- 1. Op#mizingtheInvestmentProcess forReturnsandImpact
MadeleineEvans
Pleasecontacttheauthorbeforeci1ngthispresenta1onorusingthematerialinotherworks.
2. Impactinves#ngandthebigques#ons 3. Anintroduc#on
Animpactinvestorhasanancialandanon-nancialobjec6ve,withcertain
performancerequirementsforagivenlevelofrisk1
Theseinvestorsfaceauniquestrategicchallenge:simultaneouslymanagingthese
twoobjec6vestoproduceaninvestmentwithsharedorblendedvalue2
Thispresenta6onoers:
Aframeworkforunderstandingthedriversofblendedvalue
Astrategictoolboxforcul6va6ngimpactanddesirablerisk-adjustednancialreturnsin
onesownporGolio
InsightisdrawnfromDFIsandfundsinves6nginfor-protorsocialenterprises
Entrepreneur proposesanidea Entrepreneur goesa@erprot
Investorwonderswhat happenedtoimpact
Accep#ngbelow-marketreturnsfora givenriskinexchangeforgreaterimpact
Requiringmarketrisk-adjusted returnsonimpactinvestments
Social-rstFinance-rst 4. Thebigques#on
Whatdrivesaninvestmentsimpactand nancialreturns?
Howcaninvestorsmanagethesedrivers toproduceblendedvalue? 5.
5factorsthatmaIerforperformance 6. Thebigques#on
Whatdrivesaninvestmentsimpact andnancialreturns? 7.
Opera6ngenvironment Thebuildingblocksofperformance
Financingenvironment Management& stakeholder values Business
model& technology Decisionbymanagement Financing incen6ves&
requirements Thebuildingblocksofperformance
Asimpliedviewofperformancedrivers,groundedinincen6vetheoryand
expandedinlightofimpactinves6ngprac6ce 8. Opera6ngenvironment
Thebuildingblocksofperformance Financingenvironment Management&
stakeholder values Business model& technology $$ i
Decisionbymanagement Financing incen6ves& requirements $ i
Thebuildingblocksofperformance
Asimpliedviewofperformancedrivers,groundedinincen6vetheoryand
expandedinlightofimpactinves6ngprac6ce
FivefactorsthatmaTerdriveresourcealloca6on,impact&nancialreturns
PorGolio results 9. Coreopera#onalsynergies
Thebusinessmodel&technologydenewhether
protabilityandimpactareeasytojointlyachieve
Cross-subsidymodelsrelyheavilyonmanagement
ini#a#vetogenerateimpactfromprotable opera#on
Thefactofprotableopera#oncanensureimpactin lock-step
Conictslimitvaluefortheinvestorbyforcing
managementtotrade-oprotabilityforimpact
Synergiesmaximizevalueasimpactenhances
expectedprotabilityandviceversa 1.BusinessmodelsmaIer
Prac6calexamples:
So@warebusinessfundsfounda#onthatdevelopscharterschoolsintheBronx
Solar-poweredwaterpumpissoldinKenya
Tex#lefactoryconvertstomorecostlywindpower
Leathertanningopera#oninBoliviainvestsintechnicaltrainingandprimaryeduca#onfor
workers,developingposi#verela#onshipsthatreduceriskofcostlystrikesorboycoIs
$$ i Decisionbymanagement Business model& technology 10.
Opera6ngenvironment $$ i Decisionbymanagement
Theopera6ngenvironmentaectsthecostand
revenuesofbusinessac6vi6es,makingcertain
businessmodelsmorelikelyorfeasible Consumerpreferences
Supplychaindynamics Regula#on&governmentprograms NGOac#vism
Beliefsabouttheenvironmentneedtobe consistentlyupdated
Changesintheopera#ngenvironmentmayturn
complementari#esintoconictorviceversa Business model&
technology 2.Theopera#ngenvironmentmaIers Prac6calexamples:
EuropeancustomerspaypremiumforFairTradelabelonowersaIen#ontolabor
health&safetystandardscreatesvaluedespitecostsbyboos#ngrevenue
NGOsprotestcommunityimpactofUgandanpowerplantac#veengagementand
reseIlementpremiumscreatesvaluebyreducingriskofassociatedcost-overruns
11. Opera6ngenvironment Management& stakeholder values $$ i
Decisionbymanagement Managementvaluesinuenceresource
alloca6onbyshapingintrinsicrewards Prac6calexamples
Turnatradi#onalfor-protbusinessintoa
businesssubsidizingseparateimpactac#vi#es
Createprotablebusinessesinhigh-impactareas
Generateimpactatexpenseofprotabilityor
returnwhenobjec#vesareinconict Business model& technology
3.ManagementvaluesmaIer 12. Incen6ves& requirements
Incen#ves&requirements $$ i Decisionby management
Externalrewardsorpunishmentscontainedin
nancingpayostructurecanguideresources towardop6malperformance
Maximizebothprotandimpactunderlock-step orsynergymodel
Enhanceimpactwhenmanagementpursues protatexpenseofimpact
4.Incen#vesandrequirementsmaIer
Requirementsintermsandcondi6onsenhanceandcomplementincen6ves
Ensureinvestorhasabilitytomonitorperformanceandcorrectlyapplyincen#ves
Controllevelofimpactornancialperformancepriortoinvestment
Prac6calexamples
Marginalcashpayostructureofequityordebtincen#vizesbeIernancialperformance
Sharebonusforhi^ngcertainimpacttargetsun#linvestorexitdirectlyincen#vizesimpact
Minimumimpactrequirementscallableaseventofdefaultletinvestorandmanagement
bargainoverpunishmentforlowimpactlater
Oerofnancingcondi#onalondemonstra#ngcertainobservableimpactornancialmetrics
13. Conducivenancingenvironment Financingenvironment $$ i
Decisionby management Incen6ves& requirements $ i Contract&
rela6onship Thenancingenvironmentaectsthe
scopeforcrea6vecontractstructuringand long-termnancingrela6onships,
constrainingexternalincen6vesand requirements Fundingop#ons
Legalrequirementsonpor_olio Forcesofcompe##on
Beliefsabouttheenvironmentneedtobe consistentlyupdated
Changesinthenancingenvironmentmay
underminethepowerofimplicitincen#ves Prac6calexamples
Compe##onfromsolelyfor-protlendersconstrainedenvironmentalimpactobjec#ves
pursuedbyDFIsun#lnancialvalueofsuchobjec#veswaswidelyaccepted
Risingcompe##oncanundermineimplicitincen#vesforimpactasvalueofnancing
rela#onshipdiminishesfrominvesteesperspec#ve
5.FinancingenvironmentmaIers 14. Theimpactinvestorstoolbox 15.
Thebigques#on Howcaninvestorsmanagethese
driverstoproduceblendedvalue? 16.
Thesebuildingblockscanbeadjustedaspartofinvestmentstrategyinorder
toimproveexpectedreturnsforagivenlevelofimpact,orviceversa
Arrangementsthatalignmanagementsincen6veswiththeinvestors
objec6veshelpminimizethefric6onsthatlimitordistortperformance
Threesimpletools,alreadyusedbymanyinvestorsfordierentobjec6ves
Selec#onandscreeningforconducivebusinessmodelsandinvestment
environment Structureoftheinvestmentcontract
Long-termnancingrela#onshipand(condi#onal)oersoffuturenancing
Incen6vetheoryandinvestorexperiencesuggesthowtousethesetoolsto
achieveorenhancetheblendedvalueofinvestments Blended value
Theinvestorsrole Smart acquisi6on Smart nancing 17. Opera6ng
environment A Management& stakeholdervalues Business model&
technology 1.Selec#onandscreening
Investorscanfocusscreensoncompa6blebusiness
models,opera6ngenvironmentsandmanagementvalues
Investinprotablebusinesseswhosefactofopera#on
producesadenable&jus#ableimpact(e.g.providinglife-
enhancingservicestounderservedloca#onsorpopula#ons)
Iden#fyandinvestinbusinessesthatexhibitunderlying
synergiesbetweenprotabilityandmeasurabledimensions
ofimpactofinteresttostakeholderstheinvestor
Investinbusinessesinopera#ngenvironmentswhere
preferencesofcustomer/stakeholdersareincreasingly
aIachinganancialvaluetoposi#veimpact Insightsfrominterviews
Screeningforsocialentrepreneursispopularinnewearly-stagefundsbutisnotasilver
bullet;conictscanremaininthebusinessthatunderminereturnsforagivenimpact
Shi@sinconsumervaluesandNGOagendastorewardstronglaborstandardsandpunish
poorenvironmentalstandardsprovidedcri#calsupportforthesestandardsinDFIpor_olios
Managementwhopersonallyvaluesimpactiscri#caltomaintainingimpact-orientedpolicies
withinthebusinesswhentheopera#ngornancingenvironmentreducesthedesirabilityof
impactac#vi#es(e.g.standards,abatement,community-engagementac#vi#es)
18. Opera#ngmodelsindetail Whatrela6onshipbetweenprotabilityand
impactshouldIexpecttosee? Separate ac6vi6es? Impact feedback?
Separateand subsidize Acoreac#vitygeneratesprot,andimpactis
createdthroughseparateac#vi#esfundedbya
por#onofprotsfromthecorebusiness Y None Lock-step
Impactisgeneratedbythesimplefactofprotable opera#ons N N/A Synergy
Greaterimpactenhancesprotabilityofcore
business(reducesexpectedcostsorenhances
expectedrevenues)andviceversa Y Enhances protability Trade-o
Thetwoac#vi#esconict,andmanagementis
forcedtoallocateresourcestoeitherprot-
genera#ngac#vi#esorimpact-genera#ngac#vi#es Y Dragson protability
Managementallocatesresourcestowardprot-genera6ngandimpact-genera6ngopera6ons,
whichmaybeseparateorintegrated
Impactmayfeedbackandaectrevenueandcoststructureofprot-genera6ngac6vi6es
Posi#vefeedbackenhancesprotability,whilenega#vefeedbackdragsonprotability
Screeningopera#onalmodels 19. Opera#ngenvironmentindetail
Customerswillpayapremiumforthe
businesssproductsorservicesifthebusiness
aIainsposi#vesocialimpactormi#gates nega#veimpact
Nega#veimpactcarriesadirectcost(costof
complyingwithmi#ga#onrules,etc.)
Nega#veimpactcarriesanexpectedcostto
thebusiness(NGOdemonstra#onsdamage
reputa#on,etc.),suchthatmi#ga#ngrisk
enhancesexpectednancialperformance
Theinvesteessupplychain,distributorsetc. rewardimpact
Posi#veimpactopensupnewhigher-revenue
orlower-costbusinessopportuni#es Conducivetosynergies
Likelytocausetrade-os Selec#ngaconduciveopera#ngenvironment
Highimpactishighlycostlyrela#veto altera#velow-impactscenario
High-impactgoesunrewardedbycustomers,
supplychainetc.rela#vetolow-impact business
Nega#veimpactgoesunpunishedby regula#on,NGOac#vism,etc. 20.
Incen#vesexplicitinthecontract
Applycrea6vecontractstructuringtoensureincen6vesand
requirementsareop6mizedtoproducedesiredporGolioresults
Thinkbeyondcontractsthatpurelyincen#vizeprotmaximiza#onin
caseswheretheunderlyingbusinessmodelexhibitstrade-osorfollows
aseparateandsubsidizemodel,andmanagementcannotnecessarilybe
trustedtopursueimpactastheinvestorwouldlike
Incorporateexplicitincen#vesforimpactintotheinvestmentcontractin
theformofe.g.equitysharebonusesorstep-downsininterestratesin
ordertoaltercost-benetcalculusofgenera#ngimpact
2.Crea#vecontractstructuring Investment contract Incen6ves&
requirements Insightfrominvestorinterviews
Investmentcontractsalwaysincorporatestrongincen#vesfornancialperformance(e.g.
simpledebtorequityinvestmentcontract)butseldomforimpact(saveoneinvestor)
Controlrightsgeneratedbyminimumimpactrequirementsarefrequentlyusedby
developmentnanceins#tu#onstoincen#vizepursuitofveryimportantimpactobjec#ves
Controlrightsletinvestorsgaugethedriverofdevia#onsfromexpectedimpactandrespond
inordertomaximizenancialperformanceandimpactinthelonger-term 21.
Incen#vesexplicitinthecontract
Developavaluable,long-termnancingrela6onshipthatoers
addi6onalimplicitincen6vesfortheinvesteetopursuedesired
impactstandardsoroutcomes
Addi#onalnancing(implicitly)condi#onalonmee#ngimpacttargets
canaltercost-benetcalculustomanagementofpursuingimpact
Anancingrela#onshipmustprovidevaluerela#vetocompe#ngfor-
protinvestorsinordertocreateincen#ves:lowernancingcost,
technicalexper#seormarketconnec#ons(especiallyasnecessaryto
enableimpactthatbringsnancialvalue),orpoli#calriskmi#ga#on
3.Long-termnancingrela#onship Financing rela6onship Incen6ves&
requirements Insightsfrominvestorinterviews
Implicitincen#vesforbothimpactandnancialperformancecommon
Oeroffuturenancingcondi#onalonimpactisacri#caltoolforencouragingmanagement
teamstopursueimpactobjec#vestoinvestorssa#sfac#on
Thevalueofthenancingrela#onshipiso@enresourcedbyimpactinvestorsasabargaining
chipwhendecidinghowtotakeac#oninresponsetoadevia#onfromexpectedimpact
ForDFIs,leveragingvalueofrela#onshipasincen#veformanagementtoreturnto
complianceo@entakesprecedenceoverenforcementoflegalrights 22.
Opera6ngenvironment Financingenvironment Assessthebigpicture
Business model& technology
Applyingtheintui6ontoimproveporGolioperformanceandminimizetrade-os
Assessbuildingblocksofperformanceforcompa#bilityorfric#onamongperformancedrivers
Applyimpactinvestorstoolbox:Smartselec#onandsmartnancing Management
&stakeholder values Incen6ves& requirements Compa#ble
orfric#on? Compa#ble orfric#on? Compa#ble orfric#on?
Thebigpictureforinvestors 23.
MadeleineEvansisadirectequityinvestorwithresearchand
advisoryexperienceinbothimpactinves6ngstrategyandtac6csas
wellasimpactmeasurement.
Madeleineisalsotheco-founderofFinanceMaIers,aLondon-
basedorganiza#onbridgingthegapinknowledgeandnetworks
betweenmainstreamnanceandtheUKsgrowingimpact investmentsector.
ShereceivedanMasterofPublicAdministra#onwithDis#nc#on
fromtheLondonSchoolofEconomics,wheresheaIendedasa
ThouronScholarandfocusedondevelopmenteconomicsandpolicy.
MadeleineholdsherundergraduatedegreesfromtheUniversityof
PennsylvaniasHuntsmanProgram,withaB.S.fromtheWharton
SchoolandaB.A.inInterna#onalStudiesfromtheCollegeofArts
andSciences. ShespeaksEnglish,Spanish,andGerman. Abouttheauthor 24.
Thecontentinthispresenta#onistheproductofayearofinves#ga#on,culmina#ngin
aMastersdisserta#onen#tled:Mee1ngthechallengeofimpactinves1ng:Howcan
contrac1ngprac1cessecuresocialimpactwithoutsacricingperformance?
Thedisserta#onpresentsastrategictoolboxforinvestorswithnancialandnon-
nancialobjec#ves.Contentisbasedonlessonsfromeconomictheoryofcontractsand
fromin-depthinterviewswithsixteenBri#sh,German,andU.S.impactinvestors.
Therelevanceofeachstrategictoolwilldependontheinvestorscontroloverthe
underlyingpor_olio,thelegalandfundingconstraintsoncontracts,thedegreeofac#ve
managementpursuedbytheinvestor,andtheobjec#vesofcompe#nginvestors.The
toolboxismeantasadirectresourceforinvestorsinapor_olioofcompaniesor
projects,buttheintui#onshouldbevaluableforfunds-of-fundsaswell.
Copiesofthepaperordetailsofmethodologyareavailablefromtheauthor.
Abouttheresearch 25. Assessthebigpicture Getintouch.
[email protected]
