Читать книгу Impact Investment - Allman Keith А. - Страница 9

The bulk of this book is designed to guide an investor through every stage of the investment process, with a specific look in the last chapter at considerations for an investor who is creating or working for an investment fund. While there are many aspects that work universally for investors, there is a particular focus on equity investments, given that they are the predominant force in impact investing. To help immerse readers in the investment process, a fictitious company is selected amongst three potential investments. This company is then taken through each stage of the investment process. Figure 1.1 provides a graphical overview of the core chapters with a brief discussion of each section following.

Figure 1.1 This book generally follows the investment process that an investor would encounter.

Sourcing and Screening

The first phase of the investment process involves identifying potential investments. Most investors have a specific investment thesis that they, or if organized as a fund, their investors believe in. Therefore, it's imperative that the investments the investor sources fit into the investment thesis. For instance, if a healthcare investment fund is funded by high net worth individuals who have an interest in making equity level returns, while trying to address global health problems, the investor must be very careful to find healthcare related investments at good valuations that will lead to strong exits.

While sourcing and screening investments that fit an investment thesis seems relatively straightforward, time and resources constrain an investor. Time works against an investor since costs constantly accrue. The longer it takes to make investments, the longer it will be before the investment exit returns value. In order to properly place funds, resources are needed, both financially and tangibly. It costs money to undertake onsite due diligences, and to hire consultants, lawyers, or accountants. Often, an investor will hire multiple resources to help with the process. Effective investors place money efficiently and strategically, minimizing costs along the way.

Knowing how to identify regions, economies, and industries that are investable and poised for success is critical to being an effective investor. Specific to impact investing, the social mission must be fully understood, mapped out, and tested against the investors' social investment thesis. Weighing both financial and social mission viability early on is critical to selecting the right investments for due diligence.

Investment Analysis and Valuation

Sourcing and screening sets an investor on a path with a limited number of investments. The next stop on this path is vetting the company's operations, financial potential, and social mission scope. Usually, due diligence is split into two phases, with the first being a less-committed “desktop” phase, where business plans and financial statements are analyzed. This allows both an investor and investee to be efficient with their time and resources, since deal-breaking issues can sometimes be garnered from such analyses.

For equity investors, valuation discussions start early to make sure there are no significant gaps in perceived value. In order to have such discussions, an initial investment analysis is necessary since it lends to the creation of a valuation range. This range is later refined during the due diligence phase. Valuation is one area that impact investors must think carefully about. Impact investing is unique in that it brings together a range of investors with very different costs of capital and required returns. In some cases, these return expectations are not commensurate with the risk being assumed.

Due Diligence and Investment Structuring

Eventually, a company will warrant further analysis and full, onsite due diligence is executed. This entails reviewing all operational aspects, management, competitive analyses, finances, and social mission achievement and plan. Another goal of due diligence is for investors to establish their own opinions on the necessary investments structure. Debt investors will want to review all risks and mitigating factors related to cash flow or collateral value. Equity investors will want to check the assumptions made to create the valuation range and determine what investment structure might be necessary.

When a due diligence is complete and an investor is still interested in a company, negotiations around the investment structure ensue. Some investment structures can be very simple and quick to come to agreement, while others can take a considerable amount of time and develop into very complex arrangements. Debt investors will negotiate covenants to protect their priority over cash flow or collateral. Equity investors will agree to a valuation and possibly negotiate preferential rights.

Impact investors have the added requirement of ensuring that the social mission is preserved after investment. This requires properly aligning interests and making sure the structure is able to respond to changes.

Term Sheet and Documentation

Expressing the agreed-on investment structure in documentation is critical to a successful impact investment. The beginning of this phase of the investment process starts with a term sheet that covers the investment structure, preferences, and specific rights. The goal is to have a document that can be converted into a subscription agreement that defines an equity investment or an indenture for a debt investor. Additionally, for equity investors, a shareholder agreement is needed to cover shareholder rights.

Impact investors should also negotiate specialized clauses that protect the social mission and allow the investor flexibility if the social mission is compromised. As an example, a put option, where the equity investor can sell shares back to the company, might be written into the subscription agreement if the social mission deviates too far.

Building Value to Exit

Ultimately, an equity investment realizes value when it is exited. Debt investors technically have their exits through periodic interest and principal amortization. After the investment, but prior to exit, a value-building phase exists. Active investors will take part in board meetings to help shape the company's strategy. Passive investors will be more focused on financial and social metric reporting that is established at the end of the investment and provided periodically. At some point, exits must be completed properly to return funds to the investors at levels that are aligned with their expectations.

Private Equity Funds

Investors frequently establish or work for funds that utilize other entities' money for investment. Leveraging the platform of a fund can greatly increase the amount of money invested, but it brings with it a host of economic, organizational, and impact-related considerations. Most funds operate on management fees that have to be carefully managed vis-à-vis fund expenses. Organizational issues, such as the ratio and size of investments relative to investment managers, need to be carefully thought through. For impact investing private equity funds, a core responsibility is safeguarding the social mission by properly incentivizing investment managers and adhering to strict social criteria for investments.

Impact Investment Evolution

The concluding chapter to this book explores recent developments in the impact investing industry and thoughts on how it may evolve and scale. It's clear that there are problems unique to individual impact investments that stem from investors' disparate sources of capital, sometimes causing irrational risk/return profiles. A brunt of this book seeks to provide solutions to individual impact investment problems through a sound and rigorous investment process. Investment products are also evolving to help mitigate some of these problems and further develop the industry.

However, when looking at a portfolio investment strategy there are contentious issues that divide market participants. Some argue that portfolios can be constructed where there is no trade off between financial and social return. Others believe that for an effective, for-profit commercial strategy to be successful there has to be compromise and capital placed in a gradient of investments, from high impact to traditional. The final chapter in this book explores such topics and takes a position on effective portfolio strategy.