Clearly So’s Schwartz: "Impact Investment can drive profit"
Rodney Schwartz, challenges the notion that impact investing funds are less profitable than traditional investment funds, and proves that there is much promise both economically and socially for these funds. He delivers his speech at the Wealth and Socity 2018 held at the United Kingdom last November.
Here is the transcript:
Thank you very much for this and thank you very much to the Asian backer for having me here. I’m just going to try to set up the panel and I found that when I’m a speaker it’s a very good idea just to do what you’ve been told to do, so this is what I’m gonna do and this is what they told me to do. So, it all fits together.
I’m gonna talk about innovative financing mechanisms within the impact investment space. I’m gonna talk about some of the more creative investment vehicles that we’ve used, although I think, actually, some of the more mainstream and standard vehicles can be quite effective. I’m gonna spend, also, a lot of time talking about some case studies because I think theories are really boring. Anybody who’s ever sat in a university classroom knows that. People like to talk about cases and anecdotes, etc. I will spend some time talking about … a commercial message. And standard questions …
This is the figure that’s now being used by the Global Impact Investment Network. They say that there’s now 228 billion dollars that are invested in the impact around the world. That does feel and sound like an awful lot of money. It certainly sounds like a lot of money to me. But I think that when you look at it in the context of what’s actually managed locally, it’s really pathetically small. The little thin, that line there that’s orange that you might not even be able to make out is what the 228 billion represents as a percentage of globally managed assets. It’s a really small, really, really, small number. That’s our challenge. Our mission is to bring up that goal investment. You can see in the blue what our challenge is as to be so.
People tend to think about impact investment as something that is not quite as good as regular investing, and somehow that people are making some sort of sacrifice when they do it. But I don’t believe that that’s the case. Surely, there are sometimes tradeoffs that you have to make, but one of the things I want to spend a moment is some of the good things that companies that generate impact have going for them, and that under … market where, obviously – sorry, I forgot about this. Going from the 228 billion to the figure of 115 trillion is going to be driven a lot by how we deliver on these sustainable development goals. It’s estimated that the 5 to 7 trillion dollars each year to achieve those totals. Actually, that’s what’s going to, I think, really generate some of the growth in this field.
Now, the point. There are some tailwinds which make impact investment work, which not everybody appreciates fully. One is that impact entrepreneurs or impact funds have a certain legitimacy and moral authority that pretty much everybody has lost: politicians, business leaders, media types. If you think about it – with the clergy? If you think about how many people have been leeching moral authority if you even have a group of people that have it, and there’s a value to it. Think about Anita Roddick, the deceased Anita Roddick, and how little money Body Shop had to spend on advertising. There’s a real value in having that.
Secondly, superior access to the talent labor pool. There are organisations like ours who are able to actually get people to work there and sometimes may not pay as much as they do the mainstream. That’s – when I was running Neiman’s equity business there was nobody who would come to work for us at low market rates, but I think impact companies have the ability to bring people in because they value something else. A bit like we all value impactful products.
I’ll do the test. How many of you in the audience have ever bought a fair trade product or regularly buy fair trade products? Almost all of you raised your hands. But you’ve actually acted in an economically foolish manner because you bought something that cost, on average, about 27 percent more than it should. There are no health benefits. There’s nothing about the product that necessarily will taste better, if it’s a coffee or chocolate. You just paid more for that because you value the ethical principles embedded in that product. When you as a company could sell you product just because of the ethical principles it embodies at a higher price you have something good going for you. That’s an important underpinning to this market.
And you have access to attractive capital because investors, like you all with your money, are starting to value impact. It’s these factors that I think gets impact investment going.
Very briefly, and clearly so, I promise to keep the commercial message short. We’re in the middle of transactions between applying impact enterprises on the one hand and capital on the other. We are just an investment bank but at least I feel a little bit better because I can say we’re an impact investment bank. That’s a lot nicer to say than all the other things I used to do in investment banking. We work with enterprises, help to raise capital. We act as intermediary and in particular we work with impact funds.
There are three types of organisations we work with. Growth enterprises, which are, as you might expect, early stage growth enterprises. That represents 80 percent of the transactions we’ve done. We’ve done more transactions than any other impact intermediary in Europe, about 165. Eighty percent in the growth enterprise area, but that probably represents only 20 percent of the capital we’ve raised over time.
Then there are some larger, more mature organisations. Some of you may know some of these names in the middle. These companies need sophisticated corporate finance services and don’t get them from the mainstream investment banks. That’s probably maybe 15 percent of the transactions we’ve done. It represents probably 30 percent of the capital we’ve raised. We’ve raised almost a quarter of a billion pounds.
Then we do work with impact investment funds, anywhere from 5 million up to 200 million pounds. That represents about 9 percent of the transactions we’ve done, but about 50 percent of the capital we’ve raised.
These three type of impact intermediaries that we help issue … and this is where we get the money. We get the money from individual investors, ... individuals or what you might as well just describe as rich people. The FCA restricts us from asking the person in the street for money, so we’ve had to focus on that for our growth enterprise business.
Then you can see institutional investors on the right. I know you can’t quite get all the colors, but one of the things that’s really interesting, you’ll see the second bar down from the top, the darkish blue? That represents PE and VC firms. Not impact firms, but just moral, mainstream PE and VC firms. They are by far and away the fastest growing bit of our investor client base because they really like impact companies. They think they can … into the aftermarket where they get to sell these assets, they’re growing faster. And actually, people who work at these companies like to be involved in companies like this. That’s just the way it is.
And we work the crossroad. End of commercial message.
Now, let me talk about some of the vehicles… As I said, some of these companies that we secure backing for are benefitting from very conventional types of financing. And IESO is an example of that. I think it’s a pretty poor name. It used to be called Psychology Online, so you kinda know what they do, now. I don’t know what IESO means. But it’s a really successful investment for our Asian investors. It was straightforward equity and this has been rated in terms of valuation more than a 10X. I never thought it would work in a place like the United States but it’s working in the United States; it’s certainly working in the UK, where mental health service provision is clearly inadequate. That’s one example of the sort of organisation we might work with.
This is a bit better known. How many of you heard of Bold Energy? You all need to go out and become customers of Bold Energy. They’re the, probably, fastest growing energy company in the UK. They provide 100 percent renewable energy, are number one in trust pilot for energy provision. They did a round of equity and debt. I can’t give you – I’m not allowed to give you the exact percentages I’m so sorry that’s client confidential information, but it’s 26 million total. The investors who were all offered equity thought they were getting a ridiculous price because the post- money value was 60 million, 6-0. They have just done financing recently in the last few months at a closing evaluation of 411 million. Either the price is more ridiculous now or it wasn’t so ridiculous in the first place. Even though they’re a company with, obviously, really fast growth and not profitable we were able to work with them since they were debt-financing. From a perspective of financial institutions, valued now at 411 million, it just raised to 60 million.
I mentioned, also, that we work with impact funds. The first two examples I gave you were entrepreneurs, one using equity, one using equity and debt, and similar complexity in financial structure there. We’ve also worked with firms like Palatine Private Equity. I don’t know if any of you have heard of Palatine, but Palatine is a Manchester based, normal PE firm. There’s nothing unusual about them except that the people who work there don’t just want to get as rich as possible, which makes them unusual, I guess, in the private equity industry.
They came to us and said, “We’ve done four funds, they’re really successful, and we would like to do an impact fund but we don’t know that much about impact. Can you advise us on which sectors to invest in? Can you give us some examples of companies we might invest in those sectors?” They’ve already started investing and on the right here are two of the companies they’ve started to invest in. But they’re also investors getting a mainstream return, or close to a mainstream return. They’re targeting 15-20 percent ROI. Which is below the big time but not far below a big time in the past.
We think that that was the first mainstream product equity firm to do an impact fund and we think there’s gonna be a lot more examples of that. In fact, we know there are already … invest managers, a partners group in Switzerland, and you’ll know of a lot of others. This is one example.
But the first example, and my colleagues from Big Sky Capital will know about this, the first example of a kind of fund organisation that started to seek proper or market rate financial returns was Shahaz … Not a great picture of him; those of you who know him just apologize to him on my behalf but that’s the best one I could find. Shahaz was one of our angel investors and he got really excited about this thing called impact. He said, “Hey, you know? I’m gonna do something in this space.” He was a hedge fund trader at CHIN Capital. He said, “I think we can make property investments with impact and give people a 12 percent return.” There was some support from BSC, but with a lot of support from other people he raised 250 million pounds or thereabouts. The last I checked with him he says he’s investing it very, very successfully. Quite interesting. This is a property-backed impact investment fund generating good returns with low risk or allegedly – or reportedly generating good returns with low risk.
I’ll close on this one, which is my favorite example because it actually led to the formation of Clearly So, so it’s always been very important to me. I think it follows on well from the theme of the last session, which is about women entrepreneurship. Who’s heard of Just Kidding? Great. Just Kidding, for those of you who don’t know, is the global leader in charitable giving online. It is much larger than everybody else who does that in the world put together. I had the great privilege to meet the two co-founders of this business, the two women co-founders of this business, which also makes it unusual, back in the early 2000s. I’m privileged for being able to become chairman of that company back in 2003. I have experience with a bunch of charities, which I found really frustrating and depressing. What I found really great was how these two women were able to take the entrepreneurial vigor of company organisation and turn it into a really great investment. People who invested at that time had a valuation of 5 million. It seemed ridiculously high, but it sold last year for 100 million. Again, it looked like the Bold example.
But secondly, and I think at least as importantly, this company raised 6 billion dollars, at least, for charities around the world, and also changed the cost structure for charities in terms of their giving. I could not imagine – I never had a more successful investment and I, sadly, didn’t invest very much. But I cannot fathom a more impactful investment and Clearly So was founded to create a …
Keywords: High-net Work Individuals, Social Responsibility
Institution: Clearly So
People: Rodney Schwartz