The Brief | May 9, 2023

The Brief: Impact alpha in exits, scaling community ownership, higher-ed finance, payment digitization in Central America, AI opportunities in education

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Greetings, Agents of Impact!

Featured: Impact Exits

EverFi, Vital Farms and hundreds of exits provide fresh evidence of ‘impact alpha.’ When educational services provider EverFi was acquired by Blackbaud last year for $750 million, TPG Rise exited at roughly doubled its investment. Vital Farms, a SJF Ventures portfolio company and public benefit corp., went public in 2020, debuting with a $1.3 billion valuation (it has since come down). Graduation Alliance, a New Markets Venture Partners investee, was acquired by KKR Global Impact in 2020. Impact funds are racking up exits – and putting to rest any lingering concerns (sigh) about their ability to generate market-rate returns. In an analysis of 230 impact exits from 30 market-rate impact funds, nearly two-thirds met or exceeded their financial performance expectations. Eight in 10 exits also met investor goals for impact. The study, Strengthening outcomes: Impact and financial value at exit,” by Impact Capital Managers and law firm Morrison Foerster, supports a growing body of evidence for so-called “impact alpha,” that impact can be a driver, not a drag, on financial turns. The difference: the new report takes a close-up look at individual exits, rather than fund-level performance. “Being loud and proud about impact as a driver for your strategy opens more doors than it closes,” ICM’s Marieke Spence told ImpactAlpha. “I don’t think that would have been the case 10 years ago.”

  • Exit options. Impact IPOs such as Vital Farms are still relatively rare – just 8% of the study’s exits involved public offerings. The most common exit was to a strategic buyer (57%), followed by a financial buyer (23%). Employees are increasingly sharing in the rewards through employee ownership initiatives. An emerging strategy: exiting to stakeholders, as Patagonia founder Yvon Chouinard did with his “purpose trust” aimed at funding nature-based solutions with profits not reinvested in the company.
  • Impact alpha drivers. Impact funds identified the ability to access investment opportunities – through mission-aligned networks, deep market expertise, and values alignment with investees – as the biggest driver of financial and impact outperformance. SJF Ventures, for example, came across Vital Farms through impact investment banking firm Big Path Capital.
  • Mission protection. Investors and founders are turning to a growing array of legal tools to protect impact when companies change hands. The options range from company structures such as public benefit corporations, to “reverse impact diligence,” where sellers scrutinize a potential buyer’s environmental, social and governance practices. “Golden shares” embed “mission equity” in shares with protected veto or voting rights.
  • Keep reading, “EverFi, Vital Farms and hundreds of exits provide fresh evidence of ‘impact alpha’” by Amy Cortese on ImpactAlpha.  

Turning local community ownership projects into a national movement. Kentucky Derby winner Mage isn’t the only community-owned asset with national momentum (almost 400 fractional investors held a 25% stake in the horse through the investment app Commonwealth). In neighborhoods across the country, community actors are harnessing legal structures and evergreen investment funds to preserve ownership of commercial and residential assets (see, “Neighborhood trusts are taking on speculators and building community wealth”). Communities are experimenting with models from community land trusts and cooperatives (East Bay Permanent Real Estate Cooperative and Detroit Food Commons) to real estate investment trusts (Groundcover and Kensington Corridor Trust) and approaches to tribal land repatriation (Indian Land Tenure) as ways to push back on gentrification and displacement while building pathways for wealth creation. 

  • Local fragmentation. Each transaction requires a heroic effort on the part of the community, “with no substantive community investment ecosystem in place to seamlessly support the initiatives,” argue Henry Rael of McCune Foundation, Vanessa Roanhorse of Roanhorse Consulting, and Astrid Scholz of Zebras Unite in Community ownership: Emerging models and roles for philanthropy.” The Inclusive Capital Collective report calls for the establishment of a “national container,” like ICC, that can provide an “entry point for local leaders to engage in this work.” One priority: A family of capital products, including a credit enhancement facility for diverse-led community ownership innovators.
  • Capital leverage. Catalytic investors are already helping de-risk these transactions. East Bay Permanent Real Estate Cooperative raised zero- or low-interest loans from lenders including Kataly Foundation. Kensington Corridor Trust in Philadelphia tapped local foundations and family offices, including Spring Point Partners. In Atlanta, Kendeda Fund provided the upfront grant capital for Groundcover, formerly, The Guild, for an early property acquisition. Low-interest and flexible debt can help management teams attract mainstream capital that is more rigid in its structure and terms.
  • Keep reading, “Turning local community ownership projects into a national movement,” by Dennis Price on ImpactAlpha. 

Dealflow: Education Finance

MPOWER secures $150 million debt investment from Goldman Sachs for higher-education financing. Washington, DC-based MPOWER provides loans to international and undocumented students to attend more than 400 universities and colleges in the US and Canada. It launched in 2014 to help fund higher education for students from low-income families and make sure they weren’t saddled with debt they couldn’t repay. The majority of MPOWER’s borrowers are from countries in the Global South. Financing from Goldman Sachs will support MPOWER’s portfolio expansion and supplement another line of credit from Deutsche Bank last year.

  • Lending terms. MPOWER underwrites loans based on a student’s likelihood of graduating and earning potential, and places caps on borrowing amounts to avoid overburdening students. Students begin repayment while they’re in school at an average interest rate of 12.7%. The alternative is higher-interest loans that are more burdensome for students and their families, MPOWER says.
  • Education inclusion. At least 5,000 of its more than 6,000 student borrowers have graduated, and nearly half are women and come from families with an annual median income of $12,000 or less, MPOWER reported. MPOWER’s Refugee Scholarship program has provided more than $500,000 to asylum seekers and other refugee students.
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El Salvador’s Cubo raises $3.5 million to digitize payments for small businesses. The fintech startup launched in 2021 to help micro and small enterprises in Central America accept and make payments online. Cubo’s seed investment round will support expansion to Guatemala, Panama and Costa Rica this year. The company aims to reach 70,000 businesses in Central America, 40% of them women-led.

  • Financial inclusion. Investors in Cubo’s seed round include the Inter-American Development Bank’s IDB Lab, Soma Capital, Latin Leap and Seedstars. IDB Lab’s $750,000 investment is its first in a Central American fintech venture, and “combines our efforts to boost the nascent Central American entrepreneurial ecosystem with the promotion of accessible and efficient financial services,” said IDB Lab’s Irene Arias.
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Dealflow overflow. Other investment news crossing our desks:

  • Acumen invested in CropSafe, which is supporting smallholder farmers in Nigeria to access global markets, reduce crop losses and adopt sustainable agriculture practices. (Acumen)
  • Embr Labs secured $35 million in debt funding for its wristband that helps women manage menopause symptoms in a “natural, non-hormonal” way. (Femtech Insider)
  • Former NBA star Rick Fox’s climate tech venture Partanna scored $12 million in pre-seed financing to make low-carbon concrete. (Carbon Credits)
  • San Francisco-based Frontline Wildfire Defense raised $6.4 million to help homeowners and businesses track nearby wildfires via satellite and public cameras. (Axios)

Impact Voices: Generative AI

Generative AI opportunities and risks for impact investing in education. When online tutoring company Chegg noted on a recent earnings call that ChatGPT was eating its growth, the stock dropped like a stone. The generative AI chatbot from OpenAI, which rocketed to more than 100 million users in just two months, will either massively displace jobs or make us all super productive – or both. The team at Impact Engine has been delving into the risks and opportunities of generative AI in education – one of the first sectors AI is disrupting. “The clearest case for AI’s impact is in making education and content more engaging” potentially leading to improved educational outcomes, write ImpactEngine’s Rahul Bhide and Ainsley Campbell in a guest post on ImpactAlpha. Generative AI could be used to assist teachers with lesson planning and customize content and lessons for students. For example, Koalluh, an AI reading platform, allows children to create their own hyper-personalized and interactive stories. “Their solution enables increased reading engagement, which can lead to better reading outcomes,” Bhide and Campbell note.

  • Guardrails. AI accuracy is a major concern among educators and others. Workera uses generative AI to create questions for skills assessments but has human moderators vet them as a cautionary measure. Seek.AI uses narrow datasets to inform its AI model. One of educators biggest concerns, however, is knowing whether and how students have used ChatGPT in their assignments. The issue “is not completely unlike the academic integrity issues that arose from the introduction of calculators, spreadsheets or spell check,” Bhide and Campbell say, and is inspiring renewed debate about academic integrity standards.
  • Keep reading, “Generative AI opportunities and risks for impact investing in education,” by Impact Engine’s Rahul Bhide and Ainsley Campbell on ImpactAlpha.

Agents of Impact: Follow the Talent

Don’t miss these upcoming impact investing events:

Matthew Goldstein, ex- of M12, joins Systemiq Capital as a general partner. Lydia Guett, ex- of Cambridge Associates, is also joining the climate tech venture firm as head of growth… One Acre Fund will reduce staff in its Kenya operations by nearly half… Align Impact seeks a public markets manager… Rally Assets is looking for a private investment research senior associate and a head of finance, operations and compliance.

17 Asset Management is recruiting a remote sustainable investing fellow… Oikocredit has an opening for a regional capacity building specialist in Costa Rica… The National Advisory Board on Impact Investing is out with a call for proposals for fund managers open to managing a $1 billion investment fund to address the financing gap for Nigeria’s micro and small businesses.

Thank you for your impact.

– May 9, 2023