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GUEST ARTICLE: Building Bridges In Thinking About Impact Investing - Part 10

Benjamin Bingham

17 September 2018

In a series of articles, a prominent US figure in the impact investing space explores how to pull together disparate ways of thinking about the world to show how this model of managing money should be addressed.

This is the tenth instalment from author, Benjamin Bingham, CFP, founder and CEO, 3Sisters Sustainable Management. He is the author of "Making Money Matter/Impact Investing to Change the World" . His previous essay in the series can be found here and an item introducing Ben can be seen here. As ever, the views of guest authors are not necessarily shared by the editors of this news service and we invite readers to respond. Email tom.burroughes@wealthbriefing.com

Impact lessons learned
Impact investing can become synonymous with good management over time if we learn from our early mistakes. One classic case that serves well to highlight important lessons is the poster child of early impact investors: E&Co: a pioneer in emerging markets small-scale renewable energy projects. In full disclosure, I have served for the last few years as a representative of the minority E&Co investors in an advisory capacity, overseeing the winding down process along with some of the largest institutional investors in the world who shall remain anonymous. 

Our proprietary fund had taken over a small legacy investment from an earlier fund, and at first we believed it to be a sound investment, though a low yield at 3 per cent for 10 years that we would never do again. They were making regular interest payments, and had a great reputation still for global small scale renewable energy projects. We liked their stories until reality hit.

A lawyer and board member, as a fiduciary, decided to inspect the books and found that of the $50 million or so invested, many of the loans were non-functioning and that principle and interest payments were being paid with new money. The star-studded board and management team had been, and continued to be, very effective in drawing the first wave of impact investments, but they had grown too fast, had spread themselves thinly around the globe and apparently had lost control. This Non-Governmental Organization, if it were a for-profit business, would be a candidate for bankruptcy. If it were a fund overseen by regulators it would have been in trouble.

Because E&Co was an NGO and was not a fund with management that could be fired, there were three options this board member could see. He reached out to the investors and informed them of what he had discovered and that the options he saw were:

1. To continue as is with the hope that things would change; or

2. Write off the investments and shut down the NGO; or

3. Solicit 100 per cent approval by investors and, if successful, put in place a new management team to manage the wind-down of every investment made by E&Co.

The fact that the third option was 100 per cent agreed upon, and the board member led this wind-down effort salvaging about 60 cents on the dollar, is a tribute to his mostly pro bono leadership. Although some may complain of a conflict of interest or see this as a hostile takeover, it was not a financial home run by any means, but rather a well-managed process using outsourced services in South and Central America, Asia and Africa.

At regular advisory board meetings, we heard one story after another where investees claimed their belief that the money had come in the form of a grant and no one had ever expected to have to repay it! In the case of a small hydro plant in Tibet, the collections manager was threatened with being shot and killed if he ever came near! This was hardly what any impact investor would have imagined!

In some cases, legal action was required to force the resumption of payments. This was very intense work and great credit goes to the collection services for the final outcomes, which were better than expected.  In our case, as investment managers, we had written off 50 per cent of the value of the remaining principle as soon as we heard what was going on, so the 60 per cent recovery on our recent books looks like a win.

So how did this happen and what are some of the lessons learned? Here are a few:

-- Only invest directly in an NGO if the management team has both vision and commercial experience; and if you stay engaged as an advisor, and, if it is an equity investment, require a board seat;  

-- Unless the investment is purely philanthropic, make sure the interest rate, or return expectation, matches the risk taken and that the outcome in terms of impact and the financial return matches the time you are prepared to wait;  

-- If you decide to go ahead, form an Investment Council with other co-investors who can oversee the NGO and support it both in business terms, but also in terms of monitoring and evaluating impact; and 

-- If it is a loan, make sure the collateral is collectable and will not lose value. 

These are some of the hard lessons learned and are examples of the growing pains that are an essential part of any pioneering initiative. Without the vision and enthusiasm of the original managers and investors many worthwhile projects would never have occurred. The fact that even in such a complex maze of investments a successful wind-down could be achieved is comforting. 

The reality is that, like any traditional investors, impact investors will probably continue to make some mistakes. But if these lessons are taken seriously, and impact investors demand rigor and intelligent structuring of their investments then, over time, impact investing will be considered an essential best practice for all fiduciaries to expect and demand.