Originally appeared in The Economist on November 1st, 2018
Impact capital has long been referred to as “patient capital” or assumed to have subsidized returns and, thus, institutional-minded investors have shied away from entering the space, depriving it of needed capital. This is changing with many more investors, including commercially minded investors, realizing the potential of the impact landscape. Partnerships such as those between Elevar Equity, an early-stage investor, and The Rise Fund, a growth-stage investor, were created to leverage their commercial approaches and highlight attractive investment opportunities with impact measurably embedded in their respective strategies. The two investment strategies, while different in stage and focus, are complementary in backing companies that highlight the potential of an aligned financial- and impact-focused strategy.
Evolution of Elevar Equity and The Rise Fund
Elevar Equity, a human-centered capital firm, is managed by three partners: Sandeep Farias, Johanna Posada and Jyotsna Krishnan. The Elevar Method has democratized 18+ essential services for more than 20 million underserved customers from low-income communities and has catalyzed billions of dollars of equity and debt from other investors with its early-stage investments. These investments, in more than 30 companies across India and Latin America, focus on providing financial services, agriculture, education, healthcare, and housing. Elevar is the first institutional capital in 28 and the founding investor in 13 of these companies. Elevar focuses on large sections of low-income communities where there is entrepreneurial vibrancy, an ability and willingness to pay for affordable products and services, a discerning customer who demands quality, and an opportunity for massive scale at profitable margins. The crux is that impact without scale is ineffective. Scale requires commercial capital that comprehends the opportunity and can address the demand in the world’s largest customer base. Moreover, generating returns that are attractive to capital markets is a prerequisite for truly large-scale impact. The how and why of “impact” is Elevar’s commercial thesis.
Launched in 2017 with $2.1 billion in committed capital, The Rise Fund brings institutional investors (such as pension funds, university endowments and sovereign wealth funds) and high-net-worth investors together to allocate capital proactively to impact-oriented strategies. Rise was co-founded by Bill McGlashan (Managing Partner of TPG Growth), Jeff Skoll (internet entrepreneur, film producer, and philanthropist), and Bono (U2 lead singer, social activist, and investor). TPG Growth is the investing engine behind Rise, which was founded with the belief that institutional investors needed a vehicle to enter the impact space at scale to address the problems and goals articulated in the United Nations SDGs. Rise focuses on making equity investments globally in growth companies across seven sectors—agriculture and food, education, energy, financial services, healthcare, growth infrastructure, and technology. These sectors translate to Rise pursuing impact outcomes addressing 12 of the 17 SDGs.
While TPG brings best-in-class investment underwriting and hands-on operational support, Rise needed to incorporate depth-in-impact investing. This is the cornerstone on which the co-investment partnership between Rise and Elevar was established. Maya Chorengel, one of Elevar’s Founding Partners, joined Rise’s leadership team as the Senior Partner for Impact and leads the fund’s investing in financial services. Elevar’s track record coupled with its ability to develop pipeline opportunities in some geographies and sectors of interest to Rise presented an optimal partnership platform. Elevar, constitutionally, continues to make independent investment decisions and remains a dedicated early-stage investor with access to the business-building resource teams at TPG and potential access to capital for its companies over time. Rise focuses its investing efforts on larger, growth-stage opportunities while maintaining visibility within the early-stage through its partnership with Elevar.
Two distinct approaches, both with no trade-offs
In its 10+ years of investing, Elevar’s investment thesis has evolved based on time spent in the field and understanding the needs and aspirations of underserved customers in low-income communities. The commercial success of the Elevar Method depends on identifying the nuances of self-evident, demonstrated demand and in timing an investment to match customer readiness. In 2009, as some customers prospered and outgrew microfinance loans, a need for more complex financing solutions for growing MSME (micro, small, and medium enterprises) businesses emerged. MSME customers continue to be highly underserved despite their growth potential. Apart from finance, MSMEs are seeking other products and services that can help them generate sales and revenue. Elevar’s first MSME-focused investment was in Vistaar (early 2010) and was based on field interactions with microfinance customers. Vistaar delivers customized loan products that address the individual needs of MSMEs in India. Over the last few years, Vistaar has financed more than 190,000 MSMEs. Several MSME-focused investments have followed, including Varthana, which provides education infrastructure loans to grow affordable private schools in India; Samunnati, which provides trade credit, working capital and market linkages to Indian agriculture value chains; Credijusto, which provides affordable financing to underserved Mexican enterprises that are too large for local MFIs yet remain unattractive to traditional banks; and Tienda Nube, which provides an end-to-end solution for Latin American MSMEs to access e-commerce channels to increase sales.
While the products and services themselves are simple, the innovation and discipline needed to build effective distribution channels customized for underserved markets have not existed historically. Identifying how affordable margin structures can result in robust distribution economics has been key to the development of the Elevar Method over the years. For example, while it is understood that technology can be leveraged to build non-linear scale, to most it is not obvious that you can also integrate long-standing community networks with dynamics or creatively combine online and offline strategies to achieve similar non-linear scale. It should be noted that Elevar primarily invests in and works with certain segments within low-income communities and the success of the Elevar Method rests in the shared expertise developed from learning across the business models of those investments. However, a different set of models are required to serve those at the “base of the pyramid” who are unable to pay.
Elevar’s initial capital goes into proving distribution channels and building a strong moat to demonstrate the long-term sustainability of a business model—in effect, focusing on white spaces and not zero-sum competitive investments. Since the market size is large, with millions of customers that can be reached, Elevar backs entrepreneurs who have years of operating experience building businesses and, most important, have a strong hand on the pulse of the customer segment. Early capital invested in these businesses combined with the entrepreneur quality has helped establish their credibility with mainstream capital markets.
In essence, the Elevar Method is based on following: the CUSTOMER, backing the right ENTREPRENEUR, who can build a BUSINESS MODEL premised on distribution economics and affordability, which, in turn, SCALEs and reaches a large number of underserved customers in low-income communities. Similarly, Elevar’s impact framework is deeply rooted in the Elevar Method. Business metrics demonstrate the progress of portfolio companies on three dimensions—Community, Business Model, and Scale—consistent with Elevar’s belief that metrics that indicate impact and business performance are best suited to achieve lasting impact and financial returns.
At Rise, the interplay between risk, return and impact follows two sets of criteria that every investment must meet. First, the investment case underwriting criteria, germane to every private equity fund, focuses on financial and operating performance and is ultimately expressed in potential financial return from the investment in internal rate of return and money on money/return on investment terms. Second, the impact underwriting criteria for Rise focuses on the potential social or environmental impact that a company’s products and services will have. Rise seeks “collinear” business models—those in which the drivers of business and financial success also deliver impact success. Furthermore, Rise expresses its impact analysis with the “impact multiple of money” (IMM) metric—a measure of the value of the social or environmental benefit created by a company per equity dollar invested—developed in collaboration with the Bridgespan Group. Calculation of the IMM is a multistep process articulated alongside the investment process that incorporates the most rigorous academic studies available to estimate the expected impact of a company’s output. The IMM framework, its evidence base, and its methodologies will be further developed over time and eventually shared more widely.
In all cases, each investment by Rise must meet the same underwriting standards of any investment from TPG Growth and also meet the IMM threshold required by Rise. TPG’s confidence that market-rate-return-oriented private equity funds have a role to play stems from its historical experience of making successful investments in companies that the impact world would have considered impact investments. TPG, through its extensive history of working with private sector companies, recognized the ability of some successful, growing companies to produce collinear social and environmental impact alongside market-rate returns. This realization, combined with the fundamental reality that meeting the SDGs will require trillions in private capital, led to the creation of The Rise Fund.
Both Rise and Elevar are making investments where both impact and financial returns are achieved without trade-offs. This is an important but nuanced perspective. It is imperative to note that impact investing is not a one-size-fits-all approach. On the contrary, impact investing is characterized by a spectrum of objectives involving both financial return and depth of impact—just as there are business models that may require a subsidy or require a trade-off between impact and commercial returns. For example, because of their fiduciary responsibilities, some classes of institutional investors cannot engage in a trade-off; these investors are required to pursue competitive financial returns. Unlocking the ability of many institutional investors to direct capital to impact, given their fiduciary responsibilities, requires a commercial approach similar to that of Elevar or Rise.
These considerations have driven Rise to meet its investment objectives, for example, by focusing on countries with the characteristics and financial infrastructure to facilitate market exits (e.g., out of 54 countries in Africa, TPG focuses on 4-7 countries or pan-African opportunities). Rise has been deliberate about sectors of focus (e.g., healthcare or technology) and the features of companies that lend themselves to commercial returns. Rise’s portfolio of companies includes Everfi, a SaaS-based company providing educational institutions and corporates with courses in financial education, health and wellness, diversity and inclusion (to name a few), Cellulant, a pan-African digital payments service provider with significant reach in agriculture and among the unbanked, and Fourth Partner Energy, India’s leading renewable energy services company. These are all examples of collinear business models.
Sectors and companies in which Elevar invests lend themselves to commercial return expectations, albeit with early-stage characteristics. A driving component of measured risk stems from the ability to identify models that are fundamentally profitable at a unit level while focusing on affordable margins and scale. This ensures that the focus on serving these communities is not compromised at later stages of business, maintains alignment with the entrepreneur regarding the company’s vision, and avoids mission drift. Innovation may occur at the level of product distribution or organizational design, but the target customer segment must remain the main focus. In all cases, because of Elevar’s investment approach and alignment between business and impact metrics, investment decision-making does not discern between the two.
The emergence of multiple sizable impact funds that have attracted commercial capital is a strong testament to the commercial and competitive success of businesses that deliver positive social and environmental benefit and cater to underserved customers that have been largely ignored because of a perceived inability to generate benchmark returns. Core to the DNA of both Elevar and Rise is an understanding that disciplined investing, thematic focus, and rigor in impact assessment are key precursors for success. We have a long way to go to perfect impact investing, but, ultimately, success is defined by performance in terms of both financial return and impact, with the absence of friction around “trade-offs.”
About Elevar Equity
Elevar Equity, a human-centered capital firm, invests in transformative and scalable entrepreneurial ventures focused on underserved customers in low-income communities. The Elevar Method of investing has democratized essential services for more than 20 million underserved customers and catalyzed billions of dollars of capital into 30+ companies in India and across Latin America focused on financial services, agriculture, education, healthcare, and housing.
About The Rise Fund
The Rise Fund is a global impact investing fund committed to achieving “complete returns”—measurable, positive social and environmental outcomes alongside competitive financial returns. It is managed by TPG Growth, the global growth equity and middle market buyout platform of alternative asset firm TPG. Led by a group of influential thought leaders, The Rise Fund invests in education, energy, food and agriculture, financial services, growth infrastructure, healthcare, and technology, media, and telecommunications companies that deliver complete returns.