The Brief | January 7, 2020

The Brief: Due diligence on fund managers, Middle America’s startups, fintech in Côte d’Ivoire, longevity accelerator, Australia’s climate emergency

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Greetings, Agents of Impact!

Featured: Impact Voices

Leverage, compensation and taxation: Doing due diligence on investment fund managers. Impact investors have become well-practiced in measuring the environmental and social impacts of the companies they invest in. They are increasingly vocal about good governance and accountability. But what about the structures of their own investment funds? “Our own practices and investment structures may be exacerbating the very problems we seek to solve,” write the Predistribution Initiative’s Delilah Rothenberg and Amanda Feldman in a guest post on ImpactAlpha. The initiative–a coalition of asset owners and managers, as well as labor and civil society advocates and other experts–is “committed to addressing income inequality in existing models of wealth creation.” The authors say private equity firms are in need of particular scrutiny in at least three areas:

  • Financial engineering. Excessive leverage, asset stripping, and monitoring or management fees that are part of many private equity deals may magnify returns to asset owners and managers. Such practices can put portfolio companies in precarious situations and push risk down to workers and communities (think Toys R Us). Required reporting on investment structuring would help investors diligence these risks and reduce incentives for extractive behavior. 
  • Compensation. Fund manager compensation structures can exacerbate wealth inequality just as much as excessive corporate executive compensation. Indeed, the ratios of fund management salaries to portfolio companies’ average worker’s pay are often greater than those of corporate CEOs to their employees. A way for fund managers to stand out? By sharing equity and profits with workers and communities.
  • Tax practices. Companies that use financial engineering or offshore havens to avoid taxes are attracting attention. Many investment firms and funds also are domiciled in tax havens, such as the Bahamas. The authors tread lightly on the hot topic carried interest’s tax treatment as capital gains rather than ordinary income, but suggest, “LPs could evaluate the lobbying activities of private equity fund managers in the same way they often do at the portfolio company level.”

“The growing consensus that capitalism must change” is an opportunity to address structural issues, say Rothenberg and Feldman. “If large institutional investors care about systemic risk and responding to their stakeholders, it will be critical for them to evaluate their managers just as they do their companies.”

Keep reading, “Leverage, compensation and taxation: Doing due diligence on investment fund managers,” by Delilah Rothenberg and Amanda Feldman on ImpactAlpha.

Dealflow: Follow the Money

Royal Street Ventures raises $16 million for Middle America’s startups. By global standards, American startups have good access to capital. U.S.-based businesses take in half of worldwide venture capital funding. But national figures obscure regional realities: only about 5% of U.S. venture investments flow to startups in the Southeast and Midwest. Park City, Utah, and Kansas City, Mo.-based Royal Street Ventures targets such overlooked regions. “We’re kids from the middle of the country and love building the ecosystem we came from,” the firm writes. Royal Street has raised $16.4 million for startups “between the coasts.” Its third fund will make investments of up to $1 million in investment rounds as large as $5 million. 

  • Geographic impact. Royal Street’s investment thesis emphasizes building entrepreneurial ecosystems in underfunded areas, but it doesn’t call itself an impact investor. The Rise of the Rest fund, which closed its $150 million second fund in October, invests with a similar thesis (see Steve Case’s post, “How Rise of the Rest will have impact — and why it’s not an impact fund”).
  • Portfolio impact. Royal Street’s portfolio of 40 companies includes a number of social impact startups, like female-founded Acivilate, which helps companies measure their social impact; Apostrophe Health, which facilitates health insurance for self-insured employers; local and organic food companies Allgood Provisions and Farm Hand; and solar financing company Wunder Capital (see, “Wunder Capital sells loans to free $200 million for solar financing). 
  • Check it out

Julaya raises early funding to bring digital payments to informal businesses. The Côte d’Ivoire-based fintech startup is among a growing crop of tech ventures designing digital solutions for the informal economic sector. It secured $550,000 from angel investors in what founder Mathias Léopoldie described as a difficult market to raise venture funds.

MassHousing issues first sustainability-focused housing bond. The Massachusetts housing agency issued a $108 million bond to preserve and rehabilitate affordable units in Boston and Cambridge. The agency said investors’ increased demand for social impact was an impetus for the bond.

Melinda Gates’ Pivotal Ventures and Techstars seek to accelerate longevity innovation. With the U.S. population aging, Techstars’ Future of Longevity Accelerator, in partnership with Pivotal Ventures, aims to boost innovation around the “unmet needs of individuals providing and receiving elder care.” The 13-week accelerator program in Washington, D.C. will accept 10 startups per year.

Signals: Ahead of the Curve

It’s not too early to blame climate change for Australia’s fires. Climate scientist Michael E. Mann got a firsthand view of the links between global warming and extreme weather events, which is the research topic for his sabbatical from Penn State’s Earth System Science Center. Mann was vacationing in the Blue Mountains as fires raged across Australia. “The brown skies I observed in the Blue Mountains this week are a product of human-caused climate change,” writes Mann in an article for The Guardian, republished on ImpactAlpha via the collaborative Covering Climate Now. (The collaborative’s Mark Hertsgaard notes that Mann’s piece is an exception to the bulk Australia’s fire coverage, which “has failed to make clear the climate connection to the fires, despite strong scientific evidence.”) Mann will share his insights at the National Climate Emergency Summit in Melbourne next month. “Take record heat, combine it with unprecedented drought in already dry regions and you get unprecedented bushfires like the ones engulfing the Blue Mountains and spreading across the continent. It’s not complicated.”

  • Extreme weather. Mann’s research has shown that global warming is causing the jet stream’s “wavy” pattern to become more pronounced, leading to extreme heat, drought and wildfires. Extreme weather events are likely underestimated by current climate models, he says. 
  • Climate leadership crisis. Dozens of local governments throughout Australia have declared a climate emergency. The federal government has not. Australia’s Prime Minister Scott Morrison is under fire for his support of coal and fossil fuels, and for vacationing in Hawaii as the fires spread.
  • Feel the heat.

Agents of Impact: Follow the Talent

Enclude Capital’s Laurie Spengler is stepping down as CEO, a year after the firm’s acquisition by Palladium. Spengler, a board director of CDC Group, is joining the board of the new U.K. Impact Investing Institute… Cowen Investment Management seeks an analyst or associate for its sustainable investments team… Community Capital Management has an opening for an impact research and reporting associate in Boston or Weston, Fla.

Thank you for reading. 

– Jan. 7, 2020