group 6 presentation - impact investing & venture philanthropy (1)

7/31/2019 Group 6 Presentation - Impact Investing & Venture Philanthropy (1)

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VENTUREPHILANTHROPY

& IMPACTINVESTMENT

April 22, 2011

Prepared by:Ngoc Tran, Hai Vo, Clement Ng, Alvin Cheo

March 15th, 2012


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Agenda

Social Purpose Organization market spectrum

Impact Investment The markets infrastructure

Portfolio Construction & Use of securities Investment return & Risk factors

Alignment of management team incentive (with case study)

Venture Philanthropy (VP)

Why venture Philanthropy? VP characteristics

Model of Engagement

How can PE Firms Help


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Impact Investment


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Social Investment spectrum


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Under-developed Infrastructure

Transparentinvestment

opportunities

Assessable,credible &

comparableperformance data

Ratings agencies,syndicators,

clearinghouses,and other

necessary marketintermediaries

Co-investors


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Portfolio Construction

Two-dimensional sector framework: businesssector vs impact objective

Impact can be delivered through processes orproducts

Processes : making part of companys missionhiring employees from a traditionally

underrepresented group

Products: providing affordable access to light forpeople who currently lack access to electricity

grids E.g. Products for BoP market


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Portfolio Construction


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Return: Financial return vs.Impact


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Use of investment instrument


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Risk factors in Impact Investing

Illiquidity and uncertainty around financial returnscited as biggest risks

Similar level of risk expected relative to traditionalinvestments

Risk events occurred in 7% of reported transactions


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Alignment of managementinterest What is the appropriate amount of compensation linked

directly to social and environmental performance?

Penalization and/or reward for the extent to which impacttargets are met?

Should incentives structure address short-term or long-termimpact performance, or both? The bonus is tied to short-term performance, while the carry is

determined by performance over a longer time frame.

How and by whom are social and environmental performancemetrics and targets defined? How can social andenvironmental performance be effectively monitored?


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Aureos Capitals Africa HealthFund

Impact measurement through targets:

Impact target A: 50% of people servedhave an average annual householdincome < $3,000 PPP

Impact target B: 70% of people servedhave an average annual income of lessthan $3,000 PPP

Impact target C: 15% of people servedhave an average annual income of lessthan $1,000 PPP

Compensation structure:The base carry is 15% for achieving thefinancial hurdle & adjusted upwardaccording to the achievement of one ormore of the three impact targets.

A is met, then the GP carry increases by5% from a base of 15% to a total of 20%.

The carry increases to 30% if impact targetA is surpassed AND either impact target Bor C is met


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Core Innovation Capital

Impact measurement:

An Impact Audit Committee determinessocial impact performance of GPs

action through the Impact Score

Impact score:

Portfolio-based score: 90%

Industry-based score: 10%

Compensation structure

Annual bonus: is paid to the GP in directproportion to the percentage of the totalImpact Score achieved.

20% carry interest:

90% of the carry is tied to financialperformance

the remaining 10% in directproportion to the percentage of thetotal Impact Score achieved.


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Analysis of impact-basedincentives

Criteria Areos Core Innovation

Amount of social impactliked compensation

Additional 15% of profitcan be earned if socialimpact is met

100% of bonus & 10% ofthe carry interest (2% ofprofit)

Penalization/reward forfailure/over-performanceto meet the social target

Penalization of 5%compared to normalcarry interest (20%) andadditional 10% for over-performance

No reward for over-performance but losepart of the incentive ifthe target is not met

Long-term versus short-term incentives

Long-term Both short-term & long-term

Metrics & measurements Quantitative metrics:defined by thepopulation impacted bythe investment

Use of Impact Score,determined by aninternal Impact AuditCommittee.


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What is Venture Philanthropy

A methodology thatworks to buildstronger social

purpose organizations(SPOs) by providingthem with bothfinancial and non-

financial support inorder to increase theirsocietal impact


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Venture Philanthropy 101

High

engagement

Tailored

Financing

Multi-year

support

Non-Financial

Support

Performance

measurement


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Venture PhilanthropyComparison

Similaritieswith VC/PE

Proactive and highquality management

Clear objectives andtargets

Performance culture

Optimizing leverage

Long-term engagement

Differenceswith VC/PE

Expectation of returns

Incentives alignmentwith social impact

Deal Selection

Risk

Exit


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Direct engagement

PE FirmSocial

PurposeOrganization

Hands-onengagementand financial

support


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Analysis

When Why How

Firm would like towork locally,

potentially developinga long-term

relationship with SPOin community

Proximity to charitiesoffers in-kind benefits

like use of officespace, which can alsomake up for financial

constraints

Tap firmsprofessional network

for providers of probono and financial

support

Firm unable tocontribute muchcapital, such as

publicly listed firms,can help more with pro

bono services

Direct involvementfrom firm can attract

other funders,increasing impact andsharing financial costs

Identify localchampions at

regional offices whoare passionate about

local issues


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Invest or Co-Invest with a VPO

PE FirmVPO

coordinatesassistance

SocialPurpose

Organization

Hands-onengageme

nt andfinancialsupport


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Analysis

When Why How

Firm is lacking in-housesocial sector

knowledge and prefersto use a trusted

intermediary using a VPapproach

Contribute resourceswithout incurring

management costs,while reducing risk and

transaction costs

Choose VPO based onfirms criteria and

develop a long-termrelationship with aVPO, contributing

financial resources andpro-bono support

Co-invest with VPO

when the firm wantsgreaterfreedom in

terms of choosing whichSPOstoinvest in

Flexibility to outsource

bulk of work to VPO,who is an expert on the

subject or to investdirectly

Determine criteria for

VPOs or social sectorfocus for SPOs to invest

in


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Found or Co-found a separateVPO

PE Firm

New VPOSocial

PurposeOrganization

PossiblePartners

Hands-onengageme

nt andfinancialsupport


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Analysis

When Why How

Firm is able to make asignificant commitment of

time and resource

Looking to do somethingbigger, with unique visibility,involving the firm as a team

Add a dedicated VP arm toPE firm to complementexisting business taking

care to make clearseparations between

mission, remunerationschemes, return

expectations and investmentprocess of both entities

Firm has a corporateculture that will be

conducive to larger scaleinvolvement

Grow the VP marketthrough hands-on

philanthropy engagement

Pool resources in a newinitiative to draw diverse

resources and achievegreater scale


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Why? Pressing environmental &social issues

Environmental & socialissues are receivingincreased attention fromVC and PE communities

Responsible investing

Sustainable returns

Investors pressure


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Why? Desire to give back!


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Development of skills

Judgment

Resilience

Social


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Most efficient way to the biggestimpact

VP is the mostefficient way tomake thebiggest social

impact on acause they feelstrongly about


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How can PE firms Help


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Providing Financial Capital

Funding from abudget

Foundation receives

a percentage Matching employee

donations

Host fundraisingevents and volunteerdays

Partner with others


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Providingprofessionalnetworks

Strategic advisorycompanies,accountant, lawyer

Reach and raisefunds from eachother

Influence portfolio

companies

Providing Social Capital


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Providing Intellectual Capital

Due diligence

Leverage functionalgroups

Draft business plans Serve on investment

committee board

Mentoring charitymanagement

Aiding in the event ofM&A


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Questions?

group 6 presentation - impact investing & venture philanthropy (1)

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