1. Op#mizingtheInvestmentProcess forReturnsandImpact MadeleineEvans Pleasecontacttheauthorbeforeci1ngthispresenta1onorusingthematerialinotherworks.

2. Impactinves#ngandthebigques#ons 3. Anintroduc#on Animpactinvestorhasanancialandanon-nancialobjec6ve,withcertain performancerequirementsforagivenlevelofrisk1 Theseinvestorsfaceauniquestrategicchallenge:simultaneouslymanagingthese twoobjec6vestoproduceaninvestmentwithsharedorblendedvalue2 Thispresenta6onoers: Aframeworkforunderstandingthedriversofblendedvalue Astrategictoolboxforcul6va6ngimpactanddesirablerisk-adjustednancialreturnsin onesownporGolio InsightisdrawnfromDFIsandfundsinves6nginfor-protorsocialenterprises Entrepreneur proposesanidea Entrepreneur goesa@erprot Investorwonderswhat happenedtoimpact Accep#ngbelow-marketreturnsfora givenriskinexchangeforgreaterimpact Requiringmarketrisk-adjusted returnsonimpactinvestments Social-rstFinance-rst 4. Thebigques#on Whatdrivesaninvestmentsimpactand nancialreturns? Howcaninvestorsmanagethesedrivers toproduceblendedvalue? 5. 5factorsthatmaIerforperformance 6. Thebigques#on Whatdrivesaninvestmentsimpact andnancialreturns? 7. Opera6ngenvironment Thebuildingblocksofperformance Financingenvironment Management& stakeholder values Business model& technology Decisionbymanagement Financing incen6ves& requirements Thebuildingblocksofperformance Asimpliedviewofperformancedrivers,groundedinincen6vetheoryand expandedinlightofimpactinves6ngprac6ce 8. Opera6ngenvironment Thebuildingblocksofperformance Financingenvironment Management& stakeholder values Business model& technology $$ i Decisionbymanagement Financing incen6ves& requirements $ i Thebuildingblocksofperformance Asimpliedviewofperformancedrivers,groundedinincen6vetheoryand expandedinlightofimpactinves6ngprac6ce FivefactorsthatmaTerdriveresourcealloca6on,impact&nancialreturns PorGolio results 9. Coreopera#onalsynergies Thebusinessmodel&technologydenewhether protabilityandimpactareeasytojointlyachieve Cross-subsidymodelsrelyheavilyonmanagement ini#a#vetogenerateimpactfromprotable opera#on Thefactofprotableopera#oncanensureimpactin lock-step Conictslimitvaluefortheinvestorbyforcing managementtotrade-oprotabilityforimpact Synergiesmaximizevalueasimpactenhances expectedprotabilityandviceversa 1.BusinessmodelsmaIer Prac6calexamples: So@warebusinessfundsfounda#onthatdevelopscharterschoolsintheBronx Solar-poweredwaterpumpissoldinKenya Tex#lefactoryconvertstomorecostlywindpower Leathertanningopera#oninBoliviainvestsintechnicaltrainingandprimaryeduca#onfor workers,developingposi#verela#onshipsthatreduceriskofcostlystrikesorboycoIs $$ i Decisionbymanagement Business model& technology 10. Opera6ngenvironment $$ i Decisionbymanagement Theopera6ngenvironmentaectsthecostand revenuesofbusinessac6vi6es,makingcertain businessmodelsmorelikelyorfeasible Consumerpreferences Supplychaindynamics Regula#on&governmentprograms NGOac#vism Beliefsabouttheenvironmentneedtobe consistentlyupdated Changesintheopera#ngenvironmentmayturn complementari#esintoconictorviceversa Business model& technology 2.Theopera#ngenvironmentmaIers Prac6calexamples: EuropeancustomerspaypremiumforFairTradelabelonowersaIen#ontolabor health&safetystandardscreatesvaluedespitecostsbyboos#ngrevenue NGOsprotestcommunityimpactofUgandanpowerplantac#veengagementand reseIlementpremiumscreatesvaluebyreducingriskofassociatedcost-overruns 11. Opera6ngenvironment Management& stakeholder values $$ i Decisionbymanagement Managementvaluesinuenceresource alloca6onbyshapingintrinsicrewards Prac6calexamples Turnatradi#onalfor-protbusinessintoa businesssubsidizingseparateimpactac#vi#es Createprotablebusinessesinhigh-impactareas Generateimpactatexpenseofprotabilityor returnwhenobjec#vesareinconict Business model& technology 3.ManagementvaluesmaIer 12. Incen6ves& requirements Incen#ves&requirements $$ i Decisionby management Externalrewardsorpunishmentscontainedin nancingpayostructurecanguideresources towardop6malperformance Maximizebothprotandimpactunderlock-step orsynergymodel Enhanceimpactwhenmanagementpursues protatexpenseofimpact 4.Incen#vesandrequirementsmaIer Requirementsintermsandcondi6onsenhanceandcomplementincen6ves Ensureinvestorhasabilitytomonitorperformanceandcorrectlyapplyincen#ves Controllevelofimpactornancialperformancepriortoinvestment Prac6calexamples Marginalcashpayostructureofequityordebtincen#vizesbeIernancialperformance Sharebonusforhi^ngcertainimpacttargetsun#linvestorexitdirectlyincen#vizesimpact Minimumimpactrequirementscallableaseventofdefaultletinvestorandmanagement bargainoverpunishmentforlowimpactlater Oerofnancingcondi#onalondemonstra#ngcertainobservableimpactornancialmetrics 13. Conducivenancingenvironment Financingenvironment $$ i Decisionby management Incen6ves& requirements $ i Contract& rela6onship Thenancingenvironmentaectsthe scopeforcrea6vecontractstructuringand long-termnancingrela6onships, constrainingexternalincen6vesand requirements Fundingop#ons Legalrequirementsonpor_olio Forcesofcompe##on Beliefsabouttheenvironmentneedtobe consistentlyupdated Changesinthenancingenvironmentmay underminethepowerofimplicitincen#ves Prac6calexamples Compe##onfromsolelyfor-protlendersconstrainedenvironmentalimpactobjec#ves pursuedbyDFIsun#lnancialvalueofsuchobjec#veswaswidelyaccepted Risingcompe##oncanundermineimplicitincen#vesforimpactasvalueofnancing rela#onshipdiminishesfrominvesteesperspec#ve 5.FinancingenvironmentmaIers 14. Theimpactinvestorstoolbox 15. Thebigques#on Howcaninvestorsmanagethese driverstoproduceblendedvalue? 16. Thesebuildingblockscanbeadjustedaspartofinvestmentstrategyinorder toimproveexpectedreturnsforagivenlevelofimpact,orviceversa Arrangementsthatalignmanagementsincen6veswiththeinvestors objec6veshelpminimizethefric6onsthatlimitordistortperformance Threesimpletools,alreadyusedbymanyinvestorsfordierentobjec6ves Selec#onandscreeningforconducivebusinessmodelsandinvestment environment Structureoftheinvestmentcontract Long-termnancingrela#onshipand(condi#onal)oersoffuturenancing Incen6vetheoryandinvestorexperiencesuggesthowtousethesetoolsto achieveorenhancetheblendedvalueofinvestments Blended value Theinvestorsrole Smart acquisi6on Smart nancing 17. Opera6ng environment A Management& stakeholdervalues Business model& technology 1.Selec#onandscreening Investorscanfocusscreensoncompa6blebusiness models,opera6ngenvironmentsandmanagementvalues Investinprotablebusinesseswhosefactofopera#on producesadenable&jus#ableimpact(e.g.providinglife- enhancingservicestounderservedloca#onsorpopula#ons) Iden#fyandinvestinbusinessesthatexhibitunderlying synergiesbetweenprotabilityandmeasurabledimensions ofimpactofinteresttostakeholderstheinvestor Investinbusinessesinopera#ngenvironmentswhere preferencesofcustomer/stakeholdersareincreasingly aIachinganancialvaluetoposi#veimpact Insightsfrominterviews Screeningforsocialentrepreneursispopularinnewearly-stagefundsbutisnotasilver bullet;conictscanremaininthebusinessthatunderminereturnsforagivenimpact Shi@sinconsumervaluesandNGOagendastorewardstronglaborstandardsandpunish poorenvironmentalstandardsprovidedcri#calsupportforthesestandardsinDFIpor_olios Managementwhopersonallyvaluesimpactiscri#caltomaintainingimpact-orientedpolicies withinthebusinesswhentheopera#ngornancingenvironmentreducesthedesirabilityof impactac#vi#es(e.g.standards,abatement,community-engagementac#vi#es) 18. Opera#ngmodelsindetail Whatrela6onshipbetweenprotabilityand impactshouldIexpecttosee? Separate ac6vi6es? Impact feedback? Separateand subsidize Acoreac#vitygeneratesprot,andimpactis createdthroughseparateac#vi#esfundedbya por#onofprotsfromthecorebusiness Y None Lock-step Impactisgeneratedbythesimplefactofprotable opera#ons N N/A Synergy Greaterimpactenhancesprotabilityofcore business(reducesexpectedcostsorenhances expectedrevenues)andviceversa Y Enhances protability Trade-o Thetwoac#vi#esconict,andmanagementis forcedtoallocateresourcestoeitherprot- genera#ngac#vi#esorimpact-genera#ngac#vi#es Y Dragson protability Managementallocatesresourcestowardprot-genera6ngandimpact-genera6ngopera6ons, whichmaybeseparateorintegrated Impactmayfeedbackandaectrevenueandcoststructureofprot-genera6ngac6vi6es Posi#vefeedbackenhancesprotability,whilenega#vefeedbackdragsonprotability Screeningopera#onalmodels 19. Opera#ngenvironmentindetail Customerswillpayapremiumforthe businesssproductsorservicesifthebusiness aIainsposi#vesocialimpactormi#gates nega#veimpact Nega#veimpactcarriesadirectcost(costof complyingwithmi#ga#onrules,etc.) Nega#veimpactcarriesanexpectedcostto thebusiness(NGOdemonstra#onsdamage reputa#on,etc.),suchthatmi#ga#ngrisk enhancesexpectednancialperformance Theinvesteessupplychain,distributorsetc. rewardimpact Posi#veimpactopensupnewhigher-revenue orlower-costbusinessopportuni#es Conducivetosynergies Likelytocausetrade-os Selec#ngaconduciveopera#ngenvironment Highimpactishighlycostlyrela#veto altera#velow-impactscenario High-impactgoesunrewardedbycustomers, supplychainetc.rela#vetolow-impact business Nega#veimpactgoesunpunishedby regula#on,NGOac#vism,etc. 20. Incen#vesexplicitinthecontract Applycrea6vecontractstructuringtoensureincen6vesand requirementsareop6mizedtoproducedesiredporGolioresults Thinkbeyondcontractsthatpurelyincen#vizeprotmaximiza#onin caseswheretheunderlyingbusinessmodelexhibitstrade-osorfollows aseparateandsubsidizemodel,andmanagementcannotnecessarilybe trustedtopursueimpactastheinvestorwouldlike Incorporateexplicitincen#vesforimpactintotheinvestmentcontractin theformofe.g.equitysharebonusesorstep-downsininterestratesin ordertoaltercost-benetcalculusofgenera#ngimpact 2.Crea#vecontractstructuring Investment contract Incen6ves& requirements Insightfrominvestorinterviews Investmentcontractsalwaysincorporatestrongincen#vesfornancialperformance(e.g. simpledebtorequityinvestmentcontract)butseldomforimpact(saveoneinvestor) Controlrightsgeneratedbyminimumimpactrequirementsarefrequentlyusedby developmentnanceins#tu#onstoincen#vizepursuitofveryimportantimpactobjec#ves Controlrightsletinvestorsgaugethedriverofdevia#onsfromexpectedimpactandrespond inordertomaximizenancialperformanceandimpactinthelonger-term 21. Incen#vesexplicitinthecontract Developavaluable,long-termnancingrela6onshipthatoers addi6onalimplicitincen6vesfortheinvesteetopursuedesired impactstandardsoroutcomes Addi#onalnancing(implicitly)condi#onalonmee#ngimpacttargets canaltercost-benetcalculustomanagementofpursuingimpact Anancingrela#onshipmustprovidevaluerela#vetocompe#ngfor- protinvestorsinordertocreateincen#ves:lowernancingcost, technicalexper#seormarketconnec#ons(especiallyasnecessaryto enableimpactthatbringsnancialvalue),orpoli#calriskmi#ga#on 3.Long-termnancingrela#onship Financing rela6onship Incen6ves& requirements Insightsfrominvestorinterviews Implicitincen#vesforbothimpactandnancialperformancecommon Oeroffuturenancingcondi#onalonimpactisacri#caltoolforencouragingmanagement teamstopursueimpactobjec#vestoinvestorssa#sfac#on Thevalueofthenancingrela#onshipiso@enresourcedbyimpactinvestorsasabargaining chipwhendecidinghowtotakeac#oninresponsetoadevia#onfromexpectedimpact ForDFIs,leveragingvalueofrela#onshipasincen#veformanagementtoreturnto complianceo@entakesprecedenceoverenforcementoflegalrights 22. Opera6ngenvironment Financingenvironment Assessthebigpicture Business model& technology Applyingtheintui6ontoimproveporGolioperformanceandminimizetrade-os Assessbuildingblocksofperformanceforcompa#bilityorfric#onamongperformancedrivers Applyimpactinvestorstoolbox:Smartselec#onandsmartnancing Management &stakeholder values Incen6ves& requirements Compa#ble orfric#on? Compa#ble orfric#on? Compa#ble orfric#on? Thebigpictureforinvestors 23. MadeleineEvansisadirectequityinvestorwithresearchand advisoryexperienceinbothimpactinves6ngstrategyandtac6csas wellasimpactmeasurement. Madeleineisalsotheco-founderofFinanceMaIers,aLondon- basedorganiza#onbridgingthegapinknowledgeandnetworks betweenmainstreamnanceandtheUKsgrowingimpact investmentsector. ShereceivedanMasterofPublicAdministra#onwithDis#nc#on fromtheLondonSchoolofEconomics,wheresheaIendedasa ThouronScholarandfocusedondevelopmenteconomicsandpolicy. MadeleineholdsherundergraduatedegreesfromtheUniversityof PennsylvaniasHuntsmanProgram,withaB.S.fromtheWharton SchoolandaB.A.inInterna#onalStudiesfromtheCollegeofArts andSciences. ShespeaksEnglish,Spanish,andGerman. Abouttheauthor 24. Thecontentinthispresenta#onistheproductofayearofinves#ga#on,culmina#ngin aMastersdisserta#onen#tled:Mee1ngthechallengeofimpactinves1ng:Howcan contrac1ngprac1cessecuresocialimpactwithoutsacricingperformance? Thedisserta#onpresentsastrategictoolboxforinvestorswithnancialandnon- nancialobjec#ves.Contentisbasedonlessonsfromeconomictheoryofcontractsand fromin-depthinterviewswithsixteenBri#sh,German,andU.S.impactinvestors. Therelevanceofeachstrategictoolwilldependontheinvestorscontroloverthe underlyingpor_olio,thelegalandfundingconstraintsoncontracts,thedegreeofac#ve managementpursuedbytheinvestor,andtheobjec#vesofcompe#nginvestors.The toolboxismeantasadirectresourceforinvestorsinapor_olioofcompaniesor projects,buttheintui#onshouldbevaluableforfunds-of-fundsaswell. Copiesofthepaperordetailsofmethodologyareavailablefromtheauthor. Abouttheresearch 25. Assessthebigpicture Getintouch. Evans.madeleine@gmail.com