Impact investing has solidified itself into a global industry of exponential growth since the concept emerged in 2007. According to GIIN’s recent “Sizing the Impact Investment Market” report, which collected data from over 1,340 impact investors, the market is now just over half a trillion dollars US worldwide.
Impact continues to build an identity for itself as industry players collaborate in creating a simple, common convention of principles and procedures through the five dimensions of the Impact Management Project, the GIIN’s recent development of Core Characteristics of Impact Investing and the IFC’s Operating Principles of Impact Management for impact investors to adopt.
According to a recent Impact Investing Benchmark report, impact funds that raised under $100 million have delivered almost 2x the returns of comparative general funds of similar size. Capria is an impact investor targeting commercial returns and scaled impact by advancing the next generation of local fund managers that invest in hundreds of small and growing businesses in emerging and frontier markets in Africa, Latin America, and South and Southeast Asia. Capria Network median fund size is USD $50M; we look to deliver market rate returns, or better, along with impact in every fund we select.
Capria defines impact across three dimensions – first we are creating an ecosystem and market for entrepreneurs to start and grow their businesses by advancing early stage fund managers. We provide these capable, highly-vetted, local fund managers with a unique platform for success, including senior-level partnering and capacity building, a global peer network, and tailored, patient capital. Second, for these businesses to scale and succeed, we invest in fund managers deploying market-aligned investment structures. This includes venture equity, private equity, quasi-equity, and innovative debt structures that fit the needs of local small and growing businesses. Third, we support fund managers in the development and implementation of an impact strategy that will help them focus their investments on impact businesses meeting the needs of local communities. They invest in underserved sectors of local economies including education, healthcare, housing, energy, financial services, logistics, food and agriculture.
How to gain a competitive edge by investing with impact?
Capria has been practicing pragmatic impact management using a roadmap that enables firms to align their impact investment strategies with traditional investment processes.
Capria’s pragmatic impact practice started at our founding in 2015
Key components of Capria’s impact management roadmap for investors include defining the impact thesis, integrating impact with the investment strategy, reporting and applying results to manage and enhance impact and financial returns over time.
- Impact Thesis – theory of impact that clearly articulates the differentiated investment strategy to both investors and entrepreneurs.
- Environmental and Social Management System – environmental and Social (E&S) Governance policy and Environmental and Social Management System (ESMS) that comprises E&S objectives and risks, Exclusion list (defined per institutional investor, if applicable), due diligence processes and procedures to manage risks, anti-corruption and anti-money laundering policies and procedures to ensure compliance.
- Impact & ESG in Formal Documents – impact commitments and expectations are clearly integrated in all formal fund and investment documents to establish accountability and commitment towards impact, along with reasonable flexibility to shift impact strategies.
- Impact & ESG in Screening Process – robust, quantitative, well-understood system evaluating founder’s commitment to impact, scale potential, short and long term depth of impact, sector specific considerations, etc.
- Impact & ESG in Portfolio – Impact data is tracked, measured and managed to create more resilient companies that will do better in the long run due to their explicit alignment with stakeholder care and/or environmental principles.
- Impact Reporting – Annual/semi-annual report is published including impact data aligned with UN SDGs and IRIS, and qualitative portfolio and customer stories to drive accountability to increase overall impact and financial returns, support the collective learning of the financial industry and establish positive credibility in the ecosystem.
- Impactful Exits – Robust, quantitative, well-understood system to rank impact and financial returns per portfolio company to avoid, reduce and manage mission drift.
Data from emerging markets
Capria’s impact and ESG roadmap has been integrated into Capria Quantum, our proprietary, comprehensive and holistic fund manager capabilities evaluation tool, where each of 90 elements are rated on a predefined scale 1 (getting started) to 5 (world-class leader).
The Capria Quantum definition of “Fund Impact Thesis” is consistent with IFC’s Operating Principle #1 “Define strategic impact objective(s), consistent with the investment strategy”. In our process of evaluating funds to consider for the Capria Network, we have collected data from 119 fund managers across the globe, of which about half of them are first time managers, and the balance are 2nd through 4th-time managers.
Our initial analysis (Chart 1) shows on average, globally, fund managers are proficient — they have defined their impact thesis addressing five dimensions of the Impact Management Project and aligned the Fund level impact goals conceptually to the UN Sustainable Development Goals. This clearly differentiates the Fund to investors. Interestingly, fund managers from Sub-Saharan Africa slightly surpass the global average by also predicting impact returns for the fund that takes into account both social/environmental and financial factors. They are followed by managers from Latin America and South/Southeast Asia respectively. The need to further develop this capability, the extent of which varies by region, of defining an impact thesis is apparent among fund managers. This is the very first step to develop an impact management system.
In Capria Quantum, each Principal and Partner independently rate each element on a scale of (1) “Novice” to (5) “Ninja” to reflect the team’s progress to date. The rating scale is generally defined as follows:
1 / Novice – Getting started, incomplete, or unknown level of abilities
2 / Engaged – Have the basics, but material improvement required
3 / Proficient – Adequate/sufficient, but with additional areas for improvement
4 / Expert – Highly capable, with areas of improvement toward world class still possible
5 / Ninja – World-class leader in the particular element, helping to mentor others
The Capria Network fund managers have aligned impact goals, both qualitatively and quantitatively, with the UN Sustainable Development Goals. For example, Capria’s partner in Brazil, Performa Investimentos will create long term impact in Brazil through the investment of a family of Impact funds, across the following key dimensions:
(1) Social Impact: the fund will invest in companies providing healthcare, education and financial services to underserved mid and low-income populations in Brazil, leading to new jobs in the marketplace.
(2) Financial Impact: the fund will support accelerated growth and financial sustainability of early-stage companies.
(3) Environmental Impact: the fund will also generate positive environmental impact through investments in energy efficient, environmentally sustainable and clean technology companies.
As another example, Capria’s partner in India, Unitus Ventures will create
(1) Social impact – Each investee has the potential to impact at least 100,000 BoP (base of the economic pyramid) families, and/or directly employ up to 1,000 BoP individuals across India in 5 years, resulting in improved livelihoods (new and better jobs) through the formal economy.
(2) Financial impact on the companies we invest in – Investees are on a path to financial sustainability and rapid growth through increased revenues and additional capital, enabling them to continue attracting capital to support scaling.
(3) Catalytic impact on the entrepreneurial ecosystem – Engagement with the local and global network of advisors, skilled service providers and strategic partnerships such that every investee benefits from, influences, and accelerates the functioning of the overall entrepreneurial ecosystem.
Unitus Ventures took it a step further, in a first-of-its-kind move within the Indian investment ecosystem and has been reporting impact for the last 2 years mapped at a company-by-company and fund basis to the UN Sustainable Development Goals, showing in just 5 years that they have impacted over 4.7 million lives, created 12,797 jobs, and raised follow-on capital of 3.9 times Unitus’ initial investment. As part of Unitus’ impact management, they look at strengthening impact among underserved populations, which most times happen to be women. An initial analysis applying the 2X challenge criteria shows both Funds are indeed organically gender smart, going to show gender smart businesses are able to scale their impact and grow their revenues in a very short span of time.
This is the first article of the blog series highlighting Capria’s impact management practice and how to implement principle #1 of the IFC Operating Principles of Impact Management. In the upcoming articles on Enhancing Impact and Financial Returns through Impact Management, we will share how funds in the Capria Network implement the other principles using real-world data and illustrative examples.