In this Investor Spotlight, the GIIN spoke with Bertrand Gacon, Head of Impact Investing and Socially Responsible Investing (SRI) at Lombard Odier*. For much of his career, Bertrand Gacon has been exploring ways that capital can be used to tackle many pressing social/environmental issues.
*Investment services in the United States are offered by Lombard Odier Transatlantic, Limited Partnership
- GIIN: What led Lombard Odier to decide to engage in impact investing?
- Bertrand Gacon: First of all, it has to do with the DNA of our Firm. As a 200 year-old family-owned business, Lombard Odier has always been thinking long term and looking ahead to the next generation. Lombard Odier is also a medium-sized institution anchored in the community, both here in Geneva and abroad, which means there’s a direct commitment and personal engagement from its partners and top management. Second, Lombard Odier has been involved in sustainable investment for a number of years already. For example, the bank was one of the first shareholders of BlueOrchard, the company that manages one of the very first microfinance investment funds created in 1998. Lombard Odier also participated in the creation of Ethos, a well-known foundation here in Geneva, which was created in 1997 and, the bank was also among the pioneers in Socially Responsible Investing (SRI)and Shareholder Activism. The firm also has a strategic partnership with Generation IM, one of the world’s leading specialists in sustainable investments. Historically, the bank has been entrepreneurial and willing to launch new ideas. We’ve gained a lot of experience launching innovative products. What we want to do now is take initiatives or innovations to a much broader scale and reach a lot more clients.
- GIIN: You recently launched an impact investing fund of funds. How does this new product fit into Lombard Odier’s broader impact investment strategy?
- BG: In our broader strategy, we work across two priorities– the first is innovation. When we think about innovation, it’s with products that are riskier and relatively illiquid, products that won’t necessarily raise a lot of money but that aim to be game-changing. For these reasons, our innovative work typically engages a handful of very sophisticated clients, those who are committed to impact investing and have been pioneering the space for many years. In addition to our innovation work, we realize that private banks should also bridge funding gaps in the market through their access to clients and their capacity to select and develop products that can reach the many funds, projects, and impact investment opportunities that are in need of capital. This responsibility was really what led us to launch a fund of funds in June 2014. Its very design was intended to remove barriers that might prevent mainstream investors from going into this kind of high-impact product. Our aim went beyond creating an innovative product; what we wanted to do most of all was design a solution that would be easy-to-invest, so that both bankers and clients would be comfortable having, say, 2-3 percent of their portfolios in it.
- GIIN: How did the bank develop the investment strategy for its first impact investing fund of funds?
- BG: We really reverse-engineered it, asking ourselves, “What does this product need in order to be found in all portfolios?” First, it had to be liquid. Liquidity is really something that is still today a deterrent for many private clients. Even with more traditional investing, if you start with a relatively illiquid product, you probably cut yourself off from 75 percent of the clients. Second, the product needed to have fairly low management fees, not only because we want Lombard Odier’s revenues to be consistent with the social impact objective of this fund, but also because we want this product to be able to compete—price-wise—with any other conventional investment solutions. And finally, since we wanted to reach a lot of people, we had to be careful about the absorption capacity of the product. Even if this strategy has a significant potential on the long run (several hundred million at least), many funds cannot absorb a lot of money in one shot, so we needed to make sure our combined selection could contend with this constraint and allow us to deploy at least USD 40 to 50 million in any given month if need be. During this mental exercise, we realized that the best way to address these various constraints was through an open-ended fund of funds with a monthly liquidity.
- GIIN: What impact sectors does this fund of funds invest in?
- BG: Given the absorption capacity and liquidity constraints that we identified, there was really only one area diversified enough and with a sufficient number of qualified funds – and that was development finance, which spans financial inclusion, fair trade, small and medium-sized enterprise (SME) finance, and access to basic services for low-income communities. Development finance is also one of the areas in which Switzerland has built solid expertise over the last decade. So it was a natural area for us to consider, because we already knew most of the professionals working in the space.
- GIIN: What is the average deal size for this initial portfolio?
- BG: We have two pockets in the fund. One is used to invest in more established, larger funds with a higher absorption capacity and some track record. With such funds, we can go up to 20 percent of AUM (today that would be up to USD 20 million for each fund). Then we also have a satellite pocket, which can represent up to 40 percent of our fund and is directed at more innovative strategies, niche funds, or higher-risk/higher-return instruments. For instance, we have invested in two different microfinance products that are providing loans in unhedged local currencies. We can also find in this satellite pocket regional funds or restricted products that most of the investors would never have heard about – let alone have invested in – outside of a fund of funds strategy.This satellite pocket is also a good way for us to help new funds, new fund managers, interesting strategies, or innovative products reach critical mass more quickly. In this pocket, the one constraint is that we don’t want ownership, so we avoid being more than one-third of the fund. Otherwise, there are none of the typical requirements such as size or track record. In fact, today there’s a fund we are considering that is less than USD 5 million, which isn’t an issue for us, as long as we are comfortable with the management team, pipeline, investing process, and social impact of the fund. Overall, if you do the math, we have nine investments in the portfolio and we have more than USD 100 million. So on average, deals are more or less USD 12 million, with the smallest investment being USD 4.5 million and the biggest being around USD 17 million.
- GIIN: How did you decide which funds to include in the initial portfolio?
- BG: We have a thorough due diligence process and an active advisory committee. Also, we really collaborate with fund managers, often offering feedback and suggestions. We’ve even tried to help some fund managers better understand and meet the expectations of private clients and improve their chance to raise more capital. Our relationship with fund managers is especially important because we are long-term investors – we intend to stick with the funds and hold investments in the fund for a very long time. Additionally, before we invest, we want to make sure fund managers are transparent and able to report on their own portfolios. There are a number of indicators that we need to consolidate at the fund of funds level and we need to feel that they are willing to work as partners with us. So far, it has worked out very well.
- GIIN: How did you introduce the concept of impact investing and this product to your clients? What type of education has been necessary in the launch of this new fund?
- BG: This is actually an area where we’ve made some great progress. With our desire to reach a broader audience, we really had to think about the key selling points of the product and find a way to market both the financial aspects and the social aspects of the fund. Among the key factors for the successful fundraising of the product was the fact that we spent a lot of time in the pre-selling phase internally. In the design phase, we worked with private bankers and some clients to adjust features and make sure that we were creating something that most of the clients would consider for their portfolios from a purely financial viewpoint. We have realized that the clients are actually easily convinced. In fact, the first challengeis often to convince the private bankers themselves. Talking their language and being able to show them that the fund makes sense from both a social impact standpoint and from a financial standpoint has proven to be quite effective. When we really started to fundraise, we were selling an attractive financial product that could provide clients with about 4 percent net of fees on a yearly basis, which is a decent performance. And for the first time, we managed to move the needle beyond the niche of the sophisticated pioneer clients to much more mainstream clients – which was, after all, the true goal.
- GIIN: What has the initial level of interest been like? Has this impact investing fund of funds resonated with a particular type of client?
- BG: As a matter of fact, the interest has been much greater than we initially expected. Maybe we were a little bit conservative, but our expectation was to launch the fund with a start of USD 30 million, and then try to grow the fund gradually. We were surprised that in the first round we reached more than USD 90 million in only 2 weeks. The types of clients who invested in the product were exactly those we wanted – meaning they weren’t experienced impact investors. Most of them really were new-comers to impact investing. In terms of demographics, we also achieved our target of clients diverse in size, geographic origin, gender, and age. That said, if I were to point out one trend, it would be that there is a very clear generation shift. We first saw this a couple of years ago, but now it has become so obvious that younger investors are getting involved because they feel it’s what they need to do.
- GIIN: So far, what has your approach been to finding investments?
- BG: ImpactBase is one of the sources. Also, because we’re focusing on development finance, and the team at Lombard Odier has been in that space for many years, we already know the industry and main players quite well. We have our own master database of about 480 funds. We maintain another specifically for our Fund of Funds, which (when you take into account both the impact focus and the previous constraints I mentioned such as open-ended, fairly liquid and market-rate returns) includes about 70-75 development finance funds that are really our investible universe today for the Fund of Fund-- it’s a database that is regularly expanding. We also use our network to find new funds. For instance, we are currently running a due diligence on a fund in South Africa that’s investing in basic services to low-income communities, which will be launched at the end of November. Also, many of the fund managers are actively looking to get investments and the word has spread that we are ready to invest, so most of the time they come to us spontaneously.
- GIIN: While the financial side may speak to the private bankers, how have you gone about communicating the social impact of the fund of funds– and on a broader level, how do you plan to determine if your investments have made social or environmental impact?
- BG: It’s a challenge given the fund-of-funds structure, because we need to rely on the underlying fund managers to consolidate social performance information. To help collect the data, we plan to have a yearly social impact report that will follow a template of key indicators. Given the diversity of the funds we have in the portfolio, we want to develop a framework of social dimensions that can be used to manage performance at both the individual fund level and the portfolio level. We’re also planning on spending a lot of time in rather qualitative assessments. We’ll highlight some of the portfolio companies and investees in the portfolio and share some client stories. And we’re looking to organize a yearly site visit to take key clients and private bankers to the field so they can have a more direct connection with investees and can see how these companies generate social impact.
- GIIN: Has Lombard Odier’s involvement with the impact investing market spurred any additional projects?
- BG: At Lombard Odier, we also have a research and development approach through which we take some risks and design new products that enable us to learn important lessons to share with the industry. For example, we were working earlier this year with a leading organization in the fight against malaria. This group has an internal innovative finance team who reached out to us to set up a new investment product. At the end of the day, this initiative did not get off the ground, but most of the innovations and brain-storming around this potential product allowed us to learn a lot and expand our skill sets. Through this project, we’ve also been able to attract other specialists working at Lombard Odier: investment specialists have joined from structured products, legal, and many different teams to help explore the product.
- GIIN: What are your hopes for Lombard Odier’s impact investment practice five or ten years down the road? What are your hopes for the global impact investing market a decade into the future?
- BG: One of the reasons I joined the banking sector is that I really believe we need to reinvent the way we invest, the way we think about the use of capital. I think capital is one of the most misused resources of our times. We’ve come to use capital to create more capital, which is pointless. To me, impact investing really has the promise to reconcile public society with the capital needed to tackle many of the pressing issues we face, issues we won’t be able to solve without utilizing the talent, resources, energy, and know-how available in the private sector. So, for me, in 10-20 years’ time, I’d like to see impact investing become the standard way we all collectively think about investing, about deploying capital, and about the economy and business. I hope we will come to view capital as a tool to make humanity progress and move forward. As for Lombard Odier, we hope that we will inspire the sector, which is why I am more than happy to talk to the GIIN. I’d also be happy to share our challenges, mistakes, and advice with any other private bank that is looking to create similar products. We are not afraid of competition – we are actually calling for all our friends on the marketplace to create more products, to help impact investing scale up much more quickly, and with more ambition than we see today. We need as an industry to think more about how we can design impactful products that reach the portfolios of more people.
A note to readers from the GIIN:
Diversity is a hallmark of the impact investment market, which has attracted traditional financial institutions, pension funds, private foundations, government-funded development finance institutions, fund managers, high-net-worth individuals, and family offices. As a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing, the GIIN aims to bring transparency to this market and to the practice of impact investing. To this end, we believe it is in the interest of the field to share a sample of the diverse viewpoints held by investors who are motivated by social and environmental considerations. The publication of such diverse viewpoints, however, should not be construed as an endorsement by the GIIN of those viewpoints or the individuals or institutions expressing them.