Topic : Credit Suisse - Impact Investing Questions 1. What is "impact investing"? What distinguishes it from societal value creation through the usual market approaches supported by traditional investing? 2. Why was setting up an Asian impact investing fund an interesting opportunity for Credit Suisse? How would you describe the investment strategy for the new fund? 3. What challenges did Joost Bilkes face in launching an Asian impact investing fund within Credit Suisse? How has he tried to overcome these challenges? 4. See through a financial lens, what are the strengths and weaknesses of the two investments being evaluated? Which one looks more promising? Why? 5. Seen through a social impact lens, what are the strengths and weaknesses of the two investments? Which one looks more promising? Why? 6. Taking into account all aspects you consider relevant, would you recommend Credit Suisse pursue neither, one, or both of the investments? If constrained to pursue exactly one, which one would you recommend? Why? 7. What suggestions do you have for Joost Bilkes and his team to ensure their impact investing portfolio achieves significant social impact? Formatting: 4-5 pages approximately - well written (grammatical and ideal). Avoid generalization and passive voice use active voice. double-spaced, Times New Roman, 12-point font, and 1-inch margins. 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Communicate -- with clarity, accuracy, and fluency -- the results of a scholarly or creative project through publishing, presenting, or performing, employing highly-effective conventions appropriate to the audience and context. writing skills: Style Organization Content Category Criterion Exemplary Approach to subject matter Original, logical approach to topic that acknowledges complexity and/or ambiguity; sustained, consistent analysis Development of primary ideas Main ideas well-defined and developed with depth and thoroughness Use of evidence Evidence is germane, critically evaluated, and convincingly interpreted Introduction Engages reader as it develops focus and purpose Sequence and development of paragraphs Logical, coherent sequence of paragraphs demonstrating clear analytical development; fluid transitions between ideas Conclusion Sums up main ideas and points to larger implications or places ideas in broader context Grammatical norms Consistently uses standard spelling, punctuation, and grammar Research Category Criterion Exemplary Diction Thoughtful, clear word choice Voice Writer’s unique sensibility revealed Sentence clarity and conciseness Clear, vigorous, concise sentences Choice of sources Number and types of sources thoroughly address topic Integration of sources Source material thoughtfully and smoothly integrated Documentation of sources Consistently uses standard documentation procedures in text and bibliography For the exclusive use of A. Alghafees, 2018. IN1406 Credit Suisse: Building an Impact Investing Business in Asia 10/2017-6320 This case was written by Jasjit Singh, Associate Professor of Strategy at INSEAD and Academic Director of the INSEAD Social Impact Initiative, and Joost Bilkes, Head of Responsible and Impact Investing for Asia Pacific at Credit Suisse. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This case includes some copyrighted materials kindly shared by Credit Suisse for use in the case exhibits, and the authors gratefully acknowledge Credit Suisse’s permission to use these. Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu. Copyright © 2017 INSEAD COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER. This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. Joost Bilkes was the Head of Responsible and Impact Investing for Asia Pacific at Credit Suisse (CS). His role involved designing solutions to expand CS’s impact investing business. Among other things, Joost managed CS’s role as an “impact adviser” for the new Regional Impact Investing Fund (RIIF) he had helped CS set up in Asia in 2014. 1 Looking back in the spring of 2017, Joost had reason to be proud of what had been achieved in the last three years. But many challenges lay ahead in building a robust portfolio, and in achieving a “double bottom line” combining ambitious financial targets with a substantial social impact. For now, as he evaluated two new investment opportunities needing a decision on whether to proceed to detailed due diligence, he wondered how to proceed on these. Impact Investing at Credit Suisse By 2017, the impact investing space, while still relatively small, was becoming increasingly important for investors keen to support sustainable market-based solutions for critical societal needs (Exhibit 1). As one of the most reputable global banks, CS sought to be a leader in this arena, especially given its growing prominence among its ultra-high net worth clients. CS’s impact investment funds sought positive social and/or environmental benefits in a way that would not require a compromise on financial returns. Its focus was therefore on opportunities where financial performance and impact were mutually reinforcing, rather than impact being either just the by-product of an investment or the result of a cross-subsidy model (Exhibit 2). Impact investing at CS originated with its pioneering role in the microfinance sector since its early days (Exhibit 3). In 2002, it had co-founded responsAbility Social Investments AG, an asset manager specializing in development-related funding in emerging economies. In 2008, it had launched the Microfinance Capacity Building Initiative to further build capacity in the financial sector – collaborating with other major players like Accion, FINCA, Opportunity International, Swisscontact, and Women’s World Banking. Over time, impact investing at CS grew beyond microfinance, in ways such as the creation of the first Higher Education Note (2014) and the first climate-neutral real estate fund in Europe (2015). The bank had won many awards for its impact-related work, such as the FT/IFC Sustainable Bank Award (2012) and the Environmental Finance Deal of the Year Award (2014). As of 2017, CS’s impact investments involved over USD 3.3b in assets, with close to 5,000 clients invested. Launching the Regional Impact Investing Fund (RIIF) in Asia After brief post-MBA stints at UBS Investment Bank and Westpac in Australia, Joost had joined CS in 2006. After several years in the global fund analysis division, including being promoted to head the bank’s fund platform for Asia-Pacific, Joost felt the urge to make a bigger difference in the world by extending CS’s impact investing activities globally. In Southeast Asia and China, unlike in India, Africa, and Latin America, not many impact funds financed expansion capital opportunities in the USD 2m-10m range through a commercial approach to impact investing. Joost saw this as an opportunity. By 2014, he had won support from CS leadership to set up an Impact Advisory Team (IAT) in Asia – under 1 The fund name and some related information have been disguised for confidentiality. Copyright © INSEAD 1 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. Bernard Fung’s broader Wealth Planning Services division – composed of talented internal staff and impact investment experts from outside. In addition, the team in Asia could learn and draw from the global impact investing resources CS already had. Joost attributed the relative scarcity of Asia-focused impact funds financing growth of small and medium size enterprises (SMEs) not as much to the paucity of investment opportunities as to the regional funds being small in size and focused on smaller transactions of less than US$2 million. Many of these funds invested in social enterprises whose business models were not commercially proven yet. This not only made it hard to cover such fund’s fixed costs but also involved lower financial returns, greater financial risk, and the need for more intensive management support. Such “concessionary” funds therefore involved a financial compromise for achieving impact, an approach that seemed impractical for CS’s existing client base. Joost recognized that any CS impact fund in Asia would need to be compelling from a traditional portfolio theory point of view, meeting its high expectations for attractive riskadjusted financial returns. So the focus would have to be on “win-win” deals involving businesses that could create “shared value”. Joost believed that the scalability of impact would be higher if the impact was achieved as a natural part of the commercial portfolio rather than as an add-on disconnected from the discipline of running a profitable business. After extensive research, CS formed an alliance with a regional growth-stage investment manager called the Asia Private Equity Group (APEG). Together they set up RIIF, with APEG serving as the investment manager and CS as the “impact adviser”. APEG was affiliated with a major Asian banking group, giving RIIF access to the pool of over 500 transactions a year that originated in APEG’s branch network - an efficient starting point for sourcing financially attractive deals with a high impact potential (Exhibit 4). Joost also strengthened the Asia-specific impact investing capabilities within CS, including bringing in Noah Beckwith, a renowned expert with 20 years of experience in developmental finance. RIIF’s geographic focus was on China and selected ASEAN countries: Indonesia, the Philippines, Thailand, Vietnam, Cambodia, and Laos (Exhibit 5). China and Indonesia were expected to account for up to 60% of the investments. These deals would involve SMEs, with a likely size of USD 2m-8m (possibly split over tranches). Given the smaller amounts relative to traditional investments, making the economics work required a lean and efficient operation. RIIF’s investment strategy was to focus on companies whose social impact was intrinsic to their profitability and growth: SMEs that could improve the lives of people living at less than USD 3,000 a year. Their business models had to involve a core engine involving individuals from the so-called “base of the pyramid” (BoP) as consumers, producers, distributors, and/or employees. The priority sectors were agriculture, healthcare, education, clean and renewable energy, sanitation, water, access to finance, and affordable housing. Joost had sought RIIF to be around USD 50m in size: anything smaller would be unviable, and anything larger would involve more investees than could be reasonably managed. In line with its target, RIIF managed to attract USD 55m by 2016. The largest source (71%) was CS’s ultra-high net worth clients (50% Asian, and 21% Europeans with Asian assets). The remaining sources were CS staff (12%), APEG’s corporate parent (7%), and institutional investors like pension funds (10%). Many of CS’s clients were rich entrepreneurs interested in Copyright © INSEAD 2 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. investing in SMEs. CS saw particular interest from foreign-educated millennials from leading business families, eager to employ impact investing as a strategy for making a difference. A fund size of USD 55m was small relative to the mainstream investing funds that financial institutions like CS operated. Therefore, to ensure that he still had buy-in and support within CS, Joost pitched the fund internally not as much as a major commercial undertaking in the short term as a launching pad for two bigger opportunities. First, the experience would help CS build expertise and reputation for becoming a leading impact advisor for high net worth clients in Asia, possibly helping them manage private impact investing portfolios. Second, the learnings from RIIF would be as a competitive advantage for CS in launching bigger funds in future as impact investing became more mainstream and the overall ecosystem matured. RIIF was formally set up as a seven-year private equity fund, with a target internal rate of return (IRR) of 20% per annum on a gross basis. In addition to an annual management fee of 2% of assets under management, the fund would retain a bonus calculated as 20% of the extent by which its realized returns exceeded a hurdle of 8% per annum. By mid-2017, seven investments had been approved, and two or three more deals were expected by the year’s end. The RIIF Investment Process 1. Transaction Sourcing and Screening APEG had a rich pipeline of commercially attractive deals, thanks to its vast network in Asia. This helped source opportunities that also fit with RIIF’s impact goals. In complementing APEG’s screening on potential impact, the IAT sought advice from an “Impact Advisory Council” (IAC) consisting of an independent panel of experts - with skills relevant for impactrelated issues in general and BoP-specific aspects of any transactions in particular. Building impactful business models that would also scale and deliver market returns was hard. Nevertheless, the IAT’s strategy was clear: any opportunity that did not hold significant builtin impact was not to be considered irrespective of its financial attractiveness. Promising APEG leads that passed the IAT’s initial impact screening were documented in an “Exploratory Memorandum”. This included an assessment of the business and the financial opportunity as well as its fit with RIIF’s impact strategy and requirements (Exhibit 6). Every such memorandum included an attachment called a “Transaction Eligibility Matrix” (TEM), which recorded responses to a list of impact-related questions (Exhibits 7a and 7b). As SME strategies could easily change if the founders succumbed to commercial pressures or pivoted to pursue new ways of monetizing their ideas, special attention was paid to understanding the motivation and commitment of an investee’s management regarding their BoP engagement. 2. Due Diligence If satisfied with the initial review, the IAT would work with APEG for a comprehensive due diligence. The APEG team focused on traditional venture capital factors, such as countryspecific political and macroeconomic context, sector-specific considerations like market potential and competitive landscape, and company-specific factors like management team and competitive advantage. The IAT supported them in this process by helping them evaluate Copyright © INSEAD 3 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. different risks (management risk, execution risk, market risk, financial risk, and regulatory risk) as well as adherence to relevant environmental, social, and governance (ESG) standards. However, as RIIF’s impact adviser, the IAT’s most critical role was evaluating how well an investee could deliver on RIIF’s impact-related goals. This involved multiple dimensions: x Impact alignment: To ensure that financial returns and impact grew hand in hand, the IAT looked closely at the proposed commercial route to impact, ensured clear processes to manage and measure impact, and evaluated whether the model might also bring wider transformational benefits through innovation and/or replicability. x Growth with BoP engagement: The considerations here included how robust the BoP engagement was, how well the business model could be scaled up and/or replicated with a continued BoP focus, and whether the BoP engagement could avoid crosssubsidisation and other trade-offs for impact that might cause tensions in the model. x Improved efficiency and innovation: Here the IAT evaluated how RIIF could help improve efficiency or innovation related to BoP engagement (e.g., by redesigning the value chain, improving access to markets, utilizing resources effectively, building BoP consumer demand, introducing innovations around access, price, or financing, etc.). x Monitoring and evaluation: Here the IAT examined existing or potential mechanisms for monitoring and evaluation of an investee’s social performance and the investee’s openness to adjusting its strategy in response to IAT feedback from this. 3. Investment Committee Approval and Deal Completion The findings and investment recommendation from the due diligence stage were documented in the form of a comprehensive “Investment Memorandum”. This memorandum was then circulated among members of the “Investment Committee”, comprised of leading experts whose approval was necessary before any deal for RIIF could be finalized. In additional to business analysis, the circulated information also included the findings a deal’s impact potential. This included likely economic indicators (e.g., job creation, increase in incomes, increase in employability, etc.), inclusion-related indicators (e.g., access to essential products and services, gender equality, social inclusion, etc.), and environmental indicators (e.g., reduction in environmental damage, efficient use or conservation of natural resources, etc.). If and when a deal was approved by the Investment Committee, the process proceeded to a formal agreement being signed with an investee. An important aspect of the negotiation at this stage was agreeing on a valuation for the company. Unlike in mature companies, detailed and reliable cash flow projections that could allow comprehensive financial valuation frameworks (such as a “discounted cash flow” approach) were rarely available for SMEs that fit the RIIF profile. Therefore, the valuation often involved analysis based simply on relevant comparables and sector benchmarks. The deal could be structured in various ways depending on the specific situation, including as equity, debt, and hybrid structures like convertible debt. 4. Value Addition and Portfolio Management RIIF supported its investee on various dimensions, such as financial management, marketing strategy, product development, supply chain management, organization building, and IT systems. There was continual monitoring of metrics around fiscal management, HR Copyright © INSEAD 4 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. management, corporate governance and ESG performance. The fund provided full transparency to its investors through investor meetings and field visits for interested parties. Evaluation of impact included a wide range of factors, such as product access, job creation, connection to markets, quality of employment, upward mobility, security, empowerment, and gender equality. Where relevant, RIIF drew on recognized standards – such as the Impact Reporting and Investment Standards (IRIS) and the Global Impact Investing Rating System (GIIRS). In focusing on a few key metrics, the CS team was also mindful that SMEs should not be overburdened by measurement. A portfolio-level impact assessment was carried out on a semi-annual basis, to be complemented by an in-depth annual report providing quantitative and qualitative analysis of the impact. The first such report was to be published by end-2017. 5. Exit Evaluation of exit opportunities at RIIF would involve not only financial considerations but also a quest for continuity in terms of preserving and expanding a company’s focus on impact. Exit strategies were likely to vary with context – such as an IPO, a sale to a strategic buyer, or a sale to a mainstream investor. But it was too early to tell how RIIF’s exits would work out. Evaluating Two New Investment Opportunities In the pipeline of deals coming through, two companies particularly caught the attention of Joost and the other IAT members as potential opportunities for RIIF. 2 Both seemed to offer a promising combination of financial and social returns, so the IAT started preparing an Exploratory Memorandum and accompanying TEM for each. As this task was underway, Joost wondered which, if either, of these might be worth prioritizing for a full due diligence. 1. China Nutrition China Nutrition (CN) produced nutritional supplements for infants and children in povertystricken parts of China. Its main customers were provincial and city governments, which purchased the nutritional packs for distribution to the poor as part of a nationwide programme. The programme focused exclusively on counties officially designated as low-income by the government, with average annual per capita incomes of about RMB 5,300 (USD 800). The ultimate beneficiaries were infants, who had the semi-solid food in the nutrition packs fed to them by caregivers, typically parents or grandparents. CN had been founded in 2011 by two partners with a decade of experience in running infant poverty assessments and product tests. They brought not just technical expertise but also a demonstrated and credible passion for reducing malnutrition across the country. Social Need and Market Opportunity UNICEF had recently ranked China fourth in the world in terms of percentage of stunted children (after India, Nigeria, and Pakistan). The prevalence of stunted growth among children in China was 9.4%, almost four times that of the US or Singapore. Studies had shown 2 The names of the two companies, and some related dates and figures, have been changed for anonymity. Copyright © INSEAD 5 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. that inadequate nutrition during the early years of life was a common reason for such issues. For example, iron deficiency could lead to lifelong consequences for brain development. About half of the children in rural China suffered from anaemia due to malnutrition or undernourishment. According to the Chinese Centre for Disease Control and Prevention (CDC), the incidence of low birth weight and growth retardation in poverty-stricken rural areas was over six times that in cities, as parents lacked awareness regarding children’s nutritional needs and relied on poor-nutrition foods (e.g., gruel or sliced noodle soup). The problem was compounded by the so-called “village doctors” rarely being trained physicians, generally being over-stretched, and not having the incentive or direction to prioritize nutrition. But basic health issues like stunting had gained increasing attention as China developed economically, with the government increasingly willing to spend on such issues. Supplying high-quality nutritional supplements therefore offered a huge market opportunity. Value Proposition and Business Model Unlike its competitors, for whom nutritional packs comprised only 10%-30% of the output, CN focused exclusively on nutrition packs. The company was exceptionally stringent in ensuring quality. For example, its sachets were rigorously tested every seven days for stability and presence of heavy metals. It was also good at adapting to local needs, such as tailoring its flavours to local tastes: in the predominantly Muslim north-west of China, soybean content had been reduced far below the 97% level for the east because it did not suit local tastes. CN ensured safety by sourcing its ingredients from established foreign vendors. Once its nutrition packs were distributed, recipients could simply mix the packs with water, helping children get adequate iron, zinc, folic acid, calcium, and vitamins A, B, C, and D. CN also helped the government draft national standards for such packs, and had also run pilots to establish that consumption of its supplements did improve health outcomes. Current Performance and Future Potential CN was the largest specialized producer of soy-based baby nutrition bags in the country, and enjoyed a leading position on government procurement orders. In market share calculated in terms of winning government bids, the company had an impressive share of over 40% despite being above average in the price per pack in its bids: following transparent provincial tenders, the government had been procuring CN supplements at RMB 1 (USD 0.15) per pack. CN had built strong relationships with governments at the local and national level. It had partnered with the Ministry of Health and the All-China Women’s Federation to train the village doctors to educate caregivers on effective nutrition. CN’s product was distributed in over 200 poverty-stricken counties covered by the national nutritional improvement program. Government orders accounted for 97% of CN’s business. As the government had made longterm commitment to continually increasing funding of its national program, CN was in a solid position within the sector. The company’s revenues just in the past year had grown by 37%, and were projected to grow by 63% in the next year as the market continued to grow rapidly. The company anticipated that localities needing nutrition packs for infants and children in the 6-to-36-month age group would remain its core customer at least until 2022. Its expected sales Copyright © INSEAD 6 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. for 2017 were RMB 118m (USD 17.4m). Gross margins had recently improved from 46% to 49%, owing to lower unit cost from increased economies of scale and decreased costs of raw materials and logistics. As a result, profits had been growing at an even faster pace than sales. Based on forecasts provided by CN, the company’s annual earnings trajectory would be RMB 35m for 2017, RMB 44.1m for 2018, RMB 54.4m for 2019, and RMB 61.7m for 2020. Although capacity at CN’s factory in Qingdao was listed as 500 million packages per annum, it had practically been operating below capacity as it had proven to be impossible to run more than a single one (12-hour) shift. Due to the latent demand, CN expected its revenues to therefore grow rapidly after the opening of its new, fully automated 24-hour facility in Suzhou, which would increase annual capacity from 300 million to 1 billion packs (while also further improving quality). The plant would also save about RMB 2.8m (USD 424,000) annually on direct labour cost (which was about 10% of COGS, another 80% of COGS being material costs, and the rest manufacturing-related overheads), reducing the number of workers from 88 to 49. But the facility was expensive, and CN needed a fresh investment to fund it. CN was looking into extending its nutritional product line to come up with new offerings appropriate for pregnant mothers as well as 3-to-6-year-old children, still guided by a vision that improving health outcomes through nutritional interventions was a cost-effective way of improving the lives of the poor. CN also had an ambition to diversify beyond government as its customer by growing its nascent private label. It was also considering growing the small part of its business devoted to being an OEM supplier to multinational companies. Business and Impact Risks The company’s BoP engagement model involved a need requiring a consumer behaviour change that was not easy to accomplish. Widespread adoption of the product at scale was still unproven, and would require a huge mindset shift in the way parents and other caregivers fed their infants in transitioning from breast milk to semi-solid food. In terms of BoP engagement, while CN currently had a focus on the poor, rapid growth in new business segments could dilute this. For example, because the private label business (not focused just on the poor) was being seen as a potential growth driver, it was possible that this segment might become a more dominant part of the company’s focus in future. More generally, it was unclear whether all of CN’s investors saw social impact per se as a priority, though the concern was mitigated by impact being built into the core business model itself. Investment Opportunity CN had not worked with foreign investors before, and RIIF would be the sole investor in this funding round. As per the proposal, RIIF would invest RMB 25m (USD 3.7m) in mid-2017 for the first tranche, and get an equity stake as well as a board seat in return. If all went well, they could increase their total investment to RMB 80m through one or two future tranches. CN was planning to list on the National Equities Exchange and Quotations (NEEQ) within two years, and saw CS as a valuable partner not just for financing but also for their expertise in helping CN in the listing process and in building a strong reputation ahead of their listing. As the nutritional supplement sector was still nascent, no peer comparables were available to facilitate a valuation. But, more generally, listed health food firms could be used for a rough Copyright © INSEAD 7 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. comparison: three firms most analogous to CN had valuations of 38x, 51x, and 36x of their P/E ratios. It appeared that both parties could agree on the (post-money) valuation for CN being carried out using a 12x P/E multiple of the projected 2017 earnings. The RIIF team decided to employ a 15x P/E multiple in estimating the investment’s value at the time of a likely post-IPO exit in 2020. With this assumption, the IRR worked out to be well over 20%. However, further sensitivity analysis was needed. If CN failed to go public and RIIF’s exit had to be through a private sale, a 15x P/E assumption became too aggressive. In addition, if CN’s 2020 earnings forecast was not met, there was the issue of how low their earnings number could go before RIIF’s desired 20% IRR threshold was no longer met. 2. Vietnam Finance Vietnam Finance (VF) was a company offering a retail platform for an employee benefits program that provided attractive financing options to low-income factory workers looking to purchase essential household goods and services – such as white goods (like refrigerators) and electronics (like computers and mobile phones). The founder and CEO of VF was an experienced computer engineer and entrepreneur who had earlier co-founded a software company that had successfully listed on NASDAQ (and was subsequently acquired by a large corporation for over USD 1.5b). VF also had a strong management team, most of who had advanced degrees from the U.S. as well as several years of experience (typically in business, but for some also in the public sector). Social Need and Market Opportunity While emerging economies like Vietnam were growing rapidly, low-income factory workers continued to find it hard to buy essential household products such as refrigerators, washing machines, or water heaters. The cost of these products could easily be the equivalent of a month’s salary or more for a large segment of workers who made USD 150-400 per month. The issue was not just the price of a product: low-income Vietnamese typically did not have access to formal financial services either. According to the World Bank Global Financial Inclusion Database, only 16% of Vietnamese adults living in rural areas even had a bank account. Common sources of financing were either family and friends or informal money lenders. Borrowing from friends and family was rather constraining, while that from money lenders entailed very high interest rates: often 50% or more annually. High-interest lending also often led to situations of excessive debt that borrowers were unable to service. Given the prominence of manufacturing in the Asian economies, VF saw a huge market potential in targeting factories as partners in order to reach low-income workers. Based on the company data, if 30% of the salary factory workers earned were channelled towards household goods, the market size in VF’s target countries in Asia exceeded USD 100 billion. Value Proposition and Business Model VF’s benefits program targeted large factories with more than 1,000 workers. The company signed up the factory (or its owner) as a corporate partner, after which eligible factory workers (with at least one year of service) could register under the program. VF partnered Copyright © INSEAD 8 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. with brands like Samsung, Panasonic, and Nokia for sourcing basic, old-stock, or customized models it could acquire cheaply without compromising quality, and passed on the savings to its customers as low prices and zero-interest loans (with a duration of up to six months). VF typically set up a presence within the factory or set up a booth in an area near a cluster of factories, allowing the workers to view the products during their breaks or after work. Once the workers had decided on the product, they could make the actual purchase on-site, through VF’s website or by calling a toll-free number. The products would then be delivered to a location convenient for the workers (either factory or home), saving them the logistics hassle. To protect the employees from excessive debt, there was a purchase limit so that monthly repayments could not exceed 40% of their monthly salary. Every month, the employees received a statement of their accounts. The employers were also provided a list of payments due, and these payments were deducted from the payrolls before the employees received their salaries. The employers thus acted as facilitators, but were not liable for the purchases. Current Performance and Future Potential VF had successfully rolled out the program to a sizeable scale, covering workers in more than 800 factories across Vietnam. By 2017, there were over 1,000 corporate partners with a total of about 1.8 million workers, of which about 700,000 had already registered as VF program members (a prerequisite for purchasing goods through VF’s platform). In customer surveys, most customers indicated that they were very happy with the service they received. A corporate partner normally stayed with the same provider for a benefits program as long as it worked well, so local relationships and execution were critical. VF’s competitive advantage seemed robust in Vietnam; whether it would turn out to be equally robust elsewhere remained to be seen. But early signs were that VF could also do well in other low-income countries it was targeting, like Indonesia, Thailand, Cambodia, Laos, the Philippines, and India. While Vietnam still accounted for most of the revenues, business elsewhere was expected to grow rapidly with increased investment after VF’s next funding round. Growth could also be achieved by expanding the range of products. For example, VF was exploring whether to finance products and services related to healthcare (bill payments, accessible medicines, insurance, and check-ups), education (training courses), and housing (affordable housing). The company had so far helped workers stretch payments for up to six months without interest, the cost of its own interest (about 15% for bank loans) being covered by bulk discounts obtained from suppliers. For faster scale-up, it was also considering a model of facilitating direct loans (with interest) to workers through collaboration with a partner bank. VF had already proven that it had a profitable model, and was now looking to grow rapidly in Vietnam as well as overseas (with initial focus on Indonesia and India). In 2016, it achieved USD 50m in revenues through 812k transactions (almost all from Vietnam). The management was expecting a steep increase to USD 183m in revenues through 2.7m transactions next year, with 80% of the revenues and 90% of the transactions coming from Vietnam. (Although 40% of the 2.5m registered users were projected to be outside Vietnam, a lag was expected before these overseas registrations also substantially translated into revenue-generating transactions.) Copyright © INSEAD 9 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. Due to the cost of overseas expansion, VF’s short-term margins were under pressure, but the company was still expected to continue to at least achieve break-even on the whole. Business and Impact Risks One concern was that suppliers might view VF as a channel for offloading excess inventory or old models, irrespective of how critical the product was for social impact. For example, nothing prevented VF’s model from being used disproportionately for flat-screen televisions or gaming consoles, and an attractive deal on any product could quickly tilt the loan portfolio. One option might be to segregate RIIF’s funding to only support loans generating high impact, though the practicality of this was unclear – especially as RIIF’s investment was unlikely to translate into an equity share large enough to majorly influence VF’s strategy. Further investigation was also needed on exactly which segments of workers were making the purchases, what they were buying, and how much overall debt they were carrying. RIIF would also need to monitor any difference between VF prices and outside prices to ensure that any effective interest rate built into VF’s “zero interest” model remained reasonable. Investment Opportunity VF’s eventual goal was to do a NASDAQ IPO. Its management was hoping to raise USD 20m in Series C funding in return for at most 25% equity stake in the company. Much of the new funds would be used for VF’s overseas expansion beyond Vietnam through a new holding company in Singapore. VF’s existing investors, all of whom were reputed global players (without a specific impact focus), were open to injecting USD 10m of this in the form of fresh capital. This meant that new investors would be brought in for the remaining USD 10m. RIIF was considering participating by investing USD 3m, but the exact valuation for this funding round could only be fixed after a lead investor had been identified. Making a Decision Although both investment opportunities looked attractive, there were also many questions about each. Some of the issues could get clarified through a detailed due diligence, but this was an expensive and time-consuming phase. So, if there was already reason to conclude that an opportunity had unsurmountable issues, it was best to drop it from further consideration. Joost decided he would systematically go through each case in order to first decide whether it met RIIF’s threshold for impact. He would then repeat a similar exercise for their commercial potential. He would then look at the overall picture, also considering his team’s bandwidth in terms of number of deals worth working on simultaneously and promising opportunities in the pipeline, and decide on whether to recommend either or both for further consideration. As a person actively engaged in the intellectual underpinnings of the impact investing movement, Joost also had in the back of his mind two questions the entire impact investing community was still grappling with: First, what did an “ideal” impact investor have to be like in order to practically make the biggest possible contribution to the world? Second, how could such an impact investor practically define and measure impact to be sure that their good intentions were translating into real impact in the best possible way? Copyright © INSEAD 10 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. Copyright © INSEAD Source: Credit Suisse AG Exhibit 1 Impact Investing Illustrated 11 For the exclusive use of A. Alghafees, 2018. This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. Copyright © INSEAD Source: Credit Suisse AG; Julia Balandina-Jacquier. Catalyzing Wealth For Change: Guide to Impact Investing. 2016. Exhibit 2 Credit Suisse’s Impact Investing Strategy 12 For the exclusive use of A. Alghafees, 2018. This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. Copyright © INSEAD Source: Credit Suisse AG Exhibit 3 History of Impact Investing at Credit Suisse 13 For the exclusive use of A. Alghafees, 2018. This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. Exhibit 4 The “Regional Impact Investing Fund” (RIIF) Summary of Key Terms – Feeder Fund Target Feeder Fund Size Over USD 50 million Minimum Commitment USD 250,000 and thereafter, subject to additional multiples of USD 10,000 Investor Qualification For Qualified Investors under Swiss law; Accredited Investors under Singapore law; Professional Investors under Hong Kong law; Wholesale Clients under Australian law Subscription Monthly subscription until final close of the Fund Term Up to 15 years from first closing Investor Relationship Management Fee Administrator Transferability/Secondary Market Risks See below. No investor relationship management fees will be charged at the Feeder Fund level, as the investor relationship managers have agreed to waive their respective fees, since a Credit Suisse entity is the Impact Adviser to the Fund and charges an impact advisory fee. Citco Fund Services (Luxembourg) S.A. Limited transferability. No secondary market. This is a long term investment and investors should be prepared to hold the investment until maturity. This is a long term investment, which entails risks and some or all of the capital could be lost. Please refer to the sections on “Risk Considerations” and “Taxation” of private placement memorandum of the Fund for more details regarding risks and tax consequences of an investment in the Fund. Summary of Key Terms – Fund Investment Period Five years from closing (one-year extension) Fund Term Seven years from final closing; subject to three one-year extensions Management Fee 2% per annum, calculated by reference to total commitments during the Investment Period and the value of investments thereafter Performance Fee 20% over a preferred return of simple interest at 8% p.a. First Closing The first closing is expected to be no later than Nov 30, 2015 Investment Manager Asia Private Equity Group (APEG) Impact Adviser Credit Suisse AG, Singapore Branch Administrator Citco Fund Services (Singapore) Pte, Ltd. Source: Credit Suisse AG Copyright © INSEAD 14 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. Provincial policy initiatives/ incentives encouraging SME and private enterprise growth Restrictions on private investment/ enterpriseestablishment being relaxed gradually China: Western and South-Western Provinces Re-orientation toward consumption led-growth Improved living standards at BoP in rural areas critical to contain social pressures, meaning increasing focus on Chinese interior SMEs still struggle to access appropriate finance China Copyright © INSEAD 28% of GDP attributable to private enterprises in 2012 Private investment being encouraged in agriculture, pharmaceuticals, speciality foods, financial services Modernization of farming and agriculture sector a key priority with clear socioeconomic objectives of improving rural living standards and reducing poverty China – Guizhou Province Private enterprises account for over 50% of GDP Land acquisition regulations being eased Government purchases from SME sector increasing Sectors identified for greater private-sector participation: highland agriculture, financial services, education, power and logistics, among others China – Yunnan Province EIU forecasts GDP growth of 6.2% in 2014 and 6.6% in 2015 due to strong FDI inflows and accelerating private consumption Approximately 62 m inhabitants vastly underserved with basic goods/ services Private investment urgently needed to improve healthcare, education, housing, sanitation, water and modernize agriculture Myanmar (Burma) Burma Guangxi Guizhou Fujian Philippines Taiwan Shanghai Japan Economic diversification high on government agenda due to dependence on garment sector Continued economic liberalization in wake of election in response to growing social pressures Access to finance a key theme – FDI in MFIs needed with some provinces still unserved Agricultural productivity must be vastly increased in order to reduce poverty Cambodia World Bank estimates one-third of Laotians living on less than USD 1.25/ day in 2010 Physical infrastructure, access to finance, education, healthcare among the most basic in the Region, desperately in need of private investment Thai, Cambodian and other agriculture companies increasingly establishing operations in Laos, owing to fertile soil and cheap labour Laos Pressure growing on government to improve living standards, whilst monetary and fiscal challenges remain significant Increasing opportunity for private sector to deliver key BoP-orientated goods and services that inefficient SOEs cannot Company valuations attractive in SME sector because access to finance very challenging Vietnam 212 m Indonesians living on less than USD 5/ day in 2011 (World Bank estimates). Basic services, including sanitation, water, electrification, healthcare, education drop off sharply outside major cities. Government under pressure to improve living standards beyond major urban/ peri-urban areas Strong private consumption growth among poor and near-poor, demanding basic goods and services and quality and service-delivery improvements. A major policy focus for government, especially in more remote yet populous provinces, such as West Java. Private sector key to meeting demand, as public sector is resource-constrained/ over-stretched Indonesia Indonesia Hong Kong Guang dong Shenzhen Malaysia Cambodia Thailand Vietnam Laos Yunnan Anhui ZhejHunan Jiangxi iang Hubei Jiangsu Jilin Heilongjiang Liaoning Hebei Shanxi Shandong Beijing Shaanxi Henan Ningxia Sichuan China Inner Mongolia World Bank estimates 22 m people living on less than USD 5/ day in 2012. Vast disparities in living standards between rural areas and Bangkok causing social tensions. Access to quality education, healthcare, housing, water still major issues is some rural areas Increased commerce/ co-operation expected between companies in northern Thailand and Cambodia as tensions ease, creating opportunities, especially in agriculture Thailand India Qinghai Gansu Bhutan Bangladesh Nepal Tibet Xinjiang Mongolia Henan is a key food-producing region, so modernization of agriculture, provision of agri-services, access to finance are key Food and beverages, agriculture, water, energy, transportation and logistics sectors all slated for greater private sector participation Gov’t sees need to increase living standards of rural peasants Central China – Henan and Hebei Provinces Exhibit 5 Geographic Focus of RIIF 15 For the exclusive use of A. Alghafees, 2018. This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of A. Alghafees, 2018. Exhibit 6 Deal Screening for RIIF Source: Credit Suisse AG Copyright © INSEAD 16 This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. Copyright © INSEAD 5. Integration of Financial and Social Returns 6. Mission Alignment and Shared Vision for Value Creation 7. Innovation and Replicability Financial and social returns are mutually reinforcing rather than being disconnected or at odds with each other There is alignment between the Fund and investee company management on the company’s objectives and approach to achieving social impact within a commercial framework The company’s business model generates externalities like innovation for a new scalable solution or bringing an existing solution to a new region or country The overall impact of the company will be significant in terms of the number of poor people affected as well as how their lives will be affected The company strategy provides a clear route to impact at the livelihood and commercial-social levels 3. Credible Route to Impact for Livelihood Improvement 4. Breadth and Depth of Impact 2. Business Model with High BoP Engagement Explanation The sector and market segment has high impact potential (priority sectors: agriculture; healthcare; education; clean/renewable energy; sanitation, water, waste management; manufacturing; access to finance; affordable housing; logistics, distribution or infrastructure) The company’s BoP engagement model includes at least one of the following: BOP consumers, BOP suppliers/producers, BOP distributors, and/or BOP employees Screening Criteria 1. Sector and Market Segment with High Potential for Impact x x x x x x x x x x x x 17 Clear socio-economic benefits will accrue to poor people at the individual and/or community levels through engagement with the company; If the impacts are questionable in terms of likelihood or beneficiary group, clarity must be gained early in the due diligence process. There is significant breadth of impact (the number of poor people reached as consumers, producers, suppliers, distributors, or employees) and depth of impact (improved quality/security of their lives); There are significant prospects for improvement in socio-economic indicators such as jobs created or higher wages along with improvements in livelihood sustainability, such as greater access, opportunity, or inclusion. The route to achieving the company’s commercial aspirations is embedded in its BoP engagement and its overall business model; The company’s BOP engagement and its overall business model are sustainable and financially viable. Management is fully committed to achieving social impact: the social impact thesis is central to the company’s growth strategy and prospects and not an add-on likely to be discontinued or downplayed post investment; The Fund’s investment/returns will be linked directly to activities that generate impact. A transaction should ideally have externalities like bringing to the table something new in how to confront a challenge/constraint experienced by the poor in a region; It does not need to be ground-breaking, e.g., it could simply be introduction of existing methods, products, or business models to new and underserved regions. The company’s goods/services can be expected to make significant improvements to poor people’s lives as it addresses fundamental challenges encountered by the poor (e.g., lack of access, affordability, quality, choice, and availability); The BoP engagement model is central to the way in which the company undertakes its business. It is not incidental and not merely a CSR strategy. Key Questions and Issues for Consideration and Follow-Up at Due Diligence x The transaction is within a sector that is either already an agreed-upon priority for the Fund or can be justified in terms of the potential to have substantial impact; x The specific market segment being targeted has a substantial size in terms of the potential to serve the poor. Exhibit 7a Transaction Eligibility Matrix (TEM): Section A (Impact Eligibility) For the exclusive use of A. Alghafees, 2018. This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. The target's operations are likely to induce significant residual adverse environmental and/or social impacts, or significantly affect environmental or social circumstances considered sensitive by the fund. Description Copyright © INSEAD Source: Credit Suisse AG 18 No HSE & Social Audit or ESMP required. Other documentation will be requested as part of the environmental and social due diligence process. The target's operations do not, or are not anticipated to, directly or indirectly induce significant adverse environmental and/or social impacts. ‫ ܆‬C (Low Negative Impact) ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved ‫ ܆‬Not Involved The target's operations are likely to have adverse site-specific environmental and/or social impacts that are few in number, largely reversible, and readily minimized by applying appropriate management and mitigation measures or incorporating internationally recognized design criteria and standards. ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved ‫ ܆‬Involved Requirements Full HSE & Social Audit and development of an Targeted HSE & Social Audit and development of an ESMP. Environmental and Social Management Plan (ESMP) ‫ ܆‬A (High Negative Impact) Category ‫ ܆‬B (Medium Negative Impact) Human rights abuses (including harmful or exploitative labour) Abuses of legitimate land tenure claims Weapons and munitions Alcoholic beverages Tobacco Drift net fishing Activities in protected areas (e.g., UNESCO World Heritage Sites, conservation areas, etc.) Involuntary resettlement of people, households, firms, or private institutions Production or activities that may impinge on the indigenous peoples’ lands Production, distribution, or trade in pornography Gambling, casinos and equivalent enterprises Trade in wildlife or wildlife products that are regulated Production or trade in hazardous substances and materials Preliminary Risk Categorization: 1 2 3 4 5 6 7 8 9 10 11 12 13 Exclusion List of Prohibited Activities & Products: Exhibit 7b Transaction Eligibility Matrix (TEM): Section B (Environmental & Social Risk Management) For the exclusive use of A. Alghafees, 2018. This document is authorized for use only by Abdulaziz Alghafees in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018.
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