Ceniarth Portfolio Summit @ UMASS

On Tuesday, October 24th, 2017, Ceniarth was proud to host its first ever Portfolio Summit.  The convening brought together an invitation-only group of our portfolio companies, advisors, and peer investors for a closed-door chance to reflect on the development of the impact investment field and to share insights from our collective work.  Given Ceniarth’s historical support and affiliation with the University of Massachusetts (via the Isenberg Family Charitable Foundation), the Summit was hosted on the campus of UMass Amherst.

Ceniarth Founding Director Diane Isenberg opened the Summit by framing the challenges that the sector faces in stark and honest terms:

“Last week I attended the annual conference of a well known African private equity fund . As I listened to speakers extol a rosy vision of a modern Africa enabled by leap frogging technologies  and fueled by  the disposable incomes of a growing middle class , I thought about all of the people who would be left behind just as they have been in markets in developed countries. It reinforced the importance of the work that many of us continue to do, despite the challenges and uncertainty of returns, to  figure out  how to  provide  at least some of that rosy future to those populations that traditional market-based companies often exclude to reach profitability . To me the elephant in the room is just this.  The emerging populist view of impact investing is that investors can do good and do well and that this will solve all of the problems that development aid and philanthropy have been grappling with long before the words impact investing were even invented. Thankfully doing good and doing well will be the answer to some problems.  However it will also be a formula that continues to exclude many of the most vulnerable populations both urban and rural.”

Diane’s remarks set the tone for a day of open, frank sharing that touched on some of the thorniest issues in our sector: the potential trade-offs between impact and returns, the utility of impact measurement, and the appropriate use of subsidy and grant capital were all featured topics of lively debate and dialogue.

Panel discussions were organized around Ceniarth’s three primary investment strategies, Responsible Asset Management, Impact-Driven Capital Preservation, and Programmatic Investments.  For more information about the composition of our portfolio, you can download this recent presentation on our strategy and holdings, or view a Confluence webinar by Ceniarth Director Greg Neichin.

We are incredibly appreciative for all of our portfolio companies, managers, advisors, and peers that attended including: Generation Investment Management, Bridges Fund Management, Bain Double Impact, Generate Capital, Hall Capital Partners, Goldman Sachs, Global Partnerships, Root Capital, Advance Global Capital, One Acre Fund, Frontier Markets, ColaLife, Maycomb Capital, Village Capital, Candide Group, MacArthur Foundation, Packard Foundation, Sorenson Impact Center, Calvert Impact Capital, Omidyar, and Acumen.

How Ceniarth Supports Social Entrepreneurs

Ceniarth Directors Diane Isenberg and Greg Neichin recently appeared on Financing Social Entrepreneurs, a “weekly podcast interviewing people who fund and support social innovation in different ways, grant providers, impact investors of various kinds, angel investors, foundations, family offices and more.”

Listen to Episode 6: How Ceniarth Supports Social Entrepreneurs

“In this podcast, Ceniarth directors Diane Isenberg and Greg Neichin talk about the wide-ranging support that Ceniarth can provide to social entrepreneurs and innovators: from leveraging grants and program-related investments to investing return-seeking capital. They emphasize the importance of providing finance that is appropriate to the specific needs of different social ventures.

Diane and Greg also share their views on the state of impact investing today, warn of the dangers of impact investment hyperbole, and investors who want to “have it all.” They talk about Ceniarth’s increasingly focus on assuring capital efficiency of dollars for impact, how Ceniarth uses capital to build ecosystems, and they offer invaluable advice for social entrepreneurs looking for financial support.”

Sorry, ‘Feel Good’ Investors: Deep Impact Requires Concessions

“We thought that the only way to achieve large-scale impact was to build large commercial enterprises that could generate enough cash to support both organizational growth and market-level impact. But as we began investing more heavily and more directly in early-stage companies that targeted less advantaged populations in emerging markets, we began to notice the complexity of these market segments. Again and again, we saw phenomenal entrepreneurs who were developing innovations with transformative potential – but many of them needed more patience and more upfront capital than a commercial investor would typically provide.”

From “Across the Returns Continuum,” SSIR, by Matt Bannick, Paula Goldman, Michael Kubzansky & Yasemin Saltuk, Omidyar Network

Amidst a steady stream of hyperbolic, content-free puff pieces all heralding that the impact investment industry has gone “mainstream,” Omidyar Network’s recent article (excerpted above) in the Stanford Social Innovation Review, “Across the Returns Continuum,” is an honest and nuanced treatise outlining their strategic framework. It is a must-read for any investor or philanthropic funder that seeks to develop a serious strategy around investing for impact.

Those of us actively allocating capital to fragile enterprises in developing markets recognize that those people who promise comfortable market-rate returns while solving global poverty are the equivalent of diet gurus promising that one can lose weight while eating limitless amounts of chocolate cake. As former Omidyar Network India Managing Director Jayant Sinha (now Indian minister of civil aviation) said on stage at the recent India Impact Investing Conclave, “Do not kid yourself that this is commercial investing, you are here to deliver impact.”

Yes, we certainly acknowledge that there are numerous ESG-oriented public equity and bond funds, as well as U.S. and European focused private equity and credit portfolios geared toward generally responsible and beneficial companies that are delivering perfectly solid returns. We get it. We are investors in many of them. If that is the entirety of your intended scope of impact, then mission accomplished.

However, for those with the flexibility and fiduciary responsibility to pursue direct impact in truly marginalized and underserved regions and communities, it’s necessary to grapple with the reality that these contexts often require concessionary rates of return, an appetite for a range of risks (geopolitical, currency, security, etc.), as well as a need for creative structures and patient timelines. We find it unhelpful when advisors, fund managers and even asset owners declare that you can have it all, when the reality is that it depends on what “it” is.

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It takes money to make money: Advance Global Capital (AGC)

Small and medium enterprises (SMEs) are the engine of growth and employment in developed economies, accounting for over 50% of GDP and 60% of employment. In stark contrast, SMEs in emerging and frontier economies struggle to grow and consequently account for a mere 17% of GDP and 30% of employment. The reasons for this are myriad, with factors such as poor infrastructure and imperfect regulatory environments inhibiting the growth of formal private enterprise.

However, much of this can be attributed to a very simple reason – most enterprises require money to make money. Access to finance is cited as the most significant constraint to enterprise growth by SMEs in emerging markets, with theIFC estimating a $1 trillion credit gap . They lack the collateral, financial history, and track record required by traditional lenders, while also generating lower revenue per client.

Given our interest at Ceniarth in helping to address these SME financing hurdles, we are delighted to announce our recent investment in Advance Global Capital (AGC). AGC is a relatively new fund manager that works directly with local financial institutions in emerging markets to channel vital working capital to SMEs. AGC is uniquely focused on factoring and invoice discounting as a means of mitigating credit risk and addressing the SME finance gap.

Invoice Discounting: how does it work?

Many business transactions do not involve immediate payment, delaying re-investment by entrepreneurs. SMEs are often forced by larger buyers to accept payment terms ranging from 30-120 days – and the smaller the supplier, the less leverage they have to demand better terms. AGC unlocks the value of invoices as financeable assets, through local financial institutions, known as “factors”, or directly via invoicing technology platforms, through a process called invoice discounting. In this arrangement a factor purchases approved invoices at a discount and advances funds to the supplier immediately, based on the financial history of the buyer, enabling them to buy more materials and hire more people to grow their business. The full amount of the invoice is then collected from the buyer when it comes due.

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Muhammad Yunus is wrong about off grid solar

Yes, this is a provocative headline.

Offering a critique of a Nobel Prize winner who revolutionized financial inclusion and positively impacted the lives of tens of millions is not something we take lightly. Nor would we flippantly critique the Rockefeller Foundation, an organization that quite literally wrote the book on impact investing, and, in this case, has partnered with Yunus Social Business on its new “social success notes”.

That said, we have found that constructive criticism is sorely absent from most dialogue on impact investment. As a community of practitioners, we are quick to celebrate intention and innovation rather than outcomes. Because we must work collaboratively and demonstrate momentum, we can too often hold our tongues. At Ceniarth, we prefer a more direct approach. The problems that we all hope to solve are too big and too important for us to offer pleasant courtesies when we could be working together for solutions.

Mr. Yunus co-authored an article last month with Rockefeller President Judith Rodin entitled, “Save the World, Turn a Profit”. They begin by succinctly explaining a problem that we all hope to solve. Namely, that the world’s development challenges are expensive to fix and that there is not nearly enough international aid and philanthropic money to adequately finance solutions. As a result, we must find ways to mobilize a portion of the world’s $210 trillion in commercial capital toward these issues. On this, we could not be in more emphatic agreement.

Our disagreement is centered on how to catalyze a shift in large, commercial pools of capital. The authors cite rural energy access as an example of a market where “social success notes” could be useful. The premise behind “social success notes” is that philanthropic institutions would provide “impact payments” to subsidize investments in social enterprises. For example, if a social enterprise were to hit a particular impact target (e.g. number of households served), the contingent payment would be triggered, thus improving an investor’s financial return. If all goes as planned, the authors suggest, “it’s a win-win-win: Investors receive a risk-adjusted commercial return, thanks to the impact payment; foundations achieve far greater leverage for their philanthropic dollars while achieving a desired social outcome; and social businesses receive access to low-cost capital, allowing them to focus on improving the world without the pressure of offering market-rate financial returns.”

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Expanding our capacity

One of the most important lessons that we have learned over the past two years in building Ceniarth is the value of focus and expertise.

While we began with a broad, opportunistic lens exploring a variety of underserved markets and social challenges, we quickly realized that if we sought to have real, sustainable impacts, we needed to build deep domain expertise in the complex, frontier market value chains in which we planned to intervene. We had observed too many generic impact investment firms and family offices that were focused primarily on executing deals to complete an investment portfolio allocation, as opposed to the more intensive work of evaluating how to do the right transactions to catalyze the growth of particular market ecosystems.

We are committed to this more rigorous path of impact. In that pursuit, we have been acting to add talented, experienced professionals that bring domain expertise to our current program areas. Harry Davies joined us earlier this year and is spearheading our Agriculture initiatives. With a masters degree in Development Economics, Harry had spent two years in Malawi working on private sector development issues pertaining to rural and agricultural finance. In addition, he previously work for Adam Smith International where he supported DFID, USAID, and World Bank funded projects in Kenya, Nigeria, Somalia, Democratic Republic of Congo, and Nepal. Harry is now actively building our pipeline of agriculture opportunities with a primary emphasis on asset finance transactions.

We are also very proud to announce that, as of this month, Mary Roach has joined our team to lead our work in Energy Access. Mary is well known to many in the Energy Access community through her previous work at the GSMA where she was a Senior Programme Manager for the Mobile for Development Utilities (M4D Utilities) Programme. Mary was responsible for the group’s Innovation Fund that provided critical grant support to organizations across developing Africa and Asia that leveraged mobile technology to improve access to energy, water and sanitation.

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Our latest PRI: Evidence Action’s Dispensers for Safe Water

The philanthropic and social investment world is filled with examples of good intentions gone awry and counter-intuitive outcomes. Consequently, we believe that evidence-based strategies and decision-making are critical. Without credible and transparent evaluations to assess outcomes, it feels nearly impossible to know if funding or investments are making a genuine difference. This is particularly true in fields such as healthcare and education where a myriad of variables can impact outcomes and where proper research carries with it a host of challenges. Our latest program related investment (PRI), Evidence Action’s Dispensers for Safe Water project, is an example of how sound, evidence-based solutions can be scaled.

The Problem
According to the World Health Organization (WHO) 2.5 billion people lack access to improved sanitation, 1 billion people practice open defecation, nine out of ten in rural areas, and an estimated 1.8 billion people use a source of drinking-water that is faecally contaminated.  Diarrheal diseases are the second leading cause of death in children under the age of five and one of the leading causes of malnutrition. The vast majority of these cases can be directly attributed to poor water, sanitation and hygiene.

Given this, there is an urgent need for sustainable, effective, low-cost water treatment services, especially in rural areas. Growing safe water solutions so that they reach millions of people has been a challenge due to cost, compliance, and other logistical challenges.

Proposed Solution
Evidence Action is a young organization, founded in 2013, scaling rigorously-evaluated interventions so that they are reaching millions of people. The organization looks to “fill the gap between knowing ‘what works’ and having impact at scale.” Evidence Action does this by developing business and operational models for interventions that have been rigorously evaluated. . The organization has already received praise from funders that we respect. Evidence Action’s Deworm the World Initiative was selected by GiveWell as one of its top global programs. The rigorous GiveWell process identifies charities that deliver the greatest marginal human benefit for every dollar deployed.

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Impact or Investing: There is a choice to make

Later this week, I will appear on a panel at Confluence Philanthropy’s annual practitioner gathering. The ambitious, yet ambiguous title of our session is, “The Values Discussion Every Mission Investor Needs To Hear.”

The description of this session claims that there is a “growing creative tension in the discipline of values-aligned investing” centered on “the nuanced difference between the tried-and-true methodologies of SRI/ESG investing and direct investing for impact.” Our goal as a panel is to address two fundamental questions:

(1) Is there a difference between SRI/ESG investing and direct investing for impact; and
(2) Do investors need to make choices between these two methodologies?

These are questions that we, at Ceniarth, have spent significant time reflecting on this past year.

First, is there a “nuanced difference” between SRI/ESG investing and direct investing for impact?

Absolutely. The difference is not nuanced, it is categorically complete. In fact, we believe that lumping these two different disciplines under the same broad practitioner’s umbrella called “Impact Investing” is a significant source of confusion and stasis in the industry.

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Tackling complexity with programmatic approach

In order to pursue our mission of scalable solutions to the world’s big challenges, we have come to believe that we will need to be more focused and systematic in our activities. This may sound like a trivial, simple conclusion to reach, but for organizations like ours with significant flexibility, drawing boundaries can often feel unnecessarily limiting.

Our self-imposed focus is rooted in the recognition that sectors such as Energy, Agriculture, and Healthcare require genuine system-level approaches to solutions. Operating opportunistically without deep knowledge of ecosystem dynamics can lead to counter-intuitive or disruptive outcomes. This is especially true in markets where commercial, concessionary, and philanthropic capital is converging.

By developing specific program areas and internal expertise, we hope that we will able to more responsibly intervene on complex challenges. We will hire program managers tasked with developing comprehensive knowledge of opportunities and obstacles in a given sector and challenged to propose a variety of interventions using both investment capital and philanthropic capital (grants and PRIs).

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Reflections on our mission

As a brand new organization, 2014 was a year of exploration and learning for us. Taking a broad and opportunistic perspective, we engaged in a variety of transactions across a number of sectors with varying risk and impact profiles. These investments, PRIs, and grants gave us insight into the wide range of interventions that we, as an office and foundation with flexible capital, can pursue. It also gave us an appreciation for the complexity of the problems in sectors such as energy, agriculture, and healthcare that we hope to help solve.

Our engagement with a diverse set of investors, philanthropists, entrepreneurs, and grassroots organizations also led us to reflect on our core mission as an organization. With the growing popularity of the impact investment field, it is easy to begin believing that “investing” itself is the goal. There is an allure to the implication that one can invest to solve the world’s most challenging social problems and, in doing so, can earn a market rate return.

We have come to believe that the reality of the world is not that simple. Acknowledging the complexity of the sectors and geographies where we aim to intervene and the tensions that exist in attempting to invest money in challenging problems, we have come to a strategic, reformulation of our mission and our plan for execution.

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