The Brief | May 10, 2019

The Brief’s Big 10: Moving beyond trade-offs, LeapFrog’s big raise, Kapor’s impact edge, Blackstone jumps in, Agents of Impact extinction alert

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TGIF, Agents of Impact!

Featured: The Brief’s Big 10

1. Beyond Trade-offs: The debate moves on. Getting “beyond trade-offs” doesn’t mean there are no trade-offs between social impact and financial returns. It means getting beyond an increasingly sterile debate that may be stalling what could be a transformational shift of capital. In a new series of podcasts produced in collaboration with Omidyar Network, ImpactAlpha asked a range of investors: What lies… Beyond Trade-offs? The answer: dynamic, integrated strategies to avoid specific and systemic risks, align with long-term trends and generate measurable social and environmental benefits. The new framing is taking hold. “I am seeing positive signs that we are getting beyond the ‘trade-off’ conversation,” writes Beth Bafford of Calvert Impact Capital. The conversation is shifting, she says, “From impact investing as something that you ‘should’ do if you have a heart, to impact investing as a way to find market opportunities where no one else is looking.”

  • Continuum of capital. Some commercial investors have been scared off by a perception that impact investments are invariably concessionary or are simply philanthropy dressed up as investments, Omidyar Network’s Robynn Steffen and Matt Bannick explain in the series opener. Conversely, counting as serious only risk-adjusted, market-rate investments risks driving away providers of crucial catalytic capital. Unlocking hundreds of billions—and then trillions—of dollars to address poverty, climate change and other urgent challenges requires all kinds of investors. Says Steffen: “Our message would be, ‘See the full continuum of capital and be intentional about where you play.’” Read on and listen in.
  • Smarter money. In Episode Two, Goldman Sachs’ John Goldstein charts the development of “risk-return-impact” frameworks that meet the needs of institutional investors. Incorporating environmental, social and governance, he says, is not just “for clients who care about these factors, but for clients who care about making money on risk-adjusted basis,” he says. Read on and listen in.
  • What’s ‘market-rate,’ anyway? “‘Market returns’ are derived from past performance,” tweeted Caprock Group’s Matthew Weatherley-White. “But if that is based on extractive practices (human and environmental), how can we target ‘market’ for impact investing with a straight face?”
  • Explore the continuum of returns in an interactive infographic.
  • Don’t miss an episode. Subscribe to ImpactAlpha’s podcasts on iTunes, Spotify, SoundCloud or Stitcher.

2. Late-breaking: LeapFrog Investments closes $700 million fund for healthcare and financial services. LeapFrog’s third fund is one of the largest ever raised by a dedicated impact fund manager, and pushes the firm’s commitments to $1.6 billion. LeapFrog is again targeting emerging consumers in Africa and Asia, defined as those living on less than $10 a day. LeapFrog’s Andrew Kuper called the fund “a decisive demonstration that meeting the real needs of under-served people is great business.” The fund already has made five investments, including remittances provider WorldRemit, Indian small-business lender NeoGrowth and Goodlife Pharmacy in East Africa. Lead investors included Prudential Financial, Overseas Private Investment Corp., and International Finance Corp. The Ford Foundation made a commitment to LeapFrog as part of its $1 billion mission-related investment initiative. Share this post.

3. Kapor Capital outperforms by ‘closing gaps’ for communities of color. Every investment firm aspires to rank in the top quartile of comparable firms. Not many achieve that rank by focusing exclusively on closing opportunity and outcome gaps for underrepresented African-American and Latinx communities. Mitch Kapor and Freada Kapor Klein released results for Kapor Capital’s Impact Fund. With a 29.02% internal rate of return, the fund beat the 75th percentile benchmarks for Pitchbook (25.96%) and Cambridge (26.5%) between 2011 and 2017.

  • Closing gaps. The Kapor portfolio of more than 100 companies includes justice startups like Pigeonly, the largest independent prison communication services provider, and Promise, an alternative to exploitative and expensive cash bail. It also includes Affordable Care Act enrollment channel HealthSherpa, urban-core energy-efficiency firm BlocPower, and payday loan disrupter LendUp. At least 60% of the companies were founded by a woman or person of color.
  • Fresh perspective. Kapor Capital believes a focus on the “lived experience” of underrepresented founders gives it a competitive advantage in tech. Declares the firm: “Their experiences inform the questions they ask, the markets they access and—importantly—the problems they identify that give rise to profitable, tech-driven solutions.”
  • Returns on inclusion.

4. Blackstone crafts an impact strategy around real estate and infrastructure as well as private equity. The $512 billion “alternatives” manager will make direct, indirect and co-investments. Blackstone tapped Tanya Barnes, a former Goldman Sachs’ merchant banker, to lead the initiative under its Strategic Partners group. The firm looks to meet the needs of pension funds and other institutional investors keen to diversify their portfolios with alternative assets with an impact edge. Blackstone’s Jon Gray, cited investors’ “growing demand for impact investments.” Different categories of alternatives have different attributes. Infrastructure funds, for example, generally expect returns in the high-single digits, with reliable cash flows from long-lived assets. Get the scoop.

5. Agents of Impact: Sandra Díaz, Josef Settele, and Eduardo Brondízio, co-chairs of the Global Assessment Report on Biodiversity and Ecosystem Services. “The battle is not lost yet,” says Sandra Díaz. But an exhaustive report this week painted a grim picture of ecosystem deterioration “unprecedented in human history.” Within decades, one million plant and animal species—roughly 13% of all species on earth—could become extinct. Díaz of Argentina, Settele of Germany, and Brondízio of Brazil and the U.S. issued a stark warning that humanity’s life-supporting safety net has been stretched “almost to a breaking point.”

The group’s emphasis on economic effects suggests opportunities for impact investors in agriculture, forestry, marine systems, freshwater systems, urban areas, energy and finance. The experts had earlier estimated that nature provides $24 trillion of non-monetized benefits each year in the Americas alone. “Negative trends in nature will continue to 2050 and beyond in all of the policy scenarios explored in the report, except those that include transformative change,” the authors write. Among the prescriptions: reducing inequalities in economic development, reducing over-consumption and waste and accounting for social and environmental externalities. “Ecosystems, species, wild populations, local varieties and breeds of domesticated plants and animals are shrinking, deteriorating or vanishing,” Settele said in a statement. “The essential, interconnected web of life on Earth is getting smaller and increasingly frayed.” Follow ImpactAlpha on Instagram.

  • Follow the talent with ImpactAlpha’s weekly report on career moves, job openings, events and opportunities.

6. Deals of the week. Stay on top of the dealflow all week long on A few others that stood out:

  • Fund raises. Unshackled raises $20 million venture fund for immigrant-founded startups… Ecosystem Integrity Fund closes $100 million fund for sustainability tech.
  • Well being. DispatchHealth raises $33 million for home health calls… CirrusMD clinches $15 million for tele-medicine for veterans.
  • Financing farmers. AgDevCo backs Tradin Organic to source cocoa from smallholders in Sierra Leone… WorldCover raises $6 million to insure Africa farmers against climate risks.
  • Financial inclusion. India’s Dvara KGFS raises $14 million for rural financial inclusion while ftcash raises $7.2 million to lend to India’s micro-merchants… Nobuntu to expand financial services for low-income South Africans with Crossfin’s backing.
  • Update. Energy access venture SparkMeter raises $7 million and converts $4 million in debt.

7. Beyond Meat’s IPO boosts philanthropic investors’ impact assets. Among the winners in last week’s initial public offering were the donor-advised funds of real-estate investor Mark Van Ness, and Honest Tea’s Seth Goldman. Their combined $1.1 million investment soared in value more than 30-fold, giving them the ability to make grants or invest in a raft of other early-stage impact companies through their donor-advised funds, or DAFs, at nonprofit ImpactAssets. The outcome highlights the largely untapped opportunity of DAF investing in the impact investing space, says ImpactAssets’ Tim Freundlich. For early-stage companies, DAFs can “aggregate many small commitments from individual donors into one meaningful check, and create a new source of capital for entrepreneurs,” he says. Assets in donor-advised funds jumped 27% to $110 billion in 2017. Take a bite.

8. ‘Impact alpha’ fund managers seek catalytic co-investors. Impact Capital Managers is a network of 40 fund managers seeking market-rate (or better) returns from impact investments. Marieke Spence, the group’s new executive director, says ‘impact alpha’ investors can co-invest with catalytic investors that can accept higher risks, lower returns, more flexible terms or longer repayment periods. Market-rate fund managers “are one part of an increasingly vibrant impact investing ecosystem and sit within the spectrum of returns sought by investors,” she says. Smart growth.

9. Greening global aquaculture. Farmed fish will require $300 billion over the next decade to meet demand. Impact-minded investors can drive sustainable farmed fish production argues “Towards a Blue Revolution,” a guide from The Nature Conservancy and Encourage Capital. “Driving additional investment toward these low-impact production methods can help ensure that they achieve commercial scale and become more competitive relative to conventional production systems,” write TNC’s Robert Jones and Encourage Capital’s Jason Scott. Concessionary and risk-taking capital are needed to attract commercial investors wary of production models with heavy capital costs and unknown risks. High-impact, high-growth.

  • On the beat. Follow ImpactAlpha’sFinancing Fish” vertical to track investor activity and enterprises targeting healthy, sustainable and tasty seafood.

10. A community lending hack for challenging racial bias. Chicago-based IFF, a community development financial institution, has developed an alternative to appraisal-based loan underwriting to redress historical racial bias. Lower property values in communities of color negatively impact loan terms. IFF instead underwrites loans based on enterprises’ ability to repay IFF’s flexible debt. “That difference in the cost of capital can mean the difference between a viable enterprise and no enterprise at all,” IFF’s Joe Neri wrote for ImpactAlpha. “If we remove the barriers that ‘appraised value’ lending creates in our communities, we could move the needle toward greater justice.” Equity hacks.

May 10, 2019.