Adapted from a speech by SEAF CEO Bert van der Vaart to the Big Path Capital Summit - November 2017, London.
There has been a lot of discussion over the last few years on what exactly Impact Investment is. IRIS, GIIRS, the millennium goals, the very helpful UN Social Development Goals, GIIN and perhaps inevitably Toniic have all weighed in, and have all made contributions.
My purpose here is not to add to the gradual resolution and refinement of which metrics are best or how deeply intentionality needs to be written into the contracts of the business or entrepreneur which receives the impact investment.
Rather I would like to suggest that there is both a more important aspect to impact investment and perhaps above all a more urgent need for it—which revolves around the increasingly cross-border issues which this conference rightly identifies as a theme.
Impact investing is critical to solving global problems, not because we have the solutions, but because we empower innovators who understand and creatively address regional problems that governments alone, cannot.
SEAF has been investing in underserved markets since 1989. Over that very long time, we have raised more than $800 million and invested more than $600 million in nearly 400 enterprises in more than 30 emerging and frontier markets. While we are proud of the more than 50,000 sustainable jobs our companies have created and the rapid increase in taxes paid and in the training and consequent increase in annual salaries our companies’ employees have enjoyed, and in the returns our investors have received from these investments, I have reflected on what our companies - and not only our companies - have achieved as significant impact.
What we have found I think is that companies that have provided a superior and sustainable solution for urgent problems which might in the west have been thought to be the responsibility of the government have achieved really the most stunning impact—and generally also very positive commercial returns.
Perhaps not coincidentally, most of these problems are in fact targeted by the Social Development Goals, the SDGs.
The following are examples of impact investments, followed by lessons learned through our decades of experience in the field.
An early investment SEAF made through our Croatia fund was in DOK-ing. As you may recall, Croatia had been in a ferocious war with Serbia as part of the break up of the former Yugoslavia. One especially dire bit of that war was the infestation of many parts of Croatia’s border areas with mines.
The conventional means for cleaning these mines was to have a large, heavily-armoured vehicle driven by a brave or not very smart soldier slowly and systematically over a suspected minefield and literally cause the mines to explode. Possibly effective, but these heavy machines were certainly getting damaged rather quickly, and were certainly not all terrain. Nor were drivers uniformly uninjured.
Enter Vjekoslav Majetic, founder of DOK-ing. Majetic’s singular thought was that sweeping mine fields with a heavy manned machine was not really very smart or cost-effective. He developed his signature vehicle (pictured above), which was a remote-controlled, much lighter vehicle with an extended and retractable arm. This arm was able to flail some heavy chains quickly on grounds suspected to be mine-infested. And indeed, the thing worked—when bombs exploded, the arm automatically (in most cases effectively) bounced back with very little damage.
SEAF - which at the time in this fund was focused only on building the growth of a portfolio of SMEs and a diversified Croatian economy - invested around $300,000 for a significant minority position of the company. Post-investment, the company realized rapid growth, first in Croatia, and then to other parts of the Balkans affected by mines. Even here we saw rapid growth, but near the end of our fund life, we helped the company expand to service Afghanistan and Angola. Today - 15 years after we exited at a healthy multiple - the Company is in more than 25 countries and has annual sales of close to $200 million.
Bangladesh is a growing country of more than 160 million. Thankfully for its citizens, it has been growing economically at more than 6% a year since 2004. However, growth requires energy, and Bangladesh’s government - for numerous reasons - has not been able to keep up with such needs.
Bangladesh is also poor - and especially poor in fossil fuels or other conventional energy sources. SEAF has been investing in Bangladesh for more than 7 years - and one of the first investments we made was in Solaric.
Solaric was a startup - which had both an efficient technology for the collection and distribution of solar energy - but also an efficient technology for collecting payments from the users of its energy. It could build microgrids at very reasonable prices which could provide electricity for more than 40 houses and small businesses - driving not only lighting but also household appliances and small businesses (energy for poultry breeders and layers).
The local franchisee could cut off any of the 40 or so users remotely if they did not pay him the monthly usage - but Solaric could turn off the franchisee if THEY did not make their payment. With 40 local users depending on the franchisee to pay his or her bill, you can imagine that Solaric had a very good and efficient billing procedure. Its microgrids have provided reliable clean power at rates very close to the national grid - in essence providing many people the electricity the government of Bangladesh has thus far failed to provide.
The Company grew rapidly and profitably - when it needed more capital, we sold out to the new financing party which put in 5X as much capital as we invested for a smaller percentage of the Company. The Company is now providing clean energy solutions not only in Bangladesh but also in Nepal, Malaysia and India. Because access to clean and reliable power is a global problem.
Many governments also fail to provide their citizens adequate schools for their children. Years of government-to-government loans to establish basic education have largely failed - particularly with respect to teaching English, mathematics or basic computer skills.
Yet these skills have become increasingly important for a wide variety of entry-level jobs. In 2008-2009, Bridge International Academies was founded in Nairobi to provide a relatively rigorous, standardized educational approach - where the delivery of materials and educational testing came through tablets from a central high-quality source.
Teachers, in essence, administered such content but were not required to master all the topics taught. This not only resulted in consistently higher standards and results versus government schools and many private schools, but it allowed lower costs and scalability. Today, Bridge International Academies exist not only in Kenya (where more than 100,000 students attend various Bridge schools) but also in Uganda, Nigeria, Liberia and India.
SEAF has not invested in Bridge Academies, although our friends from Novostar, Khosla Ventures, LGT Impact Ventures, and Omidyar Network have to date.
These companies began as answers to local problems, which local governments were not solving. However, their innovative entrepreneurs solved delivery and production costs in such a way that they could expand to other markets where governments were equally not solving these important problems.
I would now, however, like to suggest that impact investment has a broader role to play than even these great examples—namely for specifically cross-border problems. I refer in part to Richard Haass’ book, “A World in Disarray”, in which Haass notes that increasingly, problems are arising which national governments are just not able to solve by themselves. He cites a number of such problems, from climate change, epidemics and superbugs, cybercrime and global misinformation. To these, we can add the consequences of financial instability and unequal access, water shortages and food security, and forced migration/displacement.
Certainly these problems exist and do not seem to be going away; just as certainly, looking at the complexities of international cooperation—whether with respect to the Paris Accords for Climate Change, the slow and less than perfect response to the Ebola crisis, or what we are now seeing in reference to the more than 65 million forcibly displaced through war and unrest –we can no longer rest secure in our governments solving these problems.
I would like to suggest that impact investment - just as it has been geared to solving "have to have" social problems in local communities, has an important role to play in solving these cross-border problems. Again, we can look at three examples, both from the SEAF portfolio and outside.
It is not necessary to present the problems caused by climate change - they are many. But one SEAF company, in our India agribusiness portfolio, shows how impact investment, especially in those countries and sectors most affected, can make a substantial difference. Abhay Nutritions was started in Jalna, a dusty small town of 400,000 in central Maharashtra. This is India’s cotton belt—lots of cotton gins and smallholder farms relying on cotton. Here, an entrepreneur named Ashish Mantri looked at the cotton seed, a byproduct which had been conventionally crushed to produce low-quality edible oils and protein for cattle. The seed contained an aflatoxin - gossypol - which was in effect poisonous to all but large animals, making cottonseed protein a low-grade product for India’s many individual farmers - generally owning just a few cattle for their own milk and dung burning needs.
Ashish had studied chemical engineering at UDCT in Mumbai. Upon his return to Jalna - where his family had a cotton ginning operation - he developed a process which could crush cotton seed at lower temperatures and with no net water usage - critical in India where water is not abundant and electricity not always available and backup diesel generation rather expensive. He found that proteins from his process on average increased milk production in cattle by an average of 20% more than conventional feed. Upon more research, he found out that this process in effect stripped out the aflatoxin, resulting in easier digestibility and the nutrition provided to the cow not being offset by the anti-growth properties even in large animals. SEAF invested in Abhay on this basis—at a time when the company had achieved a little over $5 million in annual sales.
The following year—2012—a drought caused poor soya crops in the US and Brazil—leading to a global spike in soya prices. Soy is the primary source of protein for the poultry industry—both because of its high protein as well as because unique among oilseeds, it did not carry significant gossypol aflatoxins. Protein is approximately 40% of the cost of poultry feed—and feed is between 80-85% of the total costs of production for many small poultry producers. In 2012-2013, therefore, when the effects of the unexpected drought in key soya producing countries hit, the effect was that poultry feed spiked. In India—as in many other emerging markets—this meant that many farmers had to slaughter their chickens and get out of business.
Ashish thought—if his cotton seed proteins were without gossypol, could he substitute the much cheaper cotton seed for the more expensive soya bean as producer of poultry protein? With intensive work and testing, he proved that this was indeed possible—and not only for soya but also for other oilseeds—by now, rapeseed, castor, sunflower, safflower, all groundnuts and coconuts. This led to a fantastic ability to source whichever oilseeds were available and less expensive—due to better harvest or seasonality. The Company has also sold its proteins to the fish industry. Abhay Nutrition last year sold $100 million of proteins and oils—up from $5 million in 2010-2011—and has provided greater price stability for its farmers. We have licensed the technology and are implementing that technology in 5 African countries and selling proteins to a number of other countries like Bangladesh.
As a footnote, SEAF has calculated that the use of Abhay proteins in place of fishmeal as a fish food results in a massive reduction in CO2 emissions. Abhay research has also shown that its higher digestibility has greatly reduced the methane expelled by cows - a serious contributor to global warming. In fact, SEAF has recently calculated that in 2016, Abhay displaced animal proteins and methane equal to the entire national greenhouse emission footprint of the country of Benin.
Another cross-border issue that is likely to get worse is access to water and the implications for food security. SEAF has been researching across a number of companies that are refining the use of hydrogels that soak up and retain water when available -and by natural osmosis - return such water when the surrounding ground reaches a level of dryness. The application of some hydrogels across rows of crops can also soak up excess fertilizer - preventing that fertilizer from contaminating the water table and releasing such fertilizer along with the water when surrounding conditions become dry again.
The most promising technology we have seen has been developed in the United States. However, like most developed nations, the farmers in the U.S. are not especially needy for such hydrogel. Irrigation systems have been established, and thanks in part to existing programs benefitting US farmers, in times of drought, such farmers are covered in case water becomes too scarce.
But in a range of countries from Morocco to Tanzania, from Pakistan to Peru - this technology is of vital interest. Yet conventional venture financing was raised in California by California venture fund - who are trying to expand usage from just California to Mexico. With our global network in many more countries, we believe that investing to distribute this hydrogel across multiple geographies will speed up implementation and accelerate the benefits - far less water and fertilizer usage for a more secure and efficient yield. For this reason, we have established global managed accounts so that investors are not geographically constrained in their desire to achieve impact, but where we can search out the best opportunities and accelerate across multiple countries.
As a final example - and one where SEAF is very active currently - what do we do about the 65 million forcibly displaced people around the world? Among that number are many talented and experienced people. Among the many tragedies forcible displacement causes, we believe the loss of ability to deploy their talents and experience is significant and avoidable.
SEAF has a presence in 17 post-conflict countries and is focusing one of our managed account programs on Turkey and Armenia. As an example of a cross-border solution, we are investing in businesses which need the skills and talents of the refugees/migrants coming from Syria, Iraq and Iran.
These businesses include business process outsourcing - where Arabic language skills are vital but where local Turkish or Armenian sources cannot speak the language. Export businesses to Arab speaking countries is another major area for displaced migrants and refugees. SEAF is diligencing businesses which otherwise provide products or services disproportionately benefitting or employing displaced people, including affordable housing and small business lending.
Let's be clear - these investments, as well as other investments SEAF is considering or has made in companies, will not by themselves solve the major cross-border problems that provide the context for their business activities. They will target competent and high-integrity entrepreneurs who will be interested in delivering their business model in such a way that they will make profits, out of which their families and that of their employees will benefit, and out of which additional growth in investment in their businesses, and not least, which will benefit Impact investors.
But investments which target these cross-border problems relieve some of the pressures inherent in such issues. By addressing these problems, they relieve the increasingly scarce fiscal capacity of developed nations to engage. By addressing these problems through local or regional entrepreneurs, these solutions will be sustainable and accountable, and likely to adjust dynamically to variations and new challenges.
They will create business opportunities for local suppliers and other businesses - on average, SEAF investees source inputs from approximately 150 local businesses. They will provide for wealth creation, instead of a permanent drain on decreasing resources. Finally, by delivering value to their intended customers and suppliers, these investments will provide relief and hope in the future to the populations most affected by these problems.
There are other impact investments which are critically important for local parties, and long may they flourish. Our hope is that we open your eyes and excite your vision to back entrepreneurs with a mindset of solving cross-border problems, thereby generating conditions favoring peace and progress across the world.