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Meeting the challenge of impact investing:
  Optimizing the investment process
         for returns and impact
                          Madeleine Evans
      PRI-Mistra Dynamics of Responsible Investment Conference
                          Sigtuna, Sweden

                Panel: Investing and the Public Good
                         28 September 2011
About the researcher

                                  Madeleine Evans has recently completed her Master of
                                  Public Administration at the London School of Economics as
                                  a Thouron Scholar, where she focused on development
                                  economics and policy.
                                  Madeleine co-founded the Network for Impact Investing and
                                  Social Enterprise (NiiSE) at the LSE, an organization
                                  fomenting postgraduate students’ awareness, research and
                                  careers in these fields, followed by a counterpart network
                                  for young professionals, Impact Generation. Her personal
                                  research interests span impact investing strategy, financial
                                  regulation, and the role of financial markets in sustainable
                                  development.
 E-mail:
                                  Prior to moving to London, Madeleine graduated from the
 madeleine.evans@terrafirma.com   University of Pennsylvania with a B.S. from the Wharton
 Address:                         School and a B.A. in International Studies from the College
                                  of Arts and Sciences.
 Flat 5
 92 Redchurch Street              Madeleine is currently working at the private equity fund
 London E2 7GP
                                  Terra Firma.
                                                                                                 2
About the research
 The content in this presentation is the product of a year of investigation, culminating in a
 dissertation for the Master of Public Administration Program at the London School of
 Economics, entitled:
 “Meeting the challenge of impact investing: How can contracting practices secure social impact
 without sacrificing performance?”
 The dissertation presents a strategic toolbox for investors with financial and non-financial
 objectives. Content is based on lessons from economic theory of contracts and from in-depth
 interviews with sixteen UK, German, and US impact investors (with a special thank you to DEG,
 who provided generous access to data and support for this project):




 The relevance of the ideas in this presentation will depend on the investor’s control over the
 underlying portfolio, legal and funding constraints on contract structuring, and the degree of
 active management pursued by the investor.
 Copies of the paper or further details are available from the author.                            3
The strategic challenge



           Entrepreneur         Entrepreneur       Investor wonders
          proposes idea to     goes after profit   what happened to
          impact investor                               impact




                             The questions
How does the nature of the investment and contracting process
                 drive the balance between
           financial returns and positive impact?

           How can investors manage these drivers
                    to increase welfare?

                                                                      4
Incentives matter




                    5
Acquisition          Structuring           Management


  Market               Contract            Relationship




                 Choices by portfolio
                business management


              Investor “blended” returns




                                                          6
The business model
describes whether objectives are easy to jointly achieve


                  Cross-
                                   Trade-off
                 subsidy



                Lock-step           Synergy



The operating environment
makes certain models more likely or feasible

  Consumer preferences
  Supply chain dynamics             Values
  Policy & regulation
  NGO and media activism
                                    Market     Contract    Relationship
only
Contracts can^help investors
     manage outcomes
  they can measure well



                  Values




                  Market   Contract   Relationship
Valuable offers of future financing
can provide complementary incentives


                 Too risky




    Market
  connection
                   Future
                 financing    >   Next best
                                   option




                 Technical
                 assistance        Values




                                  Market      Contract   Relationship
Final thoughts



Trade-offs are manageable


We have an initial understanding of our tools and
of common practical pitfalls


We need to make data work harder

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Meeting the challenge of impact investing incentives and business models (Evans 2011)

  • 1. Meeting the challenge of impact investing: Optimizing the investment process for returns and impact Madeleine Evans PRI-Mistra Dynamics of Responsible Investment Conference Sigtuna, Sweden Panel: Investing and the Public Good 28 September 2011
  • 2. About the researcher Madeleine Evans has recently completed her Master of Public Administration at the London School of Economics as a Thouron Scholar, where she focused on development economics and policy. Madeleine co-founded the Network for Impact Investing and Social Enterprise (NiiSE) at the LSE, an organization fomenting postgraduate students’ awareness, research and careers in these fields, followed by a counterpart network for young professionals, Impact Generation. Her personal research interests span impact investing strategy, financial regulation, and the role of financial markets in sustainable development. E-mail: Prior to moving to London, Madeleine graduated from the madeleine.evans@terrafirma.com University of Pennsylvania with a B.S. from the Wharton Address: School and a B.A. in International Studies from the College of Arts and Sciences. Flat 5 92 Redchurch Street Madeleine is currently working at the private equity fund London E2 7GP Terra Firma. 2
  • 3. About the research The content in this presentation is the product of a year of investigation, culminating in a dissertation for the Master of Public Administration Program at the London School of Economics, entitled: “Meeting the challenge of impact investing: How can contracting practices secure social impact without sacrificing performance?” The dissertation presents a strategic toolbox for investors with financial and non-financial objectives. Content is based on lessons from economic theory of contracts and from in-depth interviews with sixteen UK, German, and US impact investors (with a special thank you to DEG, who provided generous access to data and support for this project): The relevance of the ideas in this presentation will depend on the investor’s control over the underlying portfolio, legal and funding constraints on contract structuring, and the degree of active management pursued by the investor. Copies of the paper or further details are available from the author. 3
  • 4. The strategic challenge Entrepreneur Entrepreneur Investor wonders proposes idea to goes after profit what happened to impact investor impact The questions How does the nature of the investment and contracting process drive the balance between financial returns and positive impact? How can investors manage these drivers to increase welfare? 4
  • 6. Acquisition Structuring Management Market Contract Relationship Choices by portfolio business management Investor “blended” returns 6
  • 7. The business model describes whether objectives are easy to jointly achieve Cross- Trade-off subsidy Lock-step Synergy The operating environment makes certain models more likely or feasible Consumer preferences Supply chain dynamics Values Policy & regulation NGO and media activism Market Contract Relationship
  • 8. only Contracts can^help investors manage outcomes they can measure well Values Market Contract Relationship
  • 9. Valuable offers of future financing can provide complementary incentives Too risky Market connection Future financing > Next best option Technical assistance Values Market Contract Relationship
  • 10. Final thoughts Trade-offs are manageable We have an initial understanding of our tools and of common practical pitfalls We need to make data work harder