A Guide for Impact Investment Fund Managers

A step-by-step resource to creating and managing a private equity impact fund

Adding Value

Increasing Growth Efficiency

A private equity impact investment fund requires a developed strategy for how it can increase the growth and efficiency of each of its portfolio companies, to ultimately drive an increase in IRR and impact. The fund manager’s job is to work with the entrepreneur to create an aligned vision for growing the company and increasing its profitability. Given the high-touch nature of the entrepreneur–fund manager relationship, fund managers should evaluate the number of portfolio companies they have, making sure they can dedicate adequate time and resources to each. Relationships with portfolio companies are most successful when they are hands-on and consistent throughout the investment lifecycle. Fund managers should have strong knowledge of the industry, sector, and any associated technology that might improve the portfolio company.

 

Adding Value: Fund Manager Role

An ideal relationship between fund manager and portfolio company is mutually beneficial, with the fund manager offering unique skills and knowledge to grow the company, increase its IRR, improve the quality and depth of its impact, and lead to positive returns for the fund and its LPs. The fund manager can provide guidance by:

  • Advising on the company’s business strategy, including product design and marketing;
  • Using gap analysis to uncover new functional needs for a growth company;
  • Helping to attract and retain quality senior staff;
  • Improving financial systems, including accounting, audit, and reporting procedures;
  • Introducing the company to other sources of financing;
  • Improving its governance and transparency;
  • Introducing the company to new technology;
  • Establishing new supply and distribution relationships;
  • Helping the company effectively measure and manage for impact; and
  • Helping the company to use social and environmental impact data to strengthen sales and impact performance.

 

Example: Gawa Capital

GAWA Capital is an impact investing company that promotes social and economic development by leveraging private capital markets to support social entrepreneurs. Focusing on underserved, low-income, and often rural markets, GAWA uses private equity, equity-like debt, and private debt to tackle development in sectors such as agriculture and financial inclusion, basing half of its funds’ performance fees on investments’ social impact performance. GAWA Capital works closely with its investees to improve impact over the course of each investment. Based on evidence GAWA has gathered throughout this process, GAWA’s investees have started to add technical assistance and training for their agricultural products, as such support can improve impact and financial returns better than providing a product alone.

 

Adding Value: Lifecycle Model

Fund managers can add value to their investees at every stage of their relationship and across the investment lifecycle (Figure 16). For example, in the early stages of identifying and screening potential investees, fund managers should start to think about how they can help grow and improve a company’s current business model. Many fund managers think in terms of a ‘one-hundred-day plan’ to create value in their portfolio companies, asking themselves: what immediate actions could be taken after investment to improve this company?

 

Figure 16: Adding value across the investment lifecycle

 

 

Adding Value: Function Model

Not all investee companies will have all the elements they need to successfully and sustainably operate their businesses, especially for funds investing in SMEs in emerging markets. Fund managers can help identify appropriate intermediaries to address these gaps. Typically, the smaller the investee, the more operational and strategic support is needed. Technical assistance (TA) can be a crucial resource in such cases (Figure 17). Fund managers can also provide this support themselves, being careful, within each discrete department, to offer specific, actionable guidance and expertise.

Figure 17: Adding Value: Functions Model

 

No business plan is implemented perfectly as planned. Fund managers should be ready to guide their portfolio companies and their own teams through the various complications that may arise. To successfully navigate these changes of course, fund managers typically work with entrepreneurs to create a close and trusting relationship. Strong relationships can help ensure that accurate and timely reporting and information gathering takes place, enabling both sides to anticipate potential issues and highlighting areas for improvement. Establishing both formal and informal reporting processes (that is, both in writing and verbally) can foster a mutually beneficial reporting process.

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