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AVPN CDM Webinar - Pre-engagementProcesses at Caspian #Welcome to the AVPN webinar on Pre-engagement. My name is Martina Mettgenberg-Lemiere.AVPN Knowledge CentreCapability Development Model (CDM)Capability Development Model (CDM)Targeted Networking and Exchange

Pre-engagement Capacity BuildingPortfolio ManagementImpact MeasurementMulti-sector Collaboration

Linkedin for the social sector!Connections based on interest, geography & sectorCDM practices and frameworksEvents webinars, roundtables and workshopsDialogueOnline discussion group following on from each events#Thanks, Patti.

Before we start, I wanted to set the context for this webinar.

The Knowledge Centre was launched to pull together practices of our members and enable learning. And some of you will have visited us at the 2015 conference in the Knowledge Showcase.

We do this in two ways, with the Capability Development Model (CDM) and through the AVPN Connector.

The CDM captures Venture Philanthropy in five practice areas, ranging from pre-engagement, over capacity building and impact assessment to portfolio management and multi-sector collaboration.

In each of these practice areas, detailed cases will form a map of good practices and allow the sector to learn from each other. These will be shared in events such as webinars, roundtables and workshops.

The AVPN Connector has been revamped and offers you the ability to connect on the basis of interest, geography and sector. Another new function of the connector is the ability to continue the discussion via the Dialogue function. This helps you cross borders and discuss with others in your interest group.

This webinar is the first in a series of webinars that will bring you the Knowledge in the five practice areas, namely in Pre-engagement. Before we start with Caspians practices, let me give you an overview of how we see pre-engagement at the moment.

2Deal- sourcingDeal-screeningDeal-structuringSocial missionFinancial information and business modelEvaluation of goal alignment and potential to deliver social missionReview documentsBackground checksRelationship buildingTerm sheetsStrategic plans and milestonesExit plansGenerating deal flowCompetitionsPitches and panelsInterviews

Process, Time and Cost?CDM Practice Area 1 Pre-engagement

#First, for the purpose of this webinar, we call social investors Venture Philanthropy Organisation (VPO) and the recipient of the fund social purpose organisation (SPO). Within these terms lies the whole range of investment types and non-profits, for-profits and hybrids

We see Pre-engagement as a linear process leading to signing some sort of a termsheet or contract between the VPO and SPO which structures the relationship for the duration of the engagement.

Yet, processes differ and concomitantly some social investors take more time and accumulate more costs.

Also, especially in Asia, investment-ready enterprises are often difficult to find. Likewise deal screening is an issue because information is difficult to obtain.

Lets dive into these two areas with cases from India, which is one of the more mature social investing market in Asia. 3Generating Deal Flow the step before Deal SourcingMore information can be found in the AVPN Paper on how to get started in Venture Philanthropy in Asia, 2014 Section 3.1; accessible on http://avpn.asia/2014/07/21/getting-started-in-venture-philanthropy-in-asia-2/

Relies on own sector expertise, 3rd party verification, funder referencesShares information with networkIssues Research Reports which then influence DGCsPublishes information widely#Before VPOs can even begin deal sourcing, they need to generate dealflow.

Our understanding from the European context is that some necessities hugely enable the process. These are good marketing channels for the VPO and a mature SPO market. Factors that influence the deal sourcing are the purpose of the engagement be it by finding organisations that fit the VPOs objectives or by deciding to create a market through investing into numerous organisations across a portfolio.This then affects the processes such as identifying the potential investment targets and defining what kind of investments suit these organisations, for instance, grants, recoverable grants, loans or equity and in which way they are being delivered.Some funders would approach selected SPOs directly or manage open applications. Both are strategic and we are yet to assess the opportunistic aspects of deal flow, wherein funders come across good organisations outside these two options.

While this appears neatly packaged and linear, it is worth noting, that it may not be as linear. For instance, processes and methods can occur side by side, meaning that once SPOs are identified, investments are defined to tailor the engagement for both sides. Also, the experience of having managed open funding applications influences purposes and processes.

This is what we hope to uncover in the case studies and share back with you to allow you to increase efficiency and effectiveness of your investments.

To give you two examples: in the context of grant making and giving circles,

Dasra is very active in building the foundation for future investors by developing extensive sector reports. It also freely shares its sector reports and in doing so facilitates how other funders locate good organisations.

Similarly EdelGive sees its role as an eco-system builder and in particular recommends their non-profits to other funders for investment.

Next to making the organisation known to SPOs, this significantly builds expertise of funders, more mature SPOs through initial grant funding and hence dealflow. 4Deal Screening ProcessMore information can be found in the AVPN Paper on how to get started in Venture Philanthropy in Asia, 2014 Section 3.2; accessible on http://avpn.asia/2014/07/21/getting-started-in-venture-philanthropy-in-asia-2/ For the case study of Caspian visit: http://avpn.asia/capability-development-model/pre-engagement/ First- Focus- Geography- Investment size- Social impactDetailed Data on- Organisation- Market- Income/Revenue- Strategy + Ops- Financial, Social AimsInvolvement of VPO in Appraisal creates commitment and motivation for positive outcomeshould be proportionate to the engagement of VPO during investment phase.

Forms of engagement during Investment Phase: - Participation- Reporting- Coordinating with other investments- Taking a board seat

3 monthsUnderstanding the organisation and the business model3 months detailed screening, investment proposal and investment decisionDetailed screening and structuringThird-party verificationNegotiations with the investee

For Equity Investments#Once deals are located, screening them and working out a mutually beneficial arrangement between the investor and investee are crucial next steps.

The funder has a role in doing due diligence but more importantly leading the relationship building for the entire engagement.

To illustrate this for Equity Investments in India, Caspian is an Indian Impact Investor since 2004 who does debt and equity investments. Their process for equity investments can be split into two parts. The first of three months is a general assessment while the second part over 3 months goes more into depth and then also involves negotiations about the exact terms of the engagement.

Caspian has a different process for debt investments, but for now, I would like to hand over to Shilpa Sudhakar and Avishek Gupta who will share more on Caspians processes. After this we will have ample time for questions and discussions.

5Caspian Impact Investment AdvisorJuly 30, 2015

An AVPN Webinar on Pre-engagement#6Caspian A BackgroundWho we are:Caspian was set up in 2004 as an impact investment manager investing in socially responsible, multiple bottom line businesses delivering financial and social value.What we do:We deploy private capital into impact sectors, including microfinance, affordable housing, last mile banking and small business financing in India. Pioneer investors in microfinance, established Indias first domestic equity fund Bellwether in 2004-05. Pioneer investors in affordable housing; also helped incubate and hold ownership in a company focused on affordable educationCaspians first equity fund Bellwether (AUM $20mn) has exited all but two of its investments and has successfully repatriated exit proceeds to LPsCaspians second equity fund India Financial Inclusion Fund (AUM $90mn) has completed its investment period and is entering the exit phaseCaspians impact debt fund commenced in April 2013; currently at USD 30 mn and poised to double in 2 years, provides debt to impact enterprises in financial inclusion and food & agriculture. Will eventually be a sector-agnostic impact debt providerThe Team:Over 100 years collective experience building and managing organizations, conceiving and launching investment vehicles, and engaging the right teams to manage these vehiclesCaspian Funds are GIIRS Pioneer Funds; Five Star rating in 2014

771. Pre launchComprehensive market assessment - Sector research and analysis to determine scope for investments and fitment with the funds mission and investment focusCaspians most recent impact debt fund was set up in 2013 after a detailed market study over 6-9 months that showed a clear opportunity in debt among impact enterprises in sectors such as SME lending and Sustainable Agribusiness.In our diversification in to additional sectors, we recently spent 6 months evaluating sectors including education, WASH, clean energy, livelihoods and healthcare. Only one was chosen based on potential for debt and fitment with CIIs lending strategy. Investors and lenders take comfort from a rigorous market study process and a calibrated entry in to new sectors.

Recruit Investment Managers with operational and/or investment expertise in the target sectors; ensures quicker deal flow and leveraging of already established networks. Also demonstrates to potential investees that as investors, we can add value beyond just the moneyKey members of the investment team had previously led and managed microfinance institutions and leads to a very quick turnaround when it comes to assessing potential deals in Microfinance. Members of the team also have experience with SME lendingCaspians foray in to affordable housing in 2009 was driven by the extensive experience of the fund manager in the mainstream mortgage business.This is also a strength of Caspian as an investor. In some of our early stage Microfinance investments, we have at times been required to provide operational inputs in crisis situations. In one of our housing finance investments, the involvement of Caspian in the first few years was extensive, as the company installed its processes and systems.

881. Pre launchCaspian has also diversified in to sectors such as Food & Agriculture, in which a) Caspians own experience is limited compared to our other focus sectors and b) the potential investees are relatively early stage and/or pre-breakeven. In such cases, additional risk mitigation strategies may need to be adopted.

Caspian took a three-pronged approach to this in its own foray in to Food & Agriculture (i) Research and Understand, (ii) Network and Originate and (iii) Mitigate RiskResearch and Understand: With grant support from a shareholder, Caspian retained a research and rating agency with Agri expertise to conduct a sectoral analysis of key sub-sectors and commodities within the food & agri space, to better undertsand the opportunities and risks in this space. A customixed due diligence tool was also developed.Network and Originate: Caspian became an active participant in an incubation facility sponsored by a agri-focused for the incubation, training and technical support of farmer producer organizations. This platform has served as a pipeline and networking opportunity for Caspian. In addition, Caspian worked on establishing a connection with investors, incubators and media organisations that covering the food & agribusiness sector. Equity investors seek us out if one of their investees requires debt.Mitigate Risk: Caspian has entered in to a partnership with Rabobank, for a guarantee program covering its Food & Agri loans to farmer producer companies and Agri-SMEs, a process that also provides for information sharing with Rabo thus enhancing Caspians knowledge and decision making capabilities in this sector.

992. Deal flow, SourcingBuild networks within the Target Market EcosystemDevelop relationships with other participants in the ecosystem incl. Investors, Lenders, Donors, rating agencies, consultants, industry associations, We have found this to be extremely important for deal sourcing, for market intelligence as well as reference checks on companies/promoters.Caspian is been a member of industry associations in India and is a co-founder of the recently established Impact Investors Council (IIC). Platforms such as this are very important, to collectively address issues of relevance to the impact investing community in India as well as for the funds to network.When diversifying in to a new sector the time spent on building networks may initially be disproportionate (to the deals actually closed)Soft launch the fund informally within these networks; ensure a clear and professional message about what we can and cannot do. Meet entrepreneurs and understand the various Business ModelsDevelop potential pipeline (this can be more in-depth once there is certainty of the fund closing where deals can be primed accordingly)We have not relied on investment banks to bring us deals and almost all our investments are sourced via our own networks.Over 10 years, Caspian has done 100 transactions, reached 10 mn ultimate clients, with over $100mn deployed.

Private and Confidential10103. Deal Screening and Due DiligenceIrrespective of type (Equity or Debt) or size of investment ($0.5 mn to $10mn) every potential investment is assessed for Quality of entrepreneurBusiness Model Social mission and commitment to social performance assessment

The due diligence process also includesAdministering a Proprietary Due diligence and risk assessment tool (this covers aspects including Mission, Business Model and products, Governance, Financial management, internal controls, HR practices, Client protection, Community and Environment);Rigorous financial analysis; andOn site visits

CustomizationAs Caspian has diversified in to sectors outside microfinance, appropriate customization of the risk assessment tools has been carried out

Private and Confidential11113. Deal Screening and Due DiligenceDue to the experience of the firm and the team we generally zoom in on the key issues for DD quickly

Equity Due diligence is more elaborate and can comprise more than one on-site visit; while in debt, the process and turnaround needs to obviously be quicker.

Areas of DD include business/ops, financial/accounting and legal; in some cases, a systems/MIS audit is also undertaken.

The deal screening and due diligence process and timeline can become challenging depending on the availability of information. With early stage companies or non-corporate entities (eg farmer producer organizations), obtaining the relevant information takes time. These delays can be more problematic in debt where the focus is on keeping the TAT low.

While an investor can be reasonably patient with obtaining information for due diligence for the first engagement, we are also careful to assess the right reason for the delays or deficiencies in information short term constraints or systemic weaknesses coupled with reluctance to share.

Private and Confidential12123. Deal screening and Due Diligence - Equity

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13Deal Structuring and Closing - Equity

Private and Confidential14Once the investment team has final approval, the Operations team steps in to close the deal. Caspian has invested in building an Ops team that has structuring, legal, financial and accounting expertise. This has been a key advantage for us as we have greater control on costs and timeline;The closing of the transaction is a joint effort by the investment and ops team.

14Deal Screening and Due Diligence process - Debt

Private and Confidential15Debt deals have a much quicker turnaround than equity; from on site due diligence visit to sanction is generally between 4-6 weeks. Loan agreements are more standardized and the in house team is able to close discussions fairly quickly. With investees that are less experienced (eg farmer producer companies), this process could take longer as some handholding will be required.

New deals are either sourced through references or people approach us through our website or email us directly. Cold calling has not been found to be effective till date.

Once the initial contact is made, an introductory call where Caspian talks about the nature of its offerings and the potential investee shares a broad overview of the business. In case the company is comfortable to work with Caspian, further information is sought. This would typically be details of the business model, track record, financials and projections. Once the information it is shared, the business team evaluates if the company fits into the criteria. Further discussions are then held with company on potential terms and an on site due diligence is scheduled. The on site due diligence typically lasts for 2 days. After the due-diligence, a further set of detailed information requirements are shared with the company. As the information is shared, it is put into a Credit Memo prepared by the Investment Manager. Once the report is ready, it is shared with the credit committee. The credit committee sends in questions in advance which may be responded to before the formal credit committee meeting. Approvals are consensus based.

In order to enable access to debt for a companies with weaker credit but with good potential and social impact, Caspian has got into a risk sharing partnership with Rabobank Foundation and Rabo Rural Fund. Caspian takes benefit of the guarantees when the standalone credit is weak. Such a requirement is established either by the Business Team or the Credit Committee.15Deal structuring and Closing - Debt

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16Keeping Costs lowFor impact investors, fund and deal sizes tend to be smaller. Managing costs is therefore quite critical. How does one stay efficient and keep transaction costs low?A focused investment policy and local presence enables high quality deal flow. We hardly ever rely on investment banks to source deals. Most of our external costs are incurred in the set up and structuring of our fundsWe have, since inception, followed a policy of conducting due diligence in-house and the firm has focused on hiring resources with these capabilities. We have on occasion commissioned an external diligence but these have been few and far between.TAT from credit approval to disbursement in our debt fund can be as short as 1 week. High transaction costs can also sometimes influence ticket sizes (since legal and other due diligence costs tend to be more or less fixed regardless of deal size). Managing processes internally has helped Caspian maintain a great deal of flexibility in the size and structuring of the investment.The firms knowledge and experience both on entrepreneur selection and transactional due diligence has thus strengthened steadily over time while also leading to a significant saving in costs. Outsourcing does happen but very selectively.Managing costs well has also resulted in Caspian being nimble and responsive to market opportunities. After deal sizes of $5-10mn in our second equity fund, we were able to switch to a minimum deal size of $200k in the new debt fund without any significant addition to costs.

1717Drop outs - EquityDropouts also have an impact on overall costs, depending on the stage at which the deal falls through. In our Equity funds, deal dropouts for Caspian after the Term Sheet stage have been quite rare. Dropouts, when they happen, tend to happen in the first 3 months or so, of engagement.

We also ensure that the term sheet contains all the material terms and conditions for the investment so that there are no big surprises or potential deal breakers for either party that surface only when detailed documentation is drawn up.

Key reasons for dropout in the initial phase:from our perspective: valuation, unsatisfactory outcome on preliminary DD (for instance, quality of promoter, governance, market reputation), or lack of agreement on key terms and covenants. Misalignment of mission is rarely a cause as deals are pre-screened for this before DD.from the investees perspective: valuation (Caspian may be outbid by another investor) or lack of agreement on investor rights.

This phase of negotiation and closing is a crucial one as it sets the tone for the relationship.

1818Drop outs - DebtDrop-outs happen across stages, with most drop outs happening before the on site due diligence process is initiated.

The expected commercials and other key terms are communicated clearly during the initial conversations. Only if a company is comfortable with the key commercials and other key terms, do we schedule an on site due-diligence.

From the potential investee side, the drop outs happen mainly due to difference in commercial expectations.

Depending upon the findings from the credit process, we might put cases on hold and suggest improvements. Post implementation of the improvements, we can take a relook at the company.

Any case of drop-outs or cases put on hold by us are revisited on a future date because there is a possibility that the situation has been remedied by then.

Private and Confidential1919ConclusionThe Indian impact space is reasonably mature and competitive; with a relatively limited number of investable entities, there is stiff competition for the perceived potential winners/leaders. The firms that succeed are the ones that enjoy a good market reputation among entrepreneurs and other market players for fairness, transparency, speed, flexibility and value add. Investees appreciate candor and clarity. Do not delay communicating a rejection. In both building and closing a deal, principal to principal engagement is important - to understand the investees motivations, it is essential to engage with them directly on all aspects of the deal. There will be more efficient resolution of any issues that crop up when discussions happen between two decision makers.The period of negotiation and closing a transaction is very critical as this is when the foundation for the relationship with the investee is laid . If the deal closes but the negotiation process results in a strained relationship with the Promoter, this will have deeper implications for the investment. An investor needs to be clear about how it will manage the investment once it is made, how active it intends to be and whether it will exercise all of the rights that it has negotiated for itself. Investees prefer dealing with engaged and responsive investors who do not delay decision making.

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This presentation shall not constitute an offer to sell or the solicitation of any offer to buy, which may only be made at the time a qualified investor receives a confidential private offering memorandum (CPOM) describing the offering and related subscription agreement. In the event of any inconsistency between the descriptions or terms in this presentation and the CPOM, the CPOM shall prevail. These securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful, until the requirements of the laws of such jurisdiction have been satisfied. This presentation is not intended for public use or distribution. Any projections, market outlooks or estimates in this presentation are forward looking statements and are based upon certain assumptions. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. Any information regarding portfolio composition or investment restrictions are intended as guidelines, which may be modified or changed by Caspian Impact Investment Adviser Private Limited in its discretion and without notice.2122Feel free to continue the conversation on Dialogue on http://avpn.asia/event/avpn-july-webinar-avpns-capability-development-model-webinar-series-pre-engagement-processes/Thank You

#Thanks for your participation in this first webinar about the Capacity Development Model.

Next up at the end of August, we will have a webinar on Capacity Building with Peter Yang from Empact, which is a skills-based volunteering intermediary in Singapore to talk about the challenges and solutions of managing skills-based volunteers.

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