The Brief | May 4, 2023

The Brief: Impact liquidity crunch, corporate climate capital, rehabilitating homes in New England, solar for small business in India, overheard in Philadelphia

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Greetings, Agents of Impact!

Featured: Economic Volatility

With rate hikes and bank woes, impact investors and entrepreneurs face a capital crunch. Like cartoon characters running in air, impact investors best not look down. Gone are the low interest rates and ready capital providers, steady economic growth and stable geopolitics that underpinned the current generation of impact investing. Yesterday’s quarter-point interest rate hike by the U.S. Federal Reserve came in the same week that First Republic collapsed into the arms of JPMorgan Chase as other banks wobbled. The escalating U.S. debt ceiling showdown spooked insiders who warned that this time could indeed be different. “As our chief economist likes to say, at higher rates bodies will continue to float to the top over the course of the summer,” David Hunt, chief of PGIM, the $1.5 trillion asset management business of Prudential Financial, told the Milken Global Conference in Beverly Hills this week.

  • Stubborn resilience. The impact investing ecosystem has yet to feel the full impact of the changed environment. “We have not yet seen loss rates or loss of income or things similar to what happened, for example, in 2008,” Jacob Haar of Community Investment Management, which finances inclusive fintech lenders in emerging markets as well as the U.S., said on a recent ImpactAlpha podcast. Community lenders including LISC and Calvert Impact report continued investor appetite for their impact notes. And worker power, which has been driven by the COVID pandemic and tight labor market, has proved remarkably resilient. The U.S. added 296,000 jobs in April, according to the latest report from the payroll processing firm ADP. Lafayette Square’s Damien Dwin had even made the contrarian argument that the Fed should raise rates even higher – to 6% – to protect workers’ real wages from inflation (see, “How the Fed can help small business owners, raise real wages and rebuild communities”).
  • Liquidity crunch. But reports are already starting to come in of increased default rates for some “inclusive fintech” lenders. Climate tech investing, which had defied the broader venture capital pullback, finally succumbed last quarter. And venture capital and other equity investors are keeping their powder dry, and their portfolio companies on edge. The rate hike will further squeeze valuations, raise capital costs and decrease liquidity. “Any business that is dependent on capital now – that is not self-funding and cash flow positive – it’s going to be harder going forward,” said Atlas Impact Partners’ Robert Brown. “Everyone who needs capital is going to be more challenged going forward.”
  • Keep reading, “With rate hikes and bank woes, impact investors and entrepreneurs face a capital crunch,” by Amy Cortese on ImpactAlpha.

Dealflow: Climate Finance

Corporations line up behind nine-figure climate investment funds. The macro investment environment may be strained, but fund managers are still collecting checks, particularly in the climate sector. Japanese car maker Mitsubishi has secured $400 million for its planned $1 billion climate tech fund. The fund is on the hunt for carbon-cutting technologies ready for commercialization and scale, in alignment with Mitsubish’s goal of achieving net zero emissions by 2050. Marunouchi Innovation Partners, an investment manager owned by Mitsubishi, is managing the fund. 

  • Climate hedge for oil majors. A consortium of global oil majors is looking to secure $750 million to invest in hardware and hard science-based climate ventures, Axios reports. The Oil and Gas Climate Initiative will invest up to $75 million each in companies developing green metal, chemical and concrete alternatives, clean energy, and supporting sustainable buildings and transport, even as they expand oil and gas production. It is a second fund for OGCI Climate Investments, the venture arm of Aramco, BP, Chevron, ExxonMobil and Shell. OGCI’s first fund raised more than $1 billion.
  • Returns on inclusionEnergy Impact Partners scored $112 million for its Elevate Future Fund. Its hook: investing in companies advancing the clean energy transition and led by diverse founders. Addressing the climate crisis “requires a coalition of diverse thought, perspective and collaboration to make actionable progress toward decarbonizing the global economy,” said EIP’s Hans Kobler. The fund, which is focusing on early-stage ventures, is backed by Amazon, GE, Microsoft’s Climate Innovation Fund and energy and utility companies.
  • Natural capital. Boston-based Folium Capital launched its third Regenerative Natural Resources Fund to raise $500 million to invest in sustainable agriculture and agroforestry. The firm has acquired $1 billion in farm and timber assets that it repositions for sustainable use. Folium looks for land that generates revenue from environmentally beneficial crops and timber as well as from carbon credits. It is invested in the US, Europe, Australia and Latin America.
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Healthy Neighborhoods Equity Fund closes $42 million for inclusive real estate in New England. The second fund from Conservation Law Foundation, a Boston-based environmental advocacy organization, and Massachusetts Housing Investment Corp., a community development finance institution, is expected to finance more than 450 homes in historically disinvested communities in Massachusetts, Connecticut and Rhode Island. “Traditional models of investment in housing tend to exclude low-income communities and reinforce the cycle of disinvestment,” said Moddie Turay of Massachusetts Housing Investment Corp. “In order to have a real impact, we need patient, longer-term investments.” 

  • Catalytic capital. The fund deploys equity with longer-than-average investment timelines to acquire and refurbish properties for affordable housing. Conservation Law’s HealthScore tool helps the fund screen and monitor investment opportunities for impact.
  • Health equity. UnitedHealth Group invested $25 million in the fund alongside other health systems, banks and foundations. The fund has made three investments in Brockton, Dorchester, and Hamilton, Mass. Half of the 102 homes will house families earning less than the area’s median income.
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KKR acquires CoolIT to advance climate impact and worker ownership. Data centers consume a lot of energy. Preventing them from overheating compounds the problem: most cooling chemicals release potent greenhouse gasses. CoolIT has been developing a greener way to cool data centers for more than two decades. The company says Its “direct liquid cooling” technology is more efficient than other cooling systems, lowering centers’ energy and water usage. KKR acquired the company through its second global impact fund (see, “KKR raises nearly $1.5 billion for Global Impact Fund II”)

  • Employee ownership. As part of the deal, KKR will help CoolIT employees take ownership stakes in the company. KKR has adopted worker-ownership strategies “based on the belief that employee engagement is a key driver in building stronger companies,” the firm said (listen to KKR’s Pete Stavros on the ImpactAlpha podcast, “This private-equity giant has distributed more than $500 million – to hourly employees“). KKR declined to comment on the size of the employees’ stake. Last year, C.H.I. Overhead Doors’ 800 workers scored average payouts of $175,000 when KKR sold the company to Nucor Corp.
  • Check it out.

Encourage Capital invests Svakarma Finance to clean energy access for India’s small businesses. Mumbai-based Svakarma is using a fintech-powered on-the-ground lending network to provide credit and other financial services to India’s micro-enterprises. The company has a dozen branches in three Indian states. It’s looking to surpass 30 billion rupees ($367 million) in lending to 70,000 customers by 2028. An investment from Encourage Capital’s Solar Finance fund will help Svakarma finance small businesses to install and adopt rooftop solar. 

  • Solar finance. Through its $40 million Solar Finance fund, Encourage becomes a minority owner of Svakarma. The fund expects to invest $9 million in Svakarma over the next 18 months.
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Signals: Total Impact Summit

Overheard in Philadelphia: Bridging capital gaps to build wealth in underserved communities. “Philadelphia’s been trying to make progress for decades with the existing tools that we have,” ImpactPHL’s John Moore said at this week’s Total Impact Summit. “Part of the reason why I’m so excited about ImpactPHL’s vision for the city is because we now have impact investing in our toolbox.” Morris said last year’s “summer of funds” saw dozens of impact-focused funds launching out of Philadelphia. 

  • Jobs and housing. REDF Impact Investing Fund brought out Opportunity Construction, one of its portfolio businesses. The Black-owned road construction enterprise provides training and high-paying jobs to formerly-incarcerated people in traditionally underserved communities in Steelton, Pa. “Some CDFIs wouldn’t invest in a group like Opportunity Construction, or a lot of our other borrowers because they may not appear on paper to be ‘capital ready or credit worthy,’” said REDF’s Emilie Linick. “If a group can graduate and pay off our loan and go get a loan from a larger CDFI, a bank or credit union, we’ve done our job.” Sarah Martinez-Helfman of Samuel S. Fels Fund is investing in the Norris Square Community Alliance, which is looking to acquire 200 affordable housing properties for residents making less than 30% of the area’s median income. “We need very flexible, patient and long-term capital,” Martinez-Helfman said. “The capital we invested in Norris Square, we may not see that money back. But it is 100% aligned with mission and values.”
  • Keep reading.

Agents of Impact: Follow the Talent

Ohmium appoints renewable energy lawyer Andrea Nicolás to its board… Laura Cozzi is promoted to director of sustainability, technology and outlooks at the International Energy Agency… Transition VC brings on Anuj Khanna, ex- of C&S Electric, as a limited partner and investment committee member… Aura Cuellar, ex- of Shell US, joins LanzaTech as executive vice president of growth and strategic projects.

The Rockefeller Foundationseeks a program strategy associate in New York… Inyova Impact Investingis looking for an equities portfolio manager in Berlin… Community Capital Managementis hiring an impact investing and financial services business development associate in Fort Lauderdale… Tideshas an opening for a remote impact investing senior director.

Opportunity Finance Network is calling for session suggestions for its 2023 conference in October… Recast Capital is accepting applications for its accelerator for women-led emerging venture funds… ReFi Summit will convene discussions on web3, climate, energy and governance in Seattle, May 24-25.