The Brief | April 17, 2024

The Brief: A good economy is good news

ImpactAlpha
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ImpactAlpha

Greetings Agents of Impact!

In today’s Brief:

  • Catch up time for impact and green investments
  • Sleek heat pumps
  • Colorado’s employee-ownership boom

Good economy actually is good news as impact investors adjust to new realities. The US economy may have gone from a soft landing to no landing. Goldman Sachs this week raised its estimate of first-quarter US GDP growth to 3.1% from 2.5%, after the fourth quarter’s 3.4% and the scorching 4.9% in last year’s third quarter. Interest rate expectations have normalized, lending markets are thawing, and investor sentiment is back to positive. “This feels like a Goldilocks moment, and impact investors are sitting in Baby Bear’s chair,” ImpactAlpha contributing editor Robert Brown writes in the final article of his four-part Macro Impact series. As broad markets rally, he says, impact investors that have been bruised and frustrated should take note. “Despite the drumbeat of negative election-year rhetoric emanating from the DC echo chamber, objectively, for most investors, things look rosy.”

  • Catch up. “We finally are seeing the bruises heal from the most recent round of investor losses,” Brown writes. Large-cap stocks have rebounded from the improving sentiment. “The same cannot be said however for earlier-stage public companies, particularly in the climate space,” Brown adds. The price-to-earnings ratio on QGREEN, Nasdaq’s green index, remains 7% below its long-run average, well behind larger cap companies. But many impact companies are gaining earnings off the trough and expectations of green financing via the Inflation Reduction Act are finally becoming reality. “Once the near-term concerns over interest rates pass and jitters about earnings season subside,” Brown says, the setup will be there for “a more constructive investment environment for the longer term.”
  • Navigating uncertainty with purpose. The tailwinds: The durability of big macro trends toward sustainability, health and wellness, and inclusion continue to drive demand. The headwinds: Higher interest rates and a backlash to progress on climate and inequality, which have put investors and consumers on edge. CEOs of Seventh Generation, Vital Farms and other purpose-driven companies who gathered at Big Path Capital’s annual MO Summit in Austin agreed that building solutions that do right by people and planet has helped them weather economic disruptions. “We’re in this moment of real transition and uncertainty,” said Jorge Fontanez who heads B Lab US and Canada. Registered B Corps have doubled over the last three years to more than 8,500. “Embrace the ambiguity of the moment,” Fontanez said, counseling CEOs and investors to find energy in the movement’s “culture of building businesses where everyone benefits.” Read Dennis Price’s takeaways from the MO Summit.
  • Macro context. In earlier columns, Rob examined “first-time ever” economic conditions that challenge impact investors to rethink models and expectations; the small but steady gains for workers that are key to the surprising health of the US economy; and the challenges for early stage companies as higher input costs and rising wages pressure profit margins. We’ll return to all of these macroeconomic themes, so drop us a line about what you’re seeing and what you need to know.

Sponsored by Impact Ventures by J&J Foundation

Innovative startups are changing the landscape of health impact everywhere. Are investors aware? While impact investment funding levels in health are low, “the need and opportunity for investment in health only grows,” write Carl Nicholas Ng and Miguel Legarda of Verge HealthTech Fund, a venture fund backed by Impact Ventures by J&J Foundation. Reach52’s digital platform, for example, connects community health workers and small pharmacies in rural areas to collect data, deliver targeted health campaigns, and make affordable health products available. More than three-quarters of unvaccinated households engaged by Reach52 received their essential childhood vaccines for Hepatitis B, polio and other diseases within a month.

  • Pushing boundaries. Reach52 began in the Philippines and has expanded to seven countries across Asia and Africa, including India. It has on boarded more than 16,500 health workers across 2,500 communities and covers more than 1.8 million people. “We fundamentally believe that by applying new technology or fresh approaches to healthcare, startups can push the boundaries of affordability and access,” write Ng and Legarda. “Investors can reap tremendous reward and return.”

Dealflow: Energy Transition

Quilt raises $33 million to launch its sleek heat pump. Heat pump sales in the US are expected to ramp up, as states implement generous financial incentives in the 2022 Inflation Reduction Act. Even with financial support, systems can be complicated and costly to install, requiring new ducts or room-by-room “mini-split” units. California-based Quilt is launching small ductless heat pumps that can be controlled with smart thermostats. Energy Impact Partners and Galvanize Climate Solutions led Quilt’s Series A round. Other investors include Lowercarbon Capital and MCJ Collective, as well as Drew Scott, host of HGTV show Property Brothers. “As someone who has spent years transforming homes and understanding homeowners’ needs, I’ve been eagerly waiting for a breakthrough like this,” Scott said.

  • Credits and rebates. Heat pump sales dipped in 2023 because of inflation and interest rates; gas furnace sales saw a steeper drop. Buffering the decline in the US is a $2,000 federal tax credit for individuals buying new heat pumps. State-administered point-of-sale rebate programs, which could offer low- and middle-income households subsidies of up to $8,000 on a new heat pump, are expected to start later this year or next. 
  • Across the pond. In the UK, home energy efficiency company Hometree secured debt from BlackRock to acquire renewable energy and heat pump installers across the country. The company, whose equity investors include Legal & General and Energy Impact Partners, has already made two acquisitions with the BlackRock capital. Geowarmth in northeast England and Little Green Energy Co. in the southeast have collectively installed 12,500 renewable energy systems. Hometree’s buying spree comes as the UK rolls out heat pump grants for lower income households. The country is delaying a plan to tax gas boiler manufacturers that don’t sell greener systems, even as the UK falls behind on its target of installing 600,000 home heat pumps by 2028.
  • Check it out.

Astarte Capital and Silvipar raise $325 million for sustainable forestry in Paraguay. Paraguay is one of the poorest countries in South America. It also has one of the highest rates of tropical deforestation in the world. London-based real assets investment firm Astarte Capital teamed up with Swedish forest management company Silvipar in 2021 to acquire and develop forestland for sustainable agroforestry in the land-locked country. The partners blew past their original $200 million target with backing from more than two dozen investors. Astarte kicked in $30 million of its own capital. The Silvipar Astarte Impact Forestry Fund “is shaping up to be among the largest and most diverse institutional capital pool ever assembled for investment in Paraguay,” the partners said in a statement.

  • Cultivation and conservation. The fund will build on Silvipar’s portfolio of roughly 15,000 acres of managed forestland in Paraguay. The partners are looking to acquire about 200,000 acres of forestland that can be sustainably managed and low-productivity farmland that can be converted for agroforestry. They’ll tap carbon markets for additional revenues. A quarter of the land will be reserved for permanent conservation. Their goal is to plant 60 million trees and create 3,000 direct jobs.
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Dealflow overflow. Investment news crossing our desks:

  • Acre Impact Capital reached a $100 million first close for its planned $300 million fund, which leverages guarantees from Export Credit Agencies to fund African infrastructure projects (for background see, “Acre Impact Capital bridges a financing gap to catalyze capital for infrastructure in Africa”).
  • BlueOrchard’s second InsuResilience Investment Fund for emerging markets’ climate adaptation secured $28.5 million from British International Investment and the Nordic Development Fund, bringing the fund to $90 million. NDF kicked in a $1 million grant for technical assistance. (BlueOrchard)
  • Brazil’s goFlux inked $6 million in a round led by Capria Ventures to digitize and finance agricultural freight services companies. (Capria Ventures)
  • Islamic finance-compliant fintech venture Algebra secured a strategic investment from Standard Chartered’s venture arm. Algebra will offer its products through Standard Chartered’s sustainable finance platform, Shoal. (SC Ventures)
  • FINCA Ventures supported a dozen early stage companies in Africa through its Venture Prize competition. Among them was infant formula maker Baobaby, the first Venture Prize winner in Togo. (FINCA)

Overheard: Employee Ownership Ideas Forum

Colorado is demonstrating how states can accelerate conversions to employee ownership (video). Colorado Gov. Jared Polis in 2019 created an employee ownership office to incentivize and provide support for retiring owners to exit to employees. Polis also introduced tax credits for employee ownership structures and a cash collateral program to finance conversions and provide liquidity to selling business owners. “Colorado is the first state in the country to codify the substantive characteristics of employee ownership in a way that is form-agnostic,” said Jason Wiener of the Colorado Employee Ownership Commission at the Employee Ownership Ideas Forum in Washington, DC, last week. The three-day gathering by the Aspen Institute and Rutgers showcased how federal and state policymakers can work with private investors to build an equitable and inclusive ownership economy. Employee ownership is “a big deal” and “a little bit revolutionary,” Senator Bernie Sanders told forum participants during a visit to Capitol Hill. “It suggests that people don’t have to just work for other people. They can actually own the places that they work in and be part of the decision making process.”

  • Ownership asset class. “For a lot of investors, employee ownership is an easy no,” said Phil Reeves of Apis & Heritage. As a new asset class for many allocators, it doesn’t fit into limited partners’ typical boxes. Sorenson Impact Foundation was the first institutional investor in Apis & Heritage’s Legacy Fund, which raised $58 million in 2022. “There’s kind of a notion that employee ownership is concessionary; that you’re not gonna make market-rate returns,” says Jim Sorenson. The foundation’s ecosystem-building work aims to show that “there’s a spectrum, and that you can make market-rate returns with impact investments.”
  • Colorado calling. More than 63 Colorado companies have gone through an ownership transition using state programs since 2021. The state is home to more than 200 companies owned by employees through employees stock ownership plans, employee ownership trusts, and worker-owned cooperatives (see, “With ELBOs and EOTs, more business owners are exiting to employee ownership”). To structure the ownership transition of Denver’s Sky Blue Builders, Apis & Heritage tapped Colorado’s collateral program to secure debt financing. Colorado “has made a real point of encouraging broad-based ownership,” Apis & Heritage’s Michael Brownrigg told ImpactAlpha.
  • Keep reading, “Colorado is demonstrating how states can accelerate conversions to employee ownership (video),” by Roodgally Senatus on ImpactAlpha. 

Agents of Impact: Follow the Talent

Appalachian Funders Network appoints Ryan Eller, previously president of Beloved Community Foundation, to executive director… Elaine Di Monaco, formerly with the Center for Public Integrity, joins The Pivot Fund as associate director of philanthropy… The Rockefeller Foundation is recruiting a foundation services office manager in Washington, DC… The Reinvestment Fund is hiring a clean energy and sustainable finance lending director… Macquarie Group Foundation’s social impact investment team is looking for an investment manager in New York.

M&T Bank seeks a Pennsylvania-based head of sustainable investing…  Founders First Capital Partners is on the hunt for a marketing manager in San Diego… 16 Fund has an opening for an investment analyst in Berlin… The California Coalition for Community Investment seeks a consultant to help the coalition strategically grow and support CDFIs in California… The 2024 Global Inclusive Growth Summit, hosted by the Mastercard Center for Inclusive Growth, will take place tomorrow in Washington, DC.

👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.

Thank you for your impact!

– April 17, 2024