State of the Impact Investing Market MAY 11, 2015 1
Eyes on the Horizon 5 th Annual Impact Investor Survey
Survey Sample
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
Investment Activity 5
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
From 2014 to 2015, respondents plan to grow commitments by 16% and deals by 17% In 2014 2015 Target Number of investments Capital committed USD mm Number of investments Capital committed USD mm Mean 37 72 44 85 Median 7 10 8 14 Sum 5,404 10,553 6,332 12,241 7
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 56 55 EEC WNS Europe 8% 40% ESE Asia 51 ESE Asia South Asia Other 10% WNS Europe EEC 37 47 MENA Oceania 11% 14% MENA 25 Other 16 Oceania 5 0 20 40 60 80 8
Investors plan to increase allocations to SSA, ESE Asia, LAC and South Asia SSA -1 8 29 29 ESE Asia 01 23 28 LAC -7 4 21 27 South Asia -4 6 23 22 WNS Europe -1 2 21 14 Northern America -5 4 30 12 MENA 0 6 19 9 EEC -10 6 16 4 Oceania 0 4 10 3-20 -10 0 10 20 30 40 50 60 70 Decrease Begin to assess Maintain Increase 9
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 84 78 71 66 59 58 Food & agriculture Education 10% Energy Housing 56 53 Information and communication technologies Manufacuring Infrastructure Habitat conservation Water & sanitation 11% 16% 17% ICT Manufacturing Water & sanitation Infrastructure Habitat conservation Arts & culture 31 29 22 20 18 12 Arts & culture 0 20 40 60 80 100 10
Investors plan to increase allocations to energy, food & agriculture, healthcare and education Food & agriculture -3 6 28 38 Energy -2 4 19 38 Healthcare 0 9 23 37 Education -1 6 25 33 FS (excl. microfinance) -1 3 31 23 Housing -4 8 20 21 Microfinance -9 1 20 20 Water & sanitation 0 18 18 16 ICT -1 6 14 15 Infrastructure -1 3 11 13 Manufacturing -2 3 12 12 Habitat conservation 0 6 14 9 Arts & culture 0 4 9 5-10 0 10 20 30 40 50 60 70 80 Decrease Begin to assess Maintain Increase 11
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 12 10 0 20 40 60 80 100 120 12
Most investors invest at growth and venture stages Assets under management Counts Growth 122 11% 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 21 0 20 40 60 80 100 120 140 13
Performance & Risk 14
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 100 90 80 70 60 50 40 30 20 10 0 2 9 71 78 27 14 Impact Expectations Financial Expectations Outperforming In line Underperforming 15
Execution and management risk remains the primary concern for impact investors Rank Score Risk factor 1 288 Business model execution & management risk 2 132 Liquidity & exit risk 3 115 Country & currency risk 4 106 Market demand & competition risk 5 98 Financing risk 6 91 Macroeconomic risk 7 34 Perception & reputational risk Note: Respondents ranked top three choices; n=146. 16
Most private equity exits to date are in financial services sector and in South Asia geography Sector 20 17 15 13 10 9 9 9 8 5 0 25 20 Geography 4 2 2 2 Microfinance Other Other FS Food & Ag Healthcare ICT Housing Education Energy Habitat conservation 21 1 Manufacturing 15 10 11 11 8 7 6 5 0 South Asia SSA WNS Europe LAC Northern America 1 1 Other ESE Asia EEC 17
Most exits achieved through sale to another investor Exit mechanism Holding period 30 25 27 25 30 25 28 20 20 15 10 5 15 15 10 5 6 11 7 8 6 0 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
Impact Measurement 19
Investors place strong importance on measuring both outputs and outcomes 120 Not important Indifferent Somewhat important Very important 100 6 80 33 28 28 33 60 40 86 72 51 42 33 30 20 0 24 12 11 1 2 5 Measure social/environmental outputs Measure social/environmental outcomes Benchmark social/environmental performance 18 25 12 14 Measure additionality Measure attribution 32 Put a dollar figure on social/environmental performance Note: n ranges from 125 to 146. 20
Back Up 21
Most investors use IRIS-aligned or proprietary metrics to measure impact How impact is measured 100 90 80 87 85 70 60 60 50 40 44 30 20 10 0 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
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 34 41 47 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 12 0 10 20 30 40 50 60 70 23
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 141. 24
Yet, important challenges remain on both the supply and demand sides Rank Score Challenge 1 193 Lack of appropriate capital across the risk/return spectrum 2 174 Shortage of high quality investment opportunities with track record 3 115 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=146. 25
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
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
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 140. 28
Thirty-four percent of investors took part in a loss-protected investment in 2014 Instrument used for loss protection 35 30 25 20 29 26 21 15 10 5 4 0 First loss reserve Gurantee or stand-by letter of credit Subordinated or deeply subordinated debt Other 29
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
Impact investors seek to achieve impact in a variety of different way Models for achieving impact 120 100 100 89 80 60 62 56 53 40 20 0 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
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= 146 32
Respondents feel competition stems mainly from limited investment opportunities Perception of competition in market Causes of competition 10% 80 70 70 32% 60 50 40 51 41 34 58% 30 20 25 10 No significant competition Some competition A lot of competition n= 146 0 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
Investors use technical assistance to address a range of issues Use of technical assistance 100 90 89 80 70 60 63 63 61 50 44 44 40 30 20 10 0 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
Many investors also use technical assistance prior to investment Stage of technical assistance use 120 100 96 80 60 40 43 29 20 0 During the investment period Post due-diligence, but prior to investment Prior to due diligence 35
Government can play a role by providing tax credits and subsidies Perceived helpfulness of potential government policies Rank Score Potential policy 1 205 Provision of credit enhancement, e.g. guarantees, first-loss, etc. 2 184 Tax credits or subsidies for investors 3 126 Technical assistance for investees 4 124 Streamlined, clearly defined regulation for investment offerings 5 111 Co-investment by government agency on similar terms 6 52 Procurement from investees Note: Respondents ranked top three choices; n=138. 36