2030 Finance | April 23, 2018

Rise Fund’s Impact Multiple of Money: A conversation with TPG’s Bill McGlashan

David Bank
ImpactAlpha Editor

David Bank

ImpactAlpha, April 23 –  The Rise Fund, launched last year by the private-equity giant TPG, seized attention with the scale of its assets. The fund quickly raised $2 billion from a Who’s Who of global billionaires and institutional investors, making it the largest impact investment fund to date.

Bill McGlashan, founder and CEO of the Rise Fund, hopes even more noteworthy will be the scale of the fund’s social and environmental impact. That impact, he says, will not only be measured, but audited and reported to investors. Rigorous underwriting for “positive externalities,” McGlashan says, may itself be the Rise Fund’s greatest impact.

>>MORETPG Rise Fund hits $2 billion target

In an on-stage conversation with McGlashan recently, hosted by the Commonwealth Club in Mill Valley, Calif., McGlashan told me that each Rise Fund investment is underwritten not only for financial targets, but for a specific impact target, in dollars. That “impact multiple of money, or IMM, can be delivered in increased income for smallholder farmers, reduced greenhouse gas emissions, lower costs through diabetes prevention, or other quantifiable social goods.

McGlashan, 54, describes himself as hell-bent on activating the trillions needed to achieve the U.N.’s Sustainable Development Goals. To get to trillions, he’s helping grow the billions. The $2 billion Rise Fund is managed by TPG Growth, the $13 billion growth equity fund platform McGlashan founded 15 years ago. Both are part of TPG, which has $72 billion under management.

>>MORE: TPG’s Rise Fund comes out of the gates with a big edtech investment

“We think we can take this beast called capitalism and help to direct it in a way that is productive,” McGlashan said. “It has to be all of us coming together, and it has to be done in a way that’s scalable and sustainable.”

David Bank, ImpactAlpha: I want to set the stage. Private equity can be a whole range of things. First, what is TPG?

Bill McGlashan, TPG Rise Fund: What we do in TPG Growth and in TPG Rise is we help build companies. We invest in businesses where we believe our capability can help entrepreneurs grow their business to scale. We’ve done this now for 15 years.

Traditionally, people think of private equity as a buyout fund. You’re not going to go out and build jobs, build innovation, build change and build impact unless you’re in the growth business.

ImpactAlpha: So you’re not a buyout fund?

McGlashan: We will do buyouts as a structure every now and then. But it’s all about growth. What we invest in is the growth of the business. If the right structure for us is to buy a business, we’ll do that.

We like building things. That’s very different than a traditional buyout fund. If we have to buy something to build it, that’s fine. If incubating makes sense, that’s fine. If partnering with an entrepreneur and being a minority makes sense, we’ll do that as well.

ImpactAlpha: But it’s not early-stage venture capital, right?

McGlashan: We’ll do early stage as well. STX Entertainment we incubated with $1 million. We started an analytics company called Noodle.ai with $5 million. We just made two investments that were in the media space, one was $3 million, the other was $15 million. We’re really more about asking the question, “Are we relevant? Can we help this person, this company, be all it can be?” If the answer is yes and there’s a marriage to be made on both sides, then we dive in and help.

ImpactAlpha: What are the minimums to get in? Can ordinary people invest in TPG Growth or Rise?

McGlashan: For the most part no. Part of that is because of the regulations around the number of investors. At some point, you cross over a limit, where it becomes a public offering.

In the case of Rise, we were trying to attract institutional capital that had not historically been investing in impact. The point of that is the $10 trillion sitting around the table, meaning the capital managed by the institutions that came into Rise. These are tough fiduciary funds, not money or philanthropy that is trying to have a blended outcome. This is money that as a fiduciary matter is looking for a return first and foremost. “And oh, by the way, we’re also delivering co-linear impact.” These are institutions that have to put money to work at scale. We have those kinds of pension funds and sovereign funds, in addition to a few individuals, though even those are coming in for fairly large amounts of capital.

ImpactAlpha: What kind of returns do those investors expect from a fund like TPG Rise?

McGlashan: They’re underwriting us on the assumption that we’ll deliver the same returns on Rise as we do for Growth. There’s no need to compromise on returns because you’re delivering impact. The sun shines on the good and the evil. An impact company is not different than the other companies. It’s just a company. And gravity exists. The same rigor and discipline and business-building skills that we apply to any of our businesses have to apply to those businesses in the same way.

Our view is that (returns and impact) are absolutely co-linear. And we have been able to convince these large capital sources that they are co-linear. If the output of a business is that which creates impact, by definition the more successful you are, the more impact you deliver. If you create a business that’s mediocre, you’re going to have mediocre impact outcomes.

ImpactAlpha: You’ve had lots of eclectic experiences. How did you come, personally, to the impact part?

McGlashan: When I was a child, we moved to Israel as a family and spent time in India. I became aware very early on that the world is not Palo Alto, California, where I was raised. One of the reasons my wife and I chose to move our family to India, to Mumbai – and the kids went to an Indian school – was in part because we were raising them in lovely Mill Valley. And it turns out the world is not Mill Valley, California. And when you arrive in Mumbai and it’s 96 degrees and humid, you really realize it’s not Mill Valley. And if you’re my son, you’re quite upset about it.

I grew up with a perspective that it’s a big world, as a global citizen. In college, I started an NGO, a nonprofit, the World Service Project. I spent time in Africa, and Costa Rica and all these places working on what I thought was going to be a very important platform in development. I came the conclusion very quickly that the numbers were against us.

Africa alone needs 15 million jobs a year just to keep up with the demographics of that continent. So 15 million this year, and next year 15 million. You can look at Syria as an example of how the Europeans have woken up to this. If we don’t get ahead of this and create opportunity and justice in these environments, where do you think they’re going? They’re going north, they’re going to Europe. The Europeans are launching a “Marshall Plan” for Africa for exactly that reason.

I came to the conclusion that it was through commerce and the sustainable, scalable nature of business that we could really address these issues. The flipside of that is there are a lot of negatives as well. Capitalism isn’t immoral as much as amoral. It needs to be managed and directed in a way so we can all know what we’re getting into when we build businesses and invest capital.

Every investment has impact. Let’s be clear. Every investment we all make has impact. The question is, is it good impact? Is it a negative impact? Or is it no-impact?

It raises an ethical question. There are $2.5 trillion sitting on the sidelines, in bank accounts, just sitting there. It creates an imperative to do something with that. Let’s go out and have a positive societal impact. That’s capital that can be invested against great purpose and great ends. It’s the most scalable sustainable way to drive change that can happen in a time frame that matters to all of us.

ImpactAlpha: You’ve been doing this for a dozen years or so with TPG Growth. And then a couple years ago, you announced TPG Rise and came out of the gates with people like Bono and all kinds of boldface-name, Silicon Valley billionaires like Jeff Skoll, Pierre Omidyar, Richard Branson, Lynne Benioff, Reid Hoffman, Laurene Powell Jobs, Mellody Hobson, the president of Ariel Investment, and Mo Ibrahim, the mobile telecom pioneer in Africa. What were they looking for?

McGlashan: My co-founders in this are Bono and Jeff Skoll. We started to talk about the idea: “What if we could do this at institutional scale? What if we could attract that $10 trillion to invest in impact?” The key for us was: let’s start with the largest growth equity firm in the world, which is TPG Growth. Within the largest private-equity firm in the world, which is TPG. And let’s pull together people that are key influencers in the impact world. Laurene Powell Jobs runs the Emerson Collective, 400 people focused on education and environmental sustainability. Richard Branson is deeply involved in renewables. Mo Ibrahim is all about governance and impact in Africa.

ImpactAlpha: A significant majority of the investment came from pensions, sovereign, university endowments, correct? They wouldn’t call themselves impact investors.

McGlashan: In fact for most of those, this is the first impact investment they’ve ever done. That’s really important, because these are fiduciary funds whose priority is to invest for widows and orphans and retirees. They have to deliver, first and foremost, a return. The whole exercise of convincing them that we can deliver impact and return, and that there was no conflict, is a breakthrough idea. Historically there has been a perception that impact funds deliver lesser returns. There’s been a notion of compromising, a tradeoff.

ImpactAlpha: Some people do shy away from the word “impact.”

McGlashan: I would say they shied away from it in the first conversation. And then as we walked through the model, and the kind of investments we were making, they understood the underwriting we were doing.

ImpactAlpha: The markets you’re going after, the problems you’re solving, the fact that other investors are not going there — is it your proposition that impact gives you an actual advantage?

McGlashan:  Millennials are two times more likely to buy a product from a company that has a purpose, three times more likely to work for a company that has a purpose. The amount of inbound interest from incredible talent that wants to work with us has been absolutely remarkable.

ImpactAlpha: OK, let’s look at a couple of deals. For example Dodla Dairy in India. it’s a huge milk producer. Why are you interested in a dairy in India?

McGlashan: It’s a great performing company. This is a unique company in that they are not industrial in the way they’re architected. It’s about 280,000 small stakeholder farmers in southern India. This is the fourth-largest dairy business in India.

ImpactAlpha: Just to be clear, small stakeholders in this case have…?

McGlashan: …In some cases, a cow, or maybe two cows. The big producers will be three or four cows. About 70% of the world’s poor are small stakeholder farmers. That’s where poverty is in the world. They don’t have capital to send their kids to school. They don’t have money to pay for health care emergencies. And they’re trapped forever.

So this is a company that collects a million liters a day, twice a day, from all those farmers across 7,200 villages in southern India. We collect it into 70 cold-storage refrigeration facilities. We pay on the spot, with long term contracts. It turns out that if you create reliable payment to small stakeholder farmers, they will improve yield and earnings by 50% on average, just by the exercise of saying, “We will take everything you make.” Because then they will naturally produce more and get better at the husbandry and all the fundamentals of increasing yield.

That impact specifically is an uplift in the household income of all of those farmers. We track it. We have KPMG auditing it. Our first two reporting cycles are through, and we’ve actually moved our forecast upwards, because we’re delivering even better than anticipated impact.

Dodla is delivering hundreds of millions of measurable economic value to those farmers, in the form of their living income.

ImpactAlpha: There’s another company called C3IoT. When I first saw that I thought, “Oh, Bill’s going soft. He’s just trying to throw a good tech deal into the fund.”

McGlashan: The great thing is I don’t have to try to convince you. We spent two years and millions of dollars working with BridgeSpan to develop our Impact Multiple of Money framework and we pressure tested it with 80 organizations. What it creates is a map of the derivative and second-derivative impact effects of really sophisticated, complicated, scalable businesses that deliver measurable real outcomes.

So C3ioT – Tom Siebel’s current business, the founder of Siebel systems. He started delivering solutions to utilities. There wasn’t enough (impact) data to pass muster. So it was originally in TPG Growth. We then did a follow-on investment and we now have about a $150 million investment into this company, which is growing about 100% a year. It’s extraordinary.

And he has now delivered a reduction of carbon, based on the savings from his utility customers, of 1.85 million tons of carbon. He’s now focused on health care and he’s committed to delivering measurable change in outcomes around diabetes by having an early predictive model that allows healthcare providers to intervene before someone becomes a Type 2 diabetic, which is wildly costly to society. We all know 50% of Americans are diabetic or pre-diabetic. So it is now a remarkable impact company. He always knew it, but it didn’t pass muster. Now it does. The data is the data.

ImpactAlpha: It’s still very hard, right? How does the promise of private equity riding to the rescue recovery for these crucial challenges, stand up to the reality?

McGlashan: I don’t think there’s a single solution. The U.N. Sustainable Development Goals are a $30 trillion challenge. The gap annually is $2.5 trillion each year. To put that in perspective, the entire philanthropy community is $850 billion. So if we don’t activate corporate dollars, private equity dollars, philanthropy – all of it together – we have no chance of achieving these outcomes. This is just one way of doing it.

The reason I really started this was the measurement side. By demonstrating co-linearity, and by measuring this way, we are now activating governments in a different way. We’re activating corporations in a different way. What everyone needs is a way of understanding: What does impact mean?

You can look at most of the problems we suffer in the world and point to externalities as the challenge. We as a human race don’t measure externalities well. We don’t know how to think about. We don’t know how to measure them, both positive and negative. When we get to a place where we can talk about this the way we do GDP or IRR (internal rate of return), it will change the world.

That’s my goal and the goal of people involved, like Bono and Jeff Skoll. We think we can take this beast called capitalism and help to direct it in a way that is productive. Because there is no chance we get to that just world with government money. There’s no chance. if you look at the dysfunction in Washington, we all know the answer there. So it has to be all of us coming together, and it has to be done in a way that’s scalable and sustainable.

ImpactAlpha: Maybe that’s the takeaway: The internalization of positive externalities will change the world.

McGlashan: The ability to understand and factor in those externalities, both positive and negative, will absolutely shape how capitalism functions in the world.

This Q&A transcript was edited for length and clarity.