Beats | November 27, 2018

Omidyar Network pushes investors ‘Beyond Tradeoffs’ to scale capital for impact

Dennis Price
ImpactAlpha Editor

Dennis Price

Different parts of investment portfolios achieve different types of impact with varying degrees of risk and return. That is true of all investing, not just impact investing.

A new series sponsored by the Omidyar Network makes that point repeatedly, as the hybrid family office seeks to move the discussion of impact investing “beyond tradeoffs.” The tired debate about whether or not impact investments require tradeoffs between impact and returns misses a key market development: The range of investment strategies that already exist all along the spectrum of risks and returns.

Put it another way: there are fewer and fewer excuses for family offices, foundation, institutional and other investors not to direct capital to impact.

The takeaway from the series of 10 essays from investors arrayed on a spectrum from fully “market-validated” to simple capital preservation: “Many investors have already moved beyond the trade-off debate to develop sophisticated approaches that deploy capital at multiple points along the continuum.”

The series spanned the leadership transition at Omidyar, and bears the imprint of both former managing director Matt Bannick and new head Mike Kubzansky, as well as Robynn Steffen, who heads Omidyar’s efforts to grow the impact investing industry. Omidyar commissioned Foundation Strategy Group to curate the essays and sponsored their publication on The Economist’s digital platform.

On display are investors targeting different asset classes, issues, geographies, and levels of expected financial return. The Ford Foundation has committed to invest $1 billion for impact, from an endowment of $12 billion. The Bill & Melinda Gates Foundation makes “program-related” impact investments, with a current mandate of $2 billion. Elevar Equity, TPG’s Rise Fund and Goldman Sachs are the voices representing market-rate impact investors, aiming to scale impact with commercial capital.

Investing across the spectrum with a mix of market-rate, catalytic and philanthropic investment tools: Prudential Financial, the Blue Haven Initiative, Lok Capital, Big Society Capital and Access – The Foundation for Social Investment.

“Matching capital to clear-eyed expectations for specific market segments,” Bannick, Kubzansky and Steffen say in an overview, “can help us fund lasting social and environmental change more efficiently while ensuring that impact investing lives up to its promise.”

ImpactAlpha has rounded up the key takeaways:

Ford Foundation: Risk is as important as returns in risk-adjusted returns.

Take real estate. An investment in affordable housing, where investors can be confident operators will be able to find renters, keep tenancy high and vacancies low, may be less risky than an investment in upscale rental housing. Pay attention to the fully risk-adjusted price of an investment, write Roy Swan, Christine Looney, and Darren Walker of the Ford Foundation. Ford has invested the first $40 million of the $1 billion endowment commitment to impact investments.

Labelling an investment “concessionary” may be shorthand way to dismiss the opportunity to use an investment to drive positive social impact, says the Ford team. Investors seeking to avoid “concessions”‘ may be ruling out low-return investments that are nonetheless “well-priced for risk taken and help investors achieve their overall portfolio return objectives.” More.

Ford Foundation to tap endowment for $1 billion to fight injustice and inequality

Elevar Equity and the Rise Fund: Growing businesses mean growing impact.

The commercially minded investors often co-invest in “co-linear” business models in which the drivers of business success also deliver impact. Their bet: The alignment between impact and financial strategies will bring institutional investors off the sidelines.

Elevar Equity, an early-stage investor with three funds and $165 million under management, and the TPG’s $2.1 billion Rise Fund, a growth-stage investor, have partnered to share pipeline and co-invest in India and Latin America. “Impact without scale is ineffective,” write Elevar’s Sandeep Farias and Rise’s Maya Chorengel. “Scale requires commercial capital that comprehends the opportunity and can address the demand in the world’s largest customer base.” More.

Rise Fund’s Impact Multiple of Money: A conversation with TPG’s Bill McGlashan

Blue Haven Initiative: Find the right type of capital for the job.

The $500 million family office of Liesel Pritzker Simmons and Ian Simmons plays across the returns continuum to expand its opportunities to have scalable impact. “We have experimented with and refined our rationale for when it makes sense to deploy what type of capital,” writes Pritzker Simmons.

In its ‘market-rate’ portfolio the single-family office makes equity investments in companies like M-KOPA, the East African pay-as-you-go solar company, that have more impact because of sustainability, growth and scale. With grants and catalytic investments, Blue Haven invests flexible capital in ideas and interventions are too risky or too low-return, or systemically undervalued by markets. More.

The $500 million Blue Haven Initiative, unplugged

Goldman Sachs: Use ESG to manage downside risks and ride upside trends.

Goldman Sachs’ decision to buy-up San Francisco-based Imprint Capital in 2015 gave the financial giant near-instant capacity to find and structure high-impact deals and funds for its high-net-worth and institutional clients.

Goldman now claims supervision of more than $15 billion in targeted environmental, social and governance, or ESG, and impact investing assets (and an additional $70 billion in assets with ESG screens). Goldman’s John Goldstein and Megan Starr say a nuanced understanding of environmental, social, and governance issues “can augment our traditional ways of thinking about risk and return.” ESG factors, say Goldstein and Starr, are helping the firm manage left tail downside risks posed by issues such as climate change and “capitalize on potential right tail upside from environmental and social themes aligned with market forces and potentially overlooked by other investors.” More.

Who’s the Next Impact Target After Goldman Sachs Snaps Up Imprint Capital?

Prudential Financial: An 80/20 rule can help meet institutional needs.

The Newark-based insurance giant began as a social enterprise that helped bring affordable burial insurance to the working poor. Prudential has made more than $1 billion in impact investments in the last five years, and more than $2.5 billion since the 1970’s. One of the keys: An 80/20 portfolio approach that allocates 80% of impact investment assets in market-rate (or better) holdings and 20% in higher-risk or concessional investments. The approach “gives us the ability to move up and down the capital stack and find opportunities that provide a sensible combination of risk, return and impact,” says Prudential’s Ommeed Sathe. More.

Lata Reddy: Prudential Financial’s investments in equity and inclusion – and Newark

Lok Capital: Technical assistance can mitigate risks and reduce costs.

The Indian venture capital firm has raised more than $175 million across three funds. Early on, the firm found success by investing in microfinance institutions through a venture fund, while providing grant funding for technical assistance to investees. The grant funds provided a “smart subsidy” to absorb a portion of the cost of training and development, allowing investees to on-lend affordably and providers of equity capital to get a reasonable return.

As the firm has expanded to education, healthcare and livelihood investing in India, where market infrastructure is less developed, they’ve identify a large segment of firms with high potential for impact but that have not reached significant scale. Such businesses may not be sustained by the typical venture approach, says Lok Capital’s Vishal Mehta. Lok is developing new investment structures (i.e., more mezzanine and debt) to meet the needs of businesses delivering public goods and will continue to engage with its investees. More.

Lok Capital returns $65 million to investors and raises $80 million more

Big Society Capital: Crowding in capital requires intentional design.

Seeded with cash from dormant bank accounts, the wholesale social investor is helping to build the UK social finance market through example. A £30 million ($38 million) investment in Rathbones’ Charity Bond Support Fund, for example, supports the issuance of new bonds by charities by investing in up to one-third of each new issue. Such investments have helped open up the charity bond market to market-rate institutional bond portfolios, with more than £230 million in bonds issued to date.

“It’s a diverse market we’re trying to build,” write Evita Zanuso of Big Society Capital and Seb Elsworth of Access – The Foundation for Social Investment, a BSC sister organization. “We’ve evolved multiple vehicles and structures to be able to play in and build out different market segments.” More.

Big Society Capital unveils £30 million fund for community finance

Bill & Melinda Gates Foundation: Incentivize for-profit firms to work for the poor.

The $2 billion strategic investment fund of the world’s largest foundation is aimed at harnessing private sector innovation for global health, development and education. Andrew Farnum and his team use equity investments, loans and guarantees to provide incentives to companies to build products for the global poor.

The foundation has made more 70 investments, including more than a dozen equity investments in early-stage biotech companies to increase the chances of a hit on vaccines and drugs for diseases such as malaria, HIV, and typhoid. A “global access” agreement guarantees low prices for less-developed countries. More.

Making Markets Work for the Poor: How the Gates Foundation Uses Program-Related Investments