Private Equity and Additionality of Capital 2024 PDF

Private Equity and the Additionality of Capital Session 4 Impact Investing (7.170), Fall Term 2024, University of St. Gallen Prof. Julian Kölbel What is the limiting factor?  Environmental benefits of plant-based meat are well...

Private Equity and the Additionality of Capital Session 4 Impact Investing (7.170), Fall Term 2024, University of St. Gallen Prof. Julian Kölbel What is the limiting factor?  Environmental benefits of plant-based meat are well established MP20 Scenario = 20% of per capital beef consumption is replaced with Microbial Protein (lab-grown meat) Percentages indicate the relative change of emissions of the beef food production system, compared to MP0 globally until 2050 Humpenöder, F. et al. Projected environmental benefits of replacing beef with microbial protein. Nature 605, 90–96 (2022). Planted Foods ETH spin-off founded in 2019 125 Million CHF raised (another 70mn on Sept. 1, 2022) Co-lead of Series A: Blue Horizon Venture Yann Sommer is involved The market for alternative protein is growing Products in retailer shelves (Coop, Migros, Lidl) These guys are heros! How much of this success is due to IMPACT investors? https://www.crunchbase.com/organization/planted-foods How is planted doing? Source: Pitchbook Enter: Blue Horizon Zurich-based private equity General Partner (GP) with a focus on food tech Seed, Venture, Growth, and Platform Development funds Participated in several rounds of Planted fundraising 9.2.2021 – Series A (amount undisclosed) 8.3.2021 – Series A (17mn with others) … Blue Horion Overview Source: Pitchbook  What about Impact? “We underwrite all our investments with our Dual Mandate in mind, targeting top-tier financial and impact returns. Therefore, the aggregated impact of our portfolio companies makes up the impact of our capital.” I would say: Owning impact is not the same thing as causing impact. For the outcome it does not matter who provided the capital. Having said that, there are some things that BlueHorizon does really well. The potential investees must have net positive impact Underlying transformation thesis is convincing Convincing case that sector expertise contributes to investees success Distribution, expertise, and mission support Impact Report: https://bluehorizon.com/wp-content/uploads/2022/08/BH_Annual_Impact_ESG_Report.pdf What about governance? Unfortunately, Blue Horizon is not developing well: IPO was canceled Limited partners forced take-over of the first (and only) PE fund Second fund has not closed 4 board members left Most employees left (or were let go) https://www.tippinpoint.ch/artikel/76942/umstrittener_vegan-unternehmer_enttaeuscht_schweizer_investoren-elite.html Recap: Differentiation of Impact Investors Not for profit For profit Investor Investee Deep dive investors I/III Impact Focus: Focusing on absolute poverty (>2USD/day) Investing in the development of companies and organizations in developing countries whose activities provide poor people with new or additional sources of income Investment Strategy: Financing start-ups and growth phase (investing horizon up to 10 years) Investing predominantly in the form of shareholding and loans (fund providers are high net worth individuals) Impact Measurement, Reporting and Communication: Evaluating the organization and business model of the company in which elea plans to invest, risk factors, and the additional benefit (“elea Impact Measurement Methodology”) Quantifying the impact created by measuring the number of people positively impacted and the amount of money saved or gained per person impacted by elea's invested enterprise Innovation and Scalability: Focusing on the creation of public added value as a tax-exempt charitable foundation Dealing with limited scalability due to high investment costs, time commitment, and limited funding availability Deep dive investors II/III Impact Focus: Focusing on the food system: Sustainable food products, sustainable food production, sustainable food packaging and delivery, and business models that address food waste and recycling. Investing in the transition to a sustainable food system that delivers both financial and impact return Investment Strategy: Focusing on early-stage companies and helping to scale the companies Investing predominantly in the form of seed or Series A investments in the form of shareholdings Impact Measurement, Reporting and Communication: Aiming to transform the Sustainable Food System Extending beyond consumer food products, ranging from better crop practices to sustainable packaging and innovative distribution. Innovation and Scalability: Trying to scale each company AND the market as a whole Deep dive investors III/III Impact Focus: Focusing on companies driving measurable social and environmental impact alongside business performance and strong returns: The Rise Funds, TPG Rise Climate, and the Evercare Health Fund Investment Strategy: Investing their funds in growth-stage, high potential, mission-driven companies Offering investment resources, business-building skills and a global network Managing $18 billion of assets across The Rise Funds, TPG Rise Climate, and the Evercare Health Fund Impact Measurement, Reporting and Communication : Deploying Y Analytics, a public benefit corporation dedicated to helping capital allocators better understand, value and manage social and environmental impact Partnering with Y Analytics and Bridgespan Social Impact, The Rise Fund created a methodology to assess potential impact (Impact Multiple of Money (IMM)) Innovation and Scalability: Later stage compared to Blue Horizon No focus on investor impact Deep dive investees I/III Business model: Hasiru Dala provides a livelihood for informal waste pickers and waste workers in India by integrating them into the city's formal waste management system, creating a positive environmental impact. Aiming for-purpose, not-for-loss Investment Characteristics: Ability to lift people out of poverty and offering improved livelihoods Profitability of business model in line with impact model – Little risk of mission drift Target Sector Impact: Informal waste pickers in Bangalore, India Business: Total waste management, event waste management, plastic collection for recycling Deep dive investees II/III Business model: Planted specializes in developing and producing plant-based meat alternatives with a focus on creating sustainable and flavorful food products. For-profit oriented business model Investment Characteristics: Impact inherent in business model – little risk of mission drift Target Sector Impact: Reduce the environmental impact of the traditional meat industry Business: Alternative meat industry Deep dive investees III/III Business model: Dodla Dairy sources, processes and distributes a variety of dairy products, while increasing the income of India's rural dairy farmers by enabling them to access lower-risk, higher-priced milk for sale For-profit oriented business model Investment Characteristics: Profitability could affect mission focus of business model – high risk of mission drift Target Sector Impact: Improving livelihoods of rural farmers Business: Dairy industry in India Bigger picture Many PE funds focus on industries such as health tech, education tech, agri-tech, real estate It is relatively easy to say that investments in these industries have positive impact (that is, company impact) The real question: How would these sectors look like without impact funds, and just with “normal PE funds”. Additionality of Capital Sufficient vs. necessary support Markets are competitive Additionality of capital hinges on limits to arbitrage/inefficiencies Ideal: overlooked but underfunded It is easier to claim investor impact with sector expertise than with capital Capital Sector Expertise Markets are competitive. When they are Whereas investments are the same efficient, good entrepreneurs will find funding. from any investor, expertise You can do concessionary returns depends on who provides it Give an explicit subsidy to the Takes time to build up, hard to copy. entrepreneur at your own loss It makes a difference whether Operate in inefficient, high-friction company is funded by fund A or B. markets, where it is costly to find good entrepreneurs (overlooked but underfunded) Paired with a credible impact mission, expertise can enhance both The fact that returns are concessionary does returns and impact not guarantee additional growth For example, non-concessionary prior Providing a lot of expert resources, investors might soak it up as extra return however, may also be a form of In my experience very rare concessionary return (higher fees). Mission Drift The idea that a start-up with a mission to save the world over time replaces that mission with simply making profits Often associated with replacement of founders PE investors can play an important role in accelerating or avoiding mission drift (this is basically engagement) The conundrum In order to have impact, you probably have to give something up (return expectations, higher cost, provide expertise). Extreme form is simply a donation But giving up returns does not guarantee impact, so you need to measure it somehow Impact Measurement and Management Take-away: There is not one accepted accounting standard for impact. The state of impact management and measurement in practice. Second Edition. The GIIN. 2020.  Thinking about company impact This is one possible framework by the Impact Management Project A guide to classifying the impact of an investment. The impact management project. 2021. Thinking about portfolio impact (IMP) The main point: it makes sense to think of company impact and investor contribution (investor impact) as two different dimensions. This tool is quite useful in practice, because you can sort your portfolio along these categories  The Impact Efficient Frontier McCreless, Mike. 2017. “Toward the Efficient Impact Frontier.” Stanford Social Innovation Review.  No data, no deal? Proposition: there may be a trade-off between measurability and impact magnitude Impact Management & Measurement (IMM) is a developing Healthcare practice Systems Software Impact Uncertainty Often, investors want to document Innovation impact ex-post, for accountability For investment decisions, however, Selling Malaria we need ex-ante estimates of impact Bednets Lack of credible ex-post data, or noisy ex-post indicators, can Expected Impact Magnitude sometimes hinder promising impact investments Source: No data, no deal? By George Carew-Jones and Alex Money. Second order effects 10 investors invest in 10 startups that do similar things. 9 go bust, but one becomes a unicorn. Who had impact? Potentially, investor appetite for alternative protein start-ups has motivated entrepreneurs to experiment all around the world with technologies and business models Even a loss-making investment might contribute to the development of the sector as a whole Assignment Please prepare a PowerPoint presentation with 3-5 slides in which you present an investment vehicle (e.g. a fund, an impact investment company, an ETF, a bank, etc.) that makes an impact claim: What is the Name, ISIN (if available), and URL of the vehicle? What claim does the vehicle make? Is it the impact of the company or the investors? What mechanism(s) does the vehicle use? Does the vehicle formulate a theory of change? What type of reporting does the vehicle provide? Overall, how would you rate the impact potential of this vehicle? Would you recommend this vehicle to an impact investor? To help you get started you can find a list for an investment vehicle here. Deadline: Monday, Dec. 16. You are invited to present during the last lecture (when there are too many submissions, we might make a selection).