The Brief | May 28, 2024

The Brief: Lafayette Square’s lending to working class places and people

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ImpactAlpha

Greetings Agents of Impact! 

In today’s Brief:

  • Lafayette Square “pro-America” lending
  • Serving India’s rural communities and entrepreneurs
  • Monitoring grid stability
  • Climate risks and opportunities for family offices

Lafayette Square’s Damien Dwin: Investing in working-class people and places. As a lender to the kind of middle-market companies that employ vast swaths of the country’s skilled workers, Lafayette Square discounts its interest rate for borrowers that demonstrate they understand the value of such employees. Lafayette Square offers borrowers a package of “workforce solutions” to help low- and moderate-income workers save for retirement, access health benefits, reduce their families’ financial insecurity, and increase economic mobility. “It makes sense that we would provide an economic reward for something that gives us a better chance of getting our money back,” Damien Dwin, founder of the impact-focused investment manager, told David Bank on ImpactAlpha’s latest Agents of Impact podcast. 

  • Geographic spread. Dwin launched Lafayette Square in 2020 with a $100 million equity investment from Morgan Stanley. Dwin saw a gap in lending to middle-market businesses – the 240,000 businesses in the US that employ more than 50 million people and generate more than a third of the nation’s GDP – especially those located away from the coasts. Lafayette Square aims to invest half of its capital in low- and moderate-income areas in 10 regions (see, “Lafayette Square is banking on low-income communities and worker solutions“). The firm made 14 new investments last year to bring its total to 19, with about $270 million in capital deployed. It’s 2030 goal: create 100,000 working class jobs. Why? “Because we can get paid, and because we see really interesting job creation and economic mobility opportunities by making credit available in those places,” Dwin says.
  • Financial incentives. At least four of Lafayette Squares’ portfolio companies have taken advantage of the interest-rate stepdown by adopting a half-dozen services and policy changes, saving between $13,500 and $42,000, according to Lafayette Square’s latest 10-K SEC filing. Until recently, Lafayette Square’s own credit facility with Sumitomo Mitsui Banking Corp. likewise provided for impact-linked interest-rate reductions. Lafayette Square sees the public-interest components of laws such as the Investment Company Act of 1940, the Community Reinvestment Act of 1977, and the SECURE 2.0 Act of 2022 as opportunities, not obstacles. “We believe you should run toward regulation, not away,” he said, especially in light of the regulatory advantages lenders enjoy. “That largesse should not be monetized by the private sector without some sense of responsibility, some sense of purpose, some sense of place in the broader capitalist system.”
  • Race to the top. Dwin said Lafayette Square’s biggest impact would be its success in attracting competitors to take advantage of the same opportunity. “Wouldn’t it be amazing if we had competitive dynamics and competitive juices flowing to the point that there was a food fight to get capital into working-class places and to businesses that employ working class people?” he said. “We are betting on America. This is a pro-America agenda. And we need as many people with money and power and resources as possible to adopt this approach and get capital into these places, into these people.”

Dealflow: Financial Inclusion

Trio of impact deals support India’s rural communities and entrepreneurs. India’s Aadhaar identification system laid the groundwork for broader access to financial and other services. Yet many rural communities remain excluded. Delhi-based Save Microfinance’s network of 10,000 rural agents in 28 states connects unbanked individuals and micro-businesses to formal financial services. Its loans support agri- and informal businesses, consumer home-buying and education, and female borrowers (see, “Billions of low and middle-income consumers represent trillions in impact investment opportunities“). Save raised $10 million from Belgian impact investor Incofin, following on $3 million from Danish private equity investor Maj Invest earlier this year.

  • Gender-smart exit. Separately, Ananya Finance for Inclusive Growth inked $13 million in equity financing from Japan-based Gojo & Company Inc., its largest shareholder. Ananya is a micro-business lender that focuses on female customers in India. Roughly 98% of the Ahmedabad-based financial services firm’s borrowers are women. The deal gives a full exit to impact investor C4D Partners.
  • Listed bonds. In Chennai, Switzerland-based BlueOrchard provided $10 million in debt to Dvara Kshetriya Gramin Financials to expand lending from its more than 400 rural branches, which serve more than 2.4 million borrowers in 10 states. The firm raised the capital through bonds listed on the India International Exchange, a stock exchange based in the state of Gujarat. 
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Reactive Technologies raises £25 million to expand its energy stability service. London-based Reactive Technologies helps network operators and energy storage developers reduce power curtailment and prevent blackouts. Such monitoring could make it easier to integrate renewable energy supplies into the grid, which is currently a bottleneck in the transition to net zero. Reactive has a six-year agreement with National Grid ESO, the largest electric utility in the UK, to mitigate close to 20 million tons of CO2 per year, or about 5.5% of the UK’s annual carbon footprint. Globally, Reactive says its technology could mitigate 1.4 billion tons of CO2 annually. 

  • Clean tech. The Series D equity round, backed by M&G Investments’ Catalyst fund, Breakthrough Energy Ventures and BGF, will help Reactive expand its commercial service in Europe, Asia and the Middle East. In the US, the company has a demonstration project with the New York State Energy Research and Development Authority.
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Dealflow overflow. Investment news crossing our desks:

  • Mercy Corp Ventures invested in California-based Epoch, which connects consumer goods companies to small emerging market producers and finances their sustainability improvements via “insetting.” (Mercy Corp Ventures)
  • PosiGen inked $150 million from Brookfield Asset Management to expand access to renewable energy in underserved communities. The deal brings Brookfield’s investment in the company to $400 million. The Connecticut Green Bank also reupped its investment. (PosiGen)
  • California-based TadHealth raised $1.6 million for its software for mental health services in schools for K-12 students. (TadHealth)

Short Signals: What We’re Reading

💰 Impact at family offices. As concern over climate change grows, 320 single family offices with $600 billion of wealth surveyed by UBS say they are treating sustainability and impact as matters of risk and opportunity for their investments, as well as their operating businesses. (UBS)

⚡🚗 Ethiopia is leapfrogging ICE vehicles. The nation of 126 million people spends over $5 billion a year to import gasoline and diesel to fuel its 1.2 million vehicles despite cheaper local renewable electricity. Government incentives for EVs and a possible ban on internal combustion engine vehicle imports could put half a million EVs on the road in the country by 2030. (CleanTechnica)

🧐 Obvious in hindsight. The 10-year-old venture fund co-founded by Ev Williams is adding AI Ethics and Generative Science to its “world positive” investment theses of planetary, human and economic health. Among the VC’s lessons: A few breakout companies can start the flywheel for investments in new areas like plant-based meat and lab-grown diamonds. (Obvious Ventures)

💲 Public revenue, not just private capital. Global development financiers have been too focused on leveraging philanthropy and public funding to mobilize trillions in private capital for development finance, argues economics professor Jayati Ghosh. More effective: boosting the revenues of low-income countries via sovereign-debt reductions and effective taxation. (Project Syndicate)

🌱 State of climate bonds. Last year’s issuance of $870 billion in climate-aligned green, social and sustainable bonds represented a 3% increase from 2022. Europe was the largest source of climate debt instruments with $405 billion, while issuance in Latin America and the Caribbean jumped nearly 50% to $52 billion, or 6% of total volume. (Climate Bonds Initiative)

Agents of Impact: Follow the Talent

Angelica Guzman Rendon, previously with the California-Mexico Studies Center, joins Impact Charitable as economic mobility program coordinator… Alison Rapaport Stillman steps down as founding general partner of Serena Ventures… Elizabeth Blankenship-Singh, previously with Climate Tech Circle, joins Overlay Capital as a senior associate… Daniel Heichner joins Community Investment Management as managing director of strategy and client solutions. 

Rofem Egbe, a former portfolio manager at Co-Creation Hub, joins Mercy Corp Ventures as an investment associate… Colorful Capital promotes Soltan Bryce to general partner… ImpactPHL is on the hunt for a chief executive officer in Philadelphia… KKR is looking for a global impact intern in Singapore… Acumen is hiring an impact manager in London. 

CareQuest Innovation Partners is recruiting a vice president of strategic ventures and impact investing… GAWA Capital is looking for an investment officer in Madrid… Tideline will host its fourth annual “State of the impact investment market” series, featuring Calvert Impact’s Beth Bafford, Fran Seegull of the US Impact Investing Alliance and other speakers, Tuesday, June 18.

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

Thank you for your impact!

– May 28, 2024