Capital Aggregation: A Market-Making Idea for Impact

As Calvert Foundation’s business has grown and evolved with the rapidly shifting impact investing markets, we have the benefit of seeing emerging trends and market-wide challenges that are hindering the growth and scale of the activity we—collectively as investors—are financing.

One of the challenges we see today is a lack of urgency and organization among groups of similarly minded investors seeking to address our shared global challenges. While there is exciting growth in the number of organizations seeking to make private impact investments—financial institutions, faith-based organizations, foundations, and family offices—the marketplace lacks the mechanisms to move capital efficiently to meet its respective demand. Impact investments remain a “nice to do” rather than a “must do” for most organizations. This investor behavior—understandable in individual cases, but harmful in the aggregate—is creating a capital-raising process for businesses, funds, and institutions seeking capital that is costly, inefficient, and wildly time consuming.

This detrimental effect is noticeable across the community-based lenders and scaled social enterprises in which we invest. The disaggregated landscape of investors causes organizations raising multi-million dollar rounds to seek investment from 5 to 10 (or more) capital sources, each with their own process, needs, impact requirements, and timeframes. Because of this lack of conformity and the lack of urgency, this process often takes at least 12-24 months, and because time is money, this yields enormous transaction costs that continue to slow these markets down.

We see two driving reasons for these market challenges: investor approach and a lack of options. Many investors approach the impact markets as they would approach philanthropic grants. They first set their impact preferences and restrictions, and then seek opportunities to invest in these areas. On the surface, this makes complete sense. These investors do not have endless amounts of capital to invest, and if they want to move the needle in a particular impact area, their investments need to match their interests as closely as possible.

This approach works in philanthropy, but it does not translate well in the capital markets. It is hard to imagine a traditional investor saying, “I want a mutual fund that is only investing in pharmaceutical companies in Europe and consumer package good companies in the United States,” and asking an asset manager to custom build that fund. Instead, that investor can either find an existing fund that most closely aligns with their interests, or they can pick individual stocks to purchase that meet their criteria. In other words, investors respond to the products available in the capital markets, rather than trying to create their own.

For impact investors who have the capacity and desire to do one-off, direct deal picking, an individually tailored approach limited to their specific areas of interest may work. But for the vast majority of institutions, it is a less-than-ideal method of creating an impact investing portfolio.

It is not surprising, however, that this bespoke approach is the most common given the second challenge: a lack of options. There are not many “off the shelf” opportunities, responsive to market demand, which investors can purchase as an alternative to constructing their own niche portfolios. At Calvert Foundation, we offer one of those options through our Community Investment Note, which allows investors to easily purchase a fixed income investment exposed to our diversified portfolio. But as impact investing matures, investors want more options with a wider variety of risk and return profiles for their fixed income portfolio.

In response to these challenges and demands, we are piloting a suite of new services called Capital Aggregation. Through these services, we seek opportunities to support organizations raising debt capital by either organizing a syndicate of investors, or by purchasing the full investment and allowing other lenders to participate. In addition to providing this support on the front end of the capital-raising process, we administer the loan throughout its life, streamlining the ongoing management and monitoring of the loan over time.

We are piloting this work in 2017 and have already closed six transactions where we have played a lead and/or administrative role. So far, we have seen a diverse set of transactions where our services can add value, including:

  • A small business fund lending in underserved markets across the United States. The fund focuses on businesses that are creating long-term quality job opportunities for local employees and creating inclusive economic development in low-income communities.
  • A new hybrid home fortification-construction-insurance model that finances new roofs for homeowners in hurricane-prone areas through their homeowner insurance savings. This will help vulnerable homeowners in coastal communities increase their safety, improve their homes, and save on insurance costs over time.
  • A biodigester construction project that turns food and agricultural waste into sources of renewable energy. These projects capture the dangerous methane gas typically emitted from this waste, converting it into a productive source of energy and cleaning a waste stream.

These capital aggregation services will help create a broader range of opportunities for investors to engage in impact markets more easily. The advantage to this sort of solution for investors is that they can leverage Calvert Foundation’s ability to choose and structure financially appropriate, deep impact investments that are responsive to market needs.

We are also starting to see other exciting efforts aimed at addressing these challenges, including new platforms like Enable Impact and ImpactUS. Enable Impact is a marketplace of curated deals, mostly early stage equity, that allows investors to search and find direct investment opportunities in mission-driven companies. ImpactUS is a platform for existing impact investing products, mostly fixed income, that allows issuers to more easily distribute their open-ended products to interested investors.

All of these solutions are an attempt to provide easier, more efficient on-ramps for interested investors so they can put their assets to work for good.

We are eager to continue bringing new investors into the diverse impact debt markets we love to serve. These markets are maturing quickly, and seek aligned investors to promote and enable their growth. We invite other investors to join us in meeting the exciting demand we see.

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Source: Capital Aggregation: A Market-Making Idea for Impact

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2017-07-05T15:17:39+00:00