State of the Impact Investing Market MAY 11, 2015

Transcription

1 State of the Impact Investing Market MAY 11,

2 Eyes on the Horizon 5 th Annual Impact Investor Survey

3 Survey Sample

4 Most respondents headquartered in North America and Western Europe Headquarter location Organization type Northern America Fund manager WNS Europe 2% 1% LAC SSA 4% 3% 5% 0% 1% Foundation Other 7% 3% 1% 5% 6% ESE Asia South Asia No single headquarter location 36% 42% Diversified financial institution/bank Development finance instiution 9% 18% 57% Oceania MENA Pension fund or insurance company EEC Family office 4

5 Investment Activity 5

6 Overall, our sample manages USD 60bn in impact investment assets 0.01% 6% 2% 2% 9% Fund manager Development finance institution Diversified financial institution/bank Foundation 18% Other 63% Pension fund or insurance company Family office Note: n=145. 6

7 From 2014 to 2015, respondents plan to grow commitments by 16% and deals by 17% In Target Number of investments Capital committed USD mm Number of investments Capital committed USD mm Mean Median Sum 5,404 10,553 6,332 12,241 7

8 Impact investments are made all over the world Assets under management Counts SSA 69 2% 0.20% LAC 64 Northern America SSA LAC 6% 6% 3% Northern America South Asia EEC WNS Europe 8% 40% ESE Asia 51 ESE Asia South Asia Other 10% WNS Europe EEC MENA Oceania 11% 14% MENA 25 Other 16 Oceania

9 Investors plan to increase allocations to SSA, ESE Asia, LAC and South Asia SSA ESE Asia LAC South Asia WNS Europe Northern America MENA EEC Oceania Decrease Begin to assess Maintain Increase 9

10 Impact investments are made across a broad variety of sectors Assets under management Counts Housing Other Microfinance Financial services (excl. microfinance) Energy Healthcare 2% 2% 5% 5% 1% 1% 1% 2% 0.00% 27% Other Food & ag Healthcare FS (excl. microfinance) Education Microfinance Food & agriculture Education 10% Energy Housing Information and communication technologies Manufacuring Infrastructure Habitat conservation Water & sanitation 11% 16% 17% ICT Manufacturing Water & sanitation Infrastructure Habitat conservation Arts & culture Arts & culture

11 Investors plan to increase allocations to energy, food & agriculture, healthcare and education Food & agriculture Energy Healthcare Education FS (excl. microfinance) Housing Microfinance Water & sanitation ICT Infrastructure Manufacturing Habitat conservation Arts & culture Decrease Begin to assess Maintain Increase 11

12 Most investments are made in private markets Assets under management Counts Private debt Private equity 109 Private equity 3% 3% 2% 0.20% Private debt 83 Equity-like debt 5% Equity-like debt 61 Public debt 6% 40% Deposits & cash 23 Public equity 8% Real assets 15 Real assets Public equity 14 Other 33% Other 13 Deposits & cash equivalents Pay-for-performance instruments (e.g. social impact bonds) Public debt Pay-for-performance

13 Most investors invest at growth and venture stages Assets under management Counts Growth % 3% 6% Venture 90 Seed/Start-up stage Venture stage Growth stage 28% Seed/start-up 60 Mature, private Mature, publicly-traded 52% Mature, private 60 Mature, public

14 Performance & Risk 14

15 Performance is mostly in line with or exceeding expectations Types of returns sought Performance against expectation 18% 55% 27% Competitive-return Investors Closer-to-market Investors Capital-preservation Investors Impact Expectations Financial Expectations Outperforming In line Underperforming 15

16 Execution and management risk remains the primary concern for impact investors Rank Score Risk factor Business model execution & management risk Liquidity & exit risk Country & currency risk Market demand & competition risk 5 98 Financing risk 6 91 Macroeconomic risk 7 34 Perception & reputational risk Note: Respondents ranked top three choices; n=

17 Most private equity exits to date are in financial services sector and in South Asia geography Sector Geography Microfinance Other Other FS Food & Ag Healthcare ICT Housing Education Energy Habitat conservation 21 1 Manufacturing South Asia SSA WNS Europe LAC Northern America 1 1 Other ESE Asia EEC 17

18 Most exits achieved through sale to another investor Exit mechanism Holding period Strategic buyer Financial buyer Management buyback 1 IPO 0 < 12 Months 1-2 Years 2-3 Years 3-4 Years 4-5 Years 5+ Years 18

19 Impact Measurement 19

20 Investors place strong importance on measuring both outputs and outcomes 120 Not important Indifferent Somewhat important Very important Measure social/environmental outputs Measure social/environmental outcomes Benchmark social/environmental performance Measure additionality Measure attribution 32 Put a dollar figure on social/environmental performance Note: n ranges from 125 to

21 Back Up 21

22 Most investors use IRIS-aligned or proprietary metrics to measure impact How impact is measured Through metrics that are aligned with IRIS Through propriatary metrics that are not aligned to any external frameworks or methodologies Through qualitative anecdotes Through standard frameworks and assessments such as GIIRS, GRI, etc. 2 We do not measure social/environmental performance 22

23 Fund managers raise capital from a wide variety of sources Assets under management Counts Diversified financial institution/ Bank Family office/hnwi 58 Pension fund or insurance company Development finance institution Family office/hnwi 8% 2% 6% 1% 1% 32% Foundation Financial institution/bank DFI Retail investor 13% Pension or Insurance 30 Foundation Fund of funds 27 Fund of funds manager 18% 19% Retail investor 21 Endowment (excluding foundations) Endowment 13 Other n = 80 Other

24 Investors generally believe the industry has matured over the past five years Strongly agree Somewhat agree Neither agree nor disagree Somewhat disagree Strongly disagree 100% 90% 80% 70% 5% 6% 33% 17% 1% 1% 8% 10% 7% 10% 26% 27% 22% 33% 9% 36% 60% 50% 58% 40% 30% 44% 49% 45% 52% 52% 41% 20% 10% 0% 20% 19% 16% 16% 14% 15% The quality of entrepreneurs/investment opportunities has improved Impact measurement practice has significantly improved Industry is a lot more competitive There has been notable innovation in deal structuring Industry has tended towards more "market-rate" investments Governments are playing a more active role 11% 3% Industry has tended towards more "below-market" (or concessionary) investments Note: n ranges from 128 to

25 Yet, important challenges remain on both the supply and demand sides Rank Score Challenge Lack of appropriate capital across the risk/return spectrum Shortage of high quality investment opportunities with track record Difficulty exiting investments 4 97 Lack of common way to talk about impact investing 5 87 Lack of innovative deal/fund structures to accommodate investors or portfolio companies needs 6 76 Lack of research and data on products and performance 7 67 Inadequate impact measurement practice 8 57 Lack of investment professionals with relevant skill sets Note: Respondents ranked top three choices; n=

26 Motivations for traditional investors to allocate capital to impact investments Rank Score Motivation 1 80 They are a part of our commitment as a responsible investor 2 69 They are an efficient way to meet our impact goals 3 54 We are responding to client demand 4 38 They provide an opportunity to gain exposure to growing sectors and geographies 5 24 They are financially attractive relative to other investment opportunities 6 6 We do so to meet regulatory requirements 7 6 They offer diversification to our broader portfolio Note: Respondents ranked top three choices; n=49. 26

27 Breakdown of total AUM by source and investment type Source of capital Type of investment Directly into companies 6% Capital on behalf of clients Proprietary capital 65% 35% Indirectly through intermediaries (including fund managers) Other 20% 74% 27

28 Respondents indicate progress across a broad range of market indicators Significant progress Some progress No progress Worsened 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 9% 67% 24% Collaboration among investors 1% 1% 1% 12% 17% 23% 17% 21% 32% 69% 59% 66% 67% 18% 17% 16% 16% Availability of investment opportunities at the company level Usage of impact measurement standards, metrics, and methodologies Availability of impact investment capital across the risk/reward spectrum Number of intermediaries including fund managers with growing, successful track record 67% 55% 11% 12% Availability of research and data on products and performance Level of government support for the market 47% 48% 5% Availability of suitable exit options Note: n ranges from 124 to

29 Thirty-four percent of investors took part in a loss-protected investment in 2014 Instrument used for loss protection First loss reserve Gurantee or stand-by letter of credit Subordinated or deeply subordinated debt Other 29

30 Common themes: What investors would like to see happen in the next five years More documented exits and greater liquidity Greater transparency about the variety of opportunities in impact investing including varying risk/return profiles Recognition that impact investing does not have to be concessionary More market-rate investment opportunities Greater participation of institutional (commercial, mainstream) investors Increased opportunity for retail investors Common language and standardization/comparability of impact metrics and methods 30

31 Impact investors seek to achieve impact in a variety of different way Models for achieving impact Selling products and services that benefit our target population(s) Providing employment to target population(s) Integrating our target population(s) into investee supply or distribution chains Achieving operational improvements that benefit the environment Selling products and services that benefit the environment 19 Other (please specify) 31

32 Co-investors are widely considered important in impact investing Co-investors are critical in our assessment; we only invest if we feel we are strongly aligned with co-investors 8% 5% 28% Co-investors are important to consider but not a priority We do not give much importance to assessing co-investors Irrelevant 59% n=

33 Respondents feel competition stems mainly from limited investment opportunities Perception of competition in market Causes of competition 10% % % No significant competition Some competition A lot of competition n= Limited number of investable ventures Limited number of scalable business models Limited number of qualified entrepreneurs Many investors in my target region(s) Many investors in my target sector(s) 33

34 Investors use technical assistance to address a range of issues Use of technical assistance General management (e.g. improving efficiency or quality of business processes) Accounting or financial systems Industry-specific skills enhancement Impact measurement HR and other internal policies Product development 34

35 Many investors also use technical assistance prior to investment Stage of technical assistance use During the investment period Post due-diligence, but prior to investment Prior to due diligence 35

36 Government can play a role by providing tax credits and subsidies Perceived helpfulness of potential government policies Rank Score Potential policy Provision of credit enhancement, e.g. guarantees, first-loss, etc Tax credits or subsidies for investors Technical assistance for investees Streamlined, clearly defined regulation for investment offerings Co-investment by government agency on similar terms 6 52 Procurement from investees Note: Respondents ranked top three choices; n=