Net Impact: The Trade-Offs between Private Equity?s Returns and Development Impacts in Emerging Ma
Guest blogger Christi Huizenga is a second-year MBA student at Thunderbird School of Global Management.? Before Thunderbird, she spent five years in project management and business development for International Justice Mission, a human rights NGO.? Christi has a B.A. in Business Communications from Calvin College in Grand Rapids, MI.
The days when development finance organizations were the only ones pouring capital into emerging markets are long gone. Private Equity firms are increasingly chasing returns into emerging markets.? A panel last weekend at the Net Impact North America Conference brought together both private equity firms and development finance organizations to discuss the trade-offs between profitable returns and the social impact of these investments.?It was moderated by Graham Sinclair, of Sinclair and Co. and the first panelist was Peter Greenwood from OPIC (the Overseas Private Investment Corporation), a U.S. Government agency working to develop private sector opportunities overseas providing services to U.S. firms.? Services include insurance, financing assistance, and support for privately owned and managed investment funds. ?OPIC private equity is essentially a fund of funds and they provide investment guarantees to their clients.??
While OPIC does not directly invest in emerging economies, they can choose to work with funds that will have a development impact.? OPIC rates investment opportunities based on factors such as environmental impact, workers rights, human rights and other development contributors.? It recently approved funds worth $5.3 billion and an average portfolio may be in the range of $250 million.?
Amie Patel, an analyst for the Soros Economic Development Fund, presented the perspective of a development finance institution.? The Soros fund is a non-profit that grew out of the Soros Foundation Network as a tool for promoting development in emerging markets.? In the beginning, the Soros Fund focused on Eastern Europe but it has now spread to include Haiti, Panama, South Africa, Pakistan, Sierra Leone, and Liberia. The Soros Economic Development Fund currently has $150 million in capital to use in countries that request the foundation’s involvement, with a typical project ranging in size from $500,000 to $5 million.? As a development finance institution, the Soros Fund isn’t focused on generating high returns.? In stead they seek to recover their initial investment and measure success by the level of impact their investments generate.??
The third panelist, Greg Bowes is a managing principal at Albright Capital Management.? Albright Capital is a unique investment firm.? It is closely tied to the Albright Group, a consulting agency focused on building business while making a positive impact on the world.? Albright Capital also works closely with a Dutch healthcare pension fund that has similar strong social values.? Unlike the Soros Economic Development Fund, Albright Capital exists to make a profit.? It is a private equity firm with strong values, not a development finance institution.?
Albright Capital is currently working in Vietnam, Thailand, Angola, and Mozambique.? They choose to work in countries with profound commercial opportunities and seek out places where their capital will have a large impact.? They countries they choose to invest in are not easy places to work, but Albright believes that engaging the private sector in under resourced areas is critically important.? They aim to make money while serving a greater good.? However, in this environment, traditional buyouts are not likely to happen, so Albright Capital must be creative in structuring their investments using tools like mezzanine financing.?
The final panelist, Michael Barth, shared his extensive experience from both the private and public perspective.? Michael is currently the Senior Director of Darby Overseas Investments, a large private equity firm managing over $2.5 billion with offices in 12 countries.? He also has significant experience working with the public side of development finance through the IFC and other institutions.?
Darby Overseas Investments is a pioneer in emerging market investing.? It was founded in 1994 and invested primarily in Latin America, expanding to Asia and other regions in 2000. Darby argues that its investment strategy is more conservative than average. Many of its staff members have experience working for development finance institutions and it has a strong focus on “responsible investing“.
Michael explained the change he has observed since Darby’s early days in1994.? Back then, the firm would get practically kicked out of investment banks when pitching potential investments in emerging markets.? Now the practice is widely encouraged and the private sector seems to be realizing the economic benefits of investments that foster good governance and environmental care in developing nations.? In his words, “responsible investing is profitable investing.”?
The focus of the discussion was the question of balance between financial returns on investments and the social/ environmental benefits of them. No better question to illustrate the actual complexity of this industry. The panelists presented situations where a standards needed to be sacrificed for deals to be completed. If a certain project threatens to destroy biodiversity but create stable jobs for large populations, should the deal be considered?
Michael, from Darby, made the point that investment opportunities can never be analyzed in black and white and the situations faced by his investment committee are much more complex than the hypothetical question above.? In fact, it is often difficult to discern where the real impact of the investment will be.? However, if presented with reliable information showing that an investment will have a significant negative impact, Darby would walk away from the opportunity.? “There are too many available opportunities to settle for a potentially harmful one.”??
Greg, from Albright Capital, was a bit more opaque in his answer.? They believe that they often can do more good by engaging than by walking away.? These considerations and the development impacts of investment beyond pure ROI are analyzed together with Albright Group.???
From a development finance perspective, this focus on social and environmental impacts issue is straightforward. For Soros Fund, for example, any profit earned beyond the achievement of social and environmental impacts is just “a nice benefit”.? They measure success by metrics such as the number of jobs created instead of just the level of profit potential.?
Although a development finance fund would tipically not invest in “harmful projects”, Soros Fund often finds itself in situations where an investment will, for instance, help to feed starving populations, doing so through practices that may not be environmentally sustainable in the long run.? Development finance institutions have to make those tough choices.? What is best considering the situation at hand?? It’s not always immediately clear.?
OPIC takes a similar stance.? While it doesn’t invest its funds directly, it has veto power over the investments of portfolios.? It conducts due diligence on a number of factors related to the impact of their investments and are able to set conditions for them to be made. “We will go forward only if you do a, b, and c to improve the impact of this investment.”?
The discussion continued with some questions from the audience relating to specific investments in various countries.? The main takeaways from the conversation centered on the role of private equity and other forms of investment as drivers of growth for emerging economies.? Interestingly, private equity firms are often well placed to influence government policies and shape a sustainable development model.? In addition, as economies slow in the West and grows in emerging markets, the influence of investment firms will rise and the lines that separate private equity and development finance will continue to blur. In many respects, these two fields are converging.?
The panelists concluded the session by sharing some bits of advice for MBA students hoping to build a career in emerging market private equity.? Michael Barth encouraged students to follow their passions and seek out opportunities to gain exposure to both finance and life in emerging markets.? He sees nothing but growth opportunities in this field.? Greg Bowes suggested that students remember to test all assumptions as they seek investment opportunities in emerging markets.? The unpredictable often occurs and diligence is critical for success.?
In summary, this interesting conversation exposed many of the complexities inherent to emergin markets investment, all very relevant to the NextBillion conversation. After all, big investments like the ones private equity constantly looks after are the ones with the greatest impact over local communities.