The Brief | May 28, 2020

The Brief: Impact insurance, community capital recap, insuring rural India, small checks for emerging-market entrepreneurs, ESG on earnings calls

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Greetings, Agents of Impact!

Featured: Impact Voices

Impact insurance: ‘Synthetic securitization’ to backstop small and medium-sized enterprises. In ordinary circumstances, few underwriters would issue insurance for highly probable events. “But these are extraordinary times, and impact investors are no ordinary investors,” Eighteen East Capital’s Thomas Venon writes in a guest post on ImpactAlpha that argues for insurance, rather than debt, to provide relief to small and medium-sized enterprises hard hit by COVID. “Asked what time it is, asset managers will instinctively run away and come back a few moments later with a pitch deck explaining why it is necessary to launch a new fund to foster the production of clocks, watches and sundials,” Venon writes. “In the interest of providing frontline lenders with the most efficient and timely assistance possible, the industry would do well to resist relying only on new fund launches and look to the provision of insurance as an appropriate tool.”

By lowering risks, credit insurance can free lenders’ balance sheets to provide additional capital in both emerging and developed markets. In a March report, Venon and his team sketched a framework for transferring risk to investors via “sustainable development certificates.” This gets wonky: Synthetic securitization “involves no transfer of legal title, but only the sale of the credit risk associated with the assets through the use of credit derivatives such as credit default swaps.” In 2018, the African Development Bank completed Room2Run, buying credit protection on $1 billion in renewable energy loans to free up over $600 million for new lending, according to the report. In the face of COVID-related business risks, last-minute, affordable insurance would allow small and medium-sized enterprises, “to confidently take on the crisis, in the full knowledge that a pre-approved, damage-based payment would allow them to speedily get back on their feet should an accident materialize,” Venon writes. “Members of the impact investing community can and should play the extraordinary role of the willing insurance provider presented with extraordinary circumstances.”

Keep reading, “Impact insurance: ‘Synthetic securitization’ to backstop small and medium-sized enterprises,” by Eighteen East Capital’s Thomas Venon on ImpactAlpha.

Dealflow: Follow the Money

GramCover raises early funding to insure India’s rural households. Poor distribution has kept affordable insurance products for safeguarding health, livelihoods and possessions out of reach for most of India’s low-income, rural households. GramCover’s digital insurance services reach more than 1.3 million farmers, and have generated $10 million in premiums. Investment from EMVC, Flourish, Omidyar Network India and Omnivore will support GramCover’s expansion of crop, livestock, health and motor insurance. Details of the investment were not disclosed.

  • Data-driven. GramCover’s Jatin Singh got the idea for the digital brokerage firm from his other venture, Skymet, which uses weather data to settle claims for government-subsidized rural insurance programs. “We solved the data problem, and it just made the market bigger,” he told ImpactAlpha.
  • Diversification. With climate change and a pandemic, low-cost crop and health insurance products present risks for insurers. Internet and smartphone access in rural areas make selling such products easier and more affordable and help insurers diversify risk. Added Singh, “If you insure more people, you can reduce rural distress and eventually create surpluses.”
  • Check it out.

From second fund, ADAP Capital aims to cut small checks quickly. Early-stage impact investor ADAP Capital is offering something many fund managers aren’t: small-ticket checks for emerging market entrepreneurs. The investment and advisory firm reached a second close for its second fund to make investments of $75,000 in up to 10 companies alleviating poverty in low-income markets. “We’re investing at a time when a lot of people are retreating,” ADAP’s Andy Lower told ImpactAlpha. ADAP, famous for its “four-hour due diligence” process, plans to host first-round video calls and cut checks in June.

  • Small tickets. ADAP invests in social entrepreneurs at the so-called “valley of death” stage: when grants and friends and family funding have run out, but the business is not yet ready for institutional capital. “We invest small amounts of money, but at the most critical part of a company’s growth,” Lower said. “If entrepreneurs can’t get funding and support to become investment-ready for other funds, then impact investors’ frustration over ‘lack of deals’ will perpetuate.”
  • Track record. Since launching in 2013, ADAP has invested in 18 companies across Africa, Asia and Latin America (see “ADAP Capital closes deals — quickly — with Neopenda and Good Nature Agro). Several have raised subsequent funding, including neonatal tech startup Neopenda, which last year raised $1 million in seed funding. Good Nature Agro, which connects East Africa’s smallholder farmers to markets, raised follow-on capital from FINCA Ventures and debt from family office Ceniarth.
  • Read on.

Signals: Ahead of the Curve

Agents of Impact call recap: 10x’ing community capital (audio). As America re-opens, “the death of Main Street” could spark a broad rethinking about the role of community development financial institutions, or CDFIs, and other channels supporting underserved small businesses. “We’re going to come out of this crisis with a different kind of system for community capital and for community regrowth and wealth,” Bruce Katz of Drexel University’s Nowak Metro Finance Lab, said last week on ImpactAlpha‘s Agents of Impact Call No. 17. “We have to completely recreate every single aspect of the ecosystem going forward.” If you missed The Call, have a listen to the audio replay. Some highlights:

  • Scaling up. CDFIs are rising to the 10x challenge. A “community recovery vehicle” designed by Calvert Impact Capital and Community Reinvestment Fund to support CDFIs would buy loans from CDFIs to free up capital for more lending. A day after The Call, New York Gov. Andrew Cuomo announced the New York Forward Loan Fund to channel $100 million to small businesses through five local CDFIs (see, New York’s $100 million loan fund for small businesses is a model for a $1 billion national fund). “I think we’ve 5x’d collaboration over the past 90 days, and maybe there’s another 5x to go,” said CRF’s Patrick Davis.
  • Free the balance sheets. “Given the magnitude of this disaster, it’s really stressing us from a capacity level,” said James Bason of TruFund, a New York-based CDFI. Only by turbocharging infrastructure for capacity-constrained CDFIs will we get “anywhere near the demand that we know exists in these communities across the country,” said Calvert Impact Capital’s Beth Bafford.
  • Reinvention. “We’ve traditionally looked at government and foundations as the critical investor bases for CDFIs, and I think it’s time that we expand that,” said Cat Berman of CNote, which gives high-net-worth individuals, family offices and banks an easy way to park idle cash with CDFIs. MacArthur Foundation’s Debra Schwartz reminded participants that decades of institution-building gave CDFIs the capacity to rise to today’s challenges. “I’m hopeful because there are some big ideas here to reinvent and to make things a lot better.”
  • Read on and listen in.

Corporate executives are suddenly talking ESG on quarterly earnings calls. Environmental, social and governance, or ESG, issues are getting more airtime this earnings season, as investors seek out healthy businesses that can drive long-term value creation. ESG is in the spotlight “as investors pay greater attention to business continuity efforts and how issuers are weathering the COVID-19 storm,” Edelman’s Jeremy Cohen told IR Magazine. Even pre-dating COVID, pressure has been growing on executives to address long-term strategies on quarterly earnings calls. Last year, CEOs made grand pledges to stakeholders. Investors are demanding more information. “Companies need to find ways to talk about these issues in credible ways,” writes Brian Tomlinson of the CEO Investor Forum, which documents the quarter-by-quarter shift toward communicating long-term value creation, in “ESG and the Earnings Call.”

  • Fuller disclosure. The sustainability of its Nespresso product drives growth, claimed Nestlé on an earnings call last year. Medical devices company BD is sharing sustainability highlights. Jones Lang LaSalle, Johnson & Johnson and Philips have convened separate ESG calls for investors. United Health Group, Best Buy, Cognizant, Ingersoll Rand and Procter & Gamble are talking long-term during investor days.
  • Removing obstacles. The status quo has benefited from the lack of standards for ESG reporting, modest sell-side analyst expectations, and limited earnings call bandwidth. Researchers are increasingly linking ESG to value and risk, crediting a focus on workers, customers and governance for ESG outperformance amid the COVID uncertainty.
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Agents of Impact: Follow the Talent

SJF Ventures‘ portfolio companies are hiring for 181 positions on the venture firm’s new jobs board (other impact venture firms with jobs boards include Kapor Capital and Omidyar Network)… Access Ventures seeks an investment associate in Louisville, Ky… Convergence is looking for a corporate fundraiser and senior associate of market acceleration.

Thank you for reading. 

–May 28, 2020