticipate actual or projected supply chain disruptions from China and, now, Italy and other parts of Europe.
• Facing or anticipating losses from multilaterals and other investors who look to program milestones as triggers for disbursements.
• Thinking through if they can continue to – or even begin to – fundraise for an investment round in this environment.
• Experiencing or anticipating immediate and direct loss of revenue as a result of the public health response including but not limited to: closure of business, closure of borders, cancellation of events, cancellation of travel, etc.

Of the direct requests we’ve received, no sector has stood out in being disproportionately affected. We’ve fielded inquiries from organizations working in human rights, energy access, agriculture, healthcare, education, and more. They are coming in from all over the world.

Timing Really Matters

Over the years, one constant we see in every crisis our borrowers face is that timing really matters. It is the difference between making payroll this month or not; the difference between continuing with minor wrinkles or losing precious momentum and trust with your staff, your customers, or your partners.

The effects of COVID-19 is no different.

During crises like this, our focus at Open Road is to provide bridge loans as they are a highly effective tool in specific cases where timing is the main issue. We don’t know how long this crisis will last, but if the fundamentals of an organization’s model are strong, we do believe in the medium-term that the situation will stabilize.

Your actions today can determine the longer-term impact and returns you help generate.

Short-term loans are a safety net as social enterprises face an ‘unexpected OMG moment’

Bridge loans take the kinks out of the system. And as the grease in the wheels, they can keep substantial additional capital moving — capital that the impact marketplace desperately needs to hold the line on impact during this crisis.

Bridge loans are not the only solution out there for impact companies in distress due to COVID-19, nor are we, thankfully, the only player. And the good news is that we’ve heard from many other funders trying to act quickly and wanting to collaborate.

Some ideas include:
• Raising grant dollars that can be used for entrepreneurs to recover
• Setting up an in-house emergency bridge loan fund for their existing portfolio
• Pooling and managing emergency relief funds for small businesses

How to be of service to your portfolio

So, what role can you and should you play to keep impact on track as the crisis plays out? Our perspective is that we are not the ones doing the hard work. The social enterprises and non-profits we’ve invested in have much more difficult problems to tackle. Our approach is one of service – we are here to serve, to do our best to “stay on the same side of the table” with borrowers. And right now they need your help.

Here are a few ideas which we feel are critical to truly serving your portfolio in an impact-focused way:

1. How you approach supporting your portfolio depends on your structure and financial instruments. We understand that everyone will have varying abilities to take risk. But everyone can do something to help. If you’re a debt fund, you can think about restructuring certain borrower’s repayment schedules, deferring interest payments, and accelerating tranched disbursements where possible. For equity funds still deploying capital, do your best to keep your investment committees happening as scheduled. Any delays now will have knock on effects to impact later.

2. Help your portfolio companies by keeping your process on track. We’ve already heard of one fund who reached out to their portfolio companies with the good intention of asking what they can do to support them, while at the same time postponing their investment committee by three weeks and thus delaying the closing of a fully raised round. If you absolutely have to change your timelines, communicate often, and try to avoid any last minute changes.

3. For all investors: get creative with what can be done. We heard from one borrower that a potential investor was open to conducting a “virtual due diligence” to keep their somewhat long process moving through the crisis. This is not a time for business as usual, think through where you as an investor have the ability to be flexible.

It is okay to press pause on looking at new investments, but for those organizations already in the pipeline, we strongly encourage you to do your best to keep them moving. 32% of all loans Open Road has made to-date (pre-COVID) have been to help our borrowers through a delay in disbursement from an original investor.

Finally, these are indeed scary, uncertain times. And yes, one option is just to put all of your work on hold, as many traditional investors will likely do.

Or… you can take a calculated risk. As impact investors, we hold ourselves to a higher standard of being stewards of impact, stewards of the well-being of the communities we serve.

If Goldman Sachs can absorb a month of interest payments on Apple credit cards, each of us can find an area where we’re willing to step out of our realm of comfort.

You can ask yourself and your board or Investment Committee where you are willing to take risk – to define and outline it, put a monetary value to it, and this becomes the beginning of your action plan. Ask yourselves, what is the maximum we as investors are willing to put at risk to keep X amount of impact on track in our portfolios?

Know this: you have a choice about how to weather this crisis as a player in the impact marketplace, and it is not a binary one. Your actions today can determine the longer-term impact and returns you help generate.

We are not asking for you to put the viability of your own organization at risk, but to remember (or even prioritize) the ‘impact’ in impact investing. Time is money to every impact organization faced with capital crunches due to COVID-19.

Our advice as impact investors is to seek out action over perfection and to find a positive role to play in determining how the impact marketplace can make it through this crisis so it emerges positioned for success.