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A Growing Focus on Impact

| December 01, 2017
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THE SUSTAINABLE INVESTOR

An investment alternative for a rising rate environment

Two weeks ago, I trekked to an unlikely hub of social impact activity: Washington, DC.  I was delighted to spend two days with some remarkable and passionate people who are helping bring some truly high-impact investment opportunities to investors like those at Boardwalk Capital.  This note is to highlight some of these opportunities, the difference they are making in the world, and their role in an investment portfolio.
 

The Evolution of "Microfinance"

A few decades ago, it was a far-fetched to think that one could make small loans to entrepreneurs in emerging countries and get paid back (with interest!)  Today, this doesn't seem so crazy at all, and the microfinance sector has a proven track record of lifting scores of people out of poverty -- while providing competitive returns to investors.

As capital has flowed to these lending institutions, efficiencies have grown andborrowing costs have declined -- further benefiting these borrowers.  Likewise, a microfinance fund available to investors in 2017 has evolved, branching out to include impact segments such as trade finance, education, health clinics, market access for artisans and small farmers and even solar lighting.  Each of these segments, and many more, have both a need for capital and the ability to improve lives.  This creates an opportunity for institutions who can also do so profitably.

 

Portfolio Considerations

With investors a bit squeamish about the possibility of rising interest rates, the bond market has not been the place for the strongest fund inflows.  Investors have been somewhat reluctant to lengthen their portfolio maturities to pick up yield...

This creates an interesting opportunity to consider impact investments in the form of notes and partnerships that invest in short term loans.  For the portion of an investor's portfolio that can be "locked up" for a few years (since many of these investments do not have trading liquidity), yields are generally competitive with government and corporate notes.  Their illiquidity, and the short time-to-maturity of their investments, make these a relatively stable component of a portfolio.

It's worth noting that, while government and corporate notes carry credit ratings from well-known agencies, impact notes and partnerships do not.  What they lack in rating clarity, they try to offset an unblemished record with investors and through innovative structures.  

Many of these investment partnerships are structured more like a bank, with reserves, or "catalytic  capital" from  foundation, that insulates investors against the first wave of credit losses.  
 

Some Specific Insights

The credibility of an organization is based on their long term track record in this space, the quality of their team, their level of due diligence and their access to the best local partners.  From hundreds of offerings around the globe, Boardwalk Capital's role is to discover, interview and evaluate these potential investments.   

We then attempt to negotiate the best terms for our clients. 

  • Can we pick up yield by bringing groups of investors, or by committing to longer terms? 
  • Can we get lower minimum investment levels, allowing us to better diversity our clients' portfolios?
In the end, we're looking for quantifiable social impact, coupled with financial return potential that is commensurate with the risk being taken, and matching these characteristics with with appropriate investors.

One such organization that meets these criteria isMicroVest (MV), based in Bethesda, Maryland. MicroVest has been investing for impact since 2003.  They call their work "Purposeful Investing", providing private capital to financial institutions that in turn make loans to entrepreneurs in developing communities. Since their inception, MV has disbursed more than $1bn to clients around the world while also earning competitive returns for their investors.

We are actively working to bring some members of the MicroVest team to an event in Atlanta, Georgia in February 2018, along with other peer companies in this sector. We'll keep you posted.

 

Other Worthy Ideas - Still in Early Evaluation Stage

As you may have read, Boardwalk clients have been investing in organic farmland, solar financing and in other impact notes.  On the horizon may be even more interesting fare that I briefly outline below:



North Sky Capital -- Clean Technology private equity.  North Sky has been a leader in this space for nearly 15 years.  Focused on proven technologies in segments such as Water, Renewable Energy, Energy Management and Storage, Sustainable Agriculture.  They will be launching a new fund in 2018.
 

Global Partnerships -- A non-profitorganization offering senior notes and catalytic capital investments for investors wishing to support diverse impacts, from financial literacy to sanitation and health.  Notes from one to ten years to maturity.
 

 
Shared Interest -- Providing capital to support lending to small businesses and farmers across Southern Africa since the end of the Apartheid era.

 
EcoTrust Forests -- EFM's unique approach to timber management captures a wide array of funding sources, from tax credits, carbon credits, conservation easements, etc. while managing sustainable forests with FSC certification and delivering attractive returns to investors.

And those are just a few. 

We welcome your thoughts and comments.

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