Investor Spotlight

Investor Spotlight: Capricorn Investment Group

Capricorn Managing Principal Ion Yadigaroglu and Managing Director Alan Chang share their perspectives with the GIIN community.

Global Impact Investing Network July 29, 2010

GIIN: Why was Capricorn set up? What were the founding motivations?
Ion Yadigaroglu:

Capricorn began nine years ago, after former eBay president Jeff Skoll had a hard time finding an asset manager that would align with his perspective on ethics, personal attention, and privacy. The easiest path was to create a new firm and so he founded Capricorn and became its anchor client.The earliest years of the firm had limited ambitions around impact, but as time went on, we began to rethink how we would invest. This started with very simple things, like becoming more informed about what stocks were in the portfolio. We didn't want to invest in companies that had real ethical problems, so we bought data about company sustainability and incorporated that information into our thinking. Another very important step was to align ourselves with fund managers who appreciate that our investments need to be sustainable, focused on the long term, and positive for the economy and environment. We look for people who are making money by adding value to their communities, rather than exploiting loopholes and short-term advantages. Because investing in funds is more removed than direct investment, it's important to us that we know and trust the people who manage the investments.

GIIN: Jeff Skoll also created the Skoll Foundation to address global problems through social enterprise. What is your relationship with the Skoll Foundation? How closely are your goals aligned with theirs?
IY:

Our official relationship with the Skoll Foundation is that we are their investment manager, as we are for Jeff Skoll and a handful of other clients, including at least one other foundation. Primarily, our clients want us to produce good returns over long periods of time, but it's also very important that we do so in a way that aligns with their values.We do work very closely with the Skoll Foundation in particular, and we are strongly motivated by that relationship. Early on, when the Foundation would ask about our investing, we'd say, "our job is to invest money, your job is to give it away." But the Foundation wasn't satisfied with this conventional answer, and they pushed us to think more about the positive and negative impacts of our investments.

After working together for nearly a decade, the Skoll Foundation trusts that we make reasonable compromises in an uncertain and complex world. They also set a high bar and aren't afraid to ask us to explain our decisions. Without that level of accountability, asset managers tend to do the conventional thing, and impact investing is unfortunately far from conventional. Successful impact investing requires a lot of trust, communication, and joint accountability.

GIIN: What types of investors are best suited to make impact investments?
IY:

A lot of people think impact investing sounds good but they don't want their portfolio changed. For instance, many people believe they are long-term investors, but what that means in practice varies enormously. There are institutional players and some unique individuals who really do think that success takes five, ten, or fifteen years. There are others who will say they want to invest long-term but in fact cannot withstand month to month changes. A genuine appetite for long term is a big component of impact investing. The other piece is liquidity. Some people want to know that they could sell everything at any time. Other people are just the opposite, looking to get more involved with impact investing and make it a bigger part of their life over the next ten to twenty years.

GIIN: What strategic or operational guidelines do you have for your investing portfolio?
IY:

We have a somewhat structured asset allocation model for the portfolio and where we want it to go. We're building towards 15% direct loans, 10% direct equity in companies, 10-15% in financial holdings like gold and treasuries, and 50% in funds ranging from equities in Europe to venture capital in China. We invest in funds when there's a real specialization required, or localization in a geography where we're not, or more capital needed than we're willing to commit. We combine this approach with field work that helps us determine specifically which investments we'll make.

The core of what we do is fairly mainstream, and that allows us to do some things that are more aggressive on impact. With a few percent of our capital, we go way out and do some things that others might call crazy.

GIIN: Tell us more about those investments you describe as fringe and aggressive on impact, those that you say others might call crazy.
IY:

I'm very interested in investments that are not just doing good, but are also important or significant. If a business is important, that can compensate for some of the risk. The electric car company Tesla is a great example. In 2005, people would literally laugh if you told them you'd invested in an electric car company. There were a million reasons not to invest: there hasn't been a new car company in 20 years, it's a capital intensive new technology and a consumer product, some of the best run and largest companies in the world are competitors, and there are regulatory and safety factors to consider, to name just a few challenges. On the other hand, Tesla was really important because electric cars were on the verge of becoming viable. There was an opportunity to prove to the huge incumbent car industry that better performing clean technology was maturing. If Tesla became successful, they'd have to pay attention.

Though Tesla ran into some problems - it took more money than it was supposed to, it took longer than planned to develop the engineering - Mercedes, Toyota, and the Department of Energy all invested in Tesla. In the end, this made for a very successful initial public offering. If the company had not been important, none of this would have happened. In my opinion, a company's significance is the most obvious way to compensate for taking unconventional risks. That's an exciting and important concept for us at Capricorn.

This alignment is fortunate, since great significance also means outsized impact. Some of the most impactful investments in the world may also be some of the most significant and therefore investable. I believe many investors have the opposite bias, which is that if the issue is a big deal it can't be a wise or lucrative investment, especially if in a new and developing industry. Some very big problems around distributed services, poor populations in emerging economies, displacing fossil fuels, expanding agriculture yields, clean water feel like big headaches to most investors, but because of their importance and scale, we also see the potential for risk mitigation in what would otherwise be risky new ventures.

GIIN: You mentioned the scale of impact, which is the primary focus for many impact investors. Can you tell us more about how your idea of significance relates to scale?
IY:

Most people talk about scale because they want the impact to be big. I talk about significance because I want my investment to work financially. The end result is often the same, but the perspective is slightly different. I'll give you another example. If three businesses are doing the same thing and they are each achieving positive impact, and a fourth company comes to Capricorn for capital, we likely won't invest. If a business is not unique, how can it be significant?

Editor's note:

the next set of questions were asked of Capricorn managing director Alan Chang, who oversees investing in emerging markets and venture capital investments globally.

GIIN: As someone who spends a lot of time evaluating prospective investments for Capricorn, what is your general approach?
Alan Chang:

Capricorn is motivated by finance first, so first and foremost we are seeking to generate superior returns over the long run. For appropriate portions of the portfolio, we look for impact investments that do a lot of social and environmental good while generating superior returns. When looking for these types of investments, we aim to find great, long-term businesses that are viable and sustainable, and positively impact the environment and the community in which they operate.

GIIN:

What specific impact areas do you focused on?

AC:

In the broader Capricorn investment framework, I manage our portfolios in the emerging markets, as well as our global venture capital investments. Within these portfolios, not only are we finding tremendous opportunities, we are also finding opportunities in the nexus of new technologies that can be applied to solving problems in the emerging markets.

On top of geographic and asset class focus areas, we overlay our thematic investment approach. These themes include solutions for climate change, rural electrification, food and agriculture, health and wellness, as well as global water solutions. Within the emerging market for alternative energy, especially in India and Africa, we have been focused on finding viable solutions that address global warming issues related to the extended use of fossil fuels due to a lack of infrastructure, which is exacerbated by the rapid adoption of mobile phones and other power-consuming technologies. At the intersection of food, agriculture, and energy, we invested in companies that aim to organize and empower disenfranchised small-lot farmers by teaching them how to farm sustainably. Additionally, we've looked at the electrification of driving technology and the development of a smart grid. In all of our investments, we seek significance as well as multiplier effects that can leverage a relatively small investment into much greater impact.

GIIN: As someone who is identifying prospective investments for Capricorn, what areas have the most exciting impact investing opportunities?
AC:

In the developing world, there are exciting opportunities to leapfrog old polluting systems. The concept is similar to the growth of the mobile phone industry in emerging markets. At first, mobile phones were available only in the developed markets. The phones were extremely expensive, and the cost of putting up the towers and network infrastructure was expensive. When the globalized economy helped to bring down these costs, China and India leapfrogged the developed world by moving to wireless infrastructure and skipping wire lines altogether.

The rural electrification market is very exciting in a similar way. Major manufacturers are entering this market and driving down the cost of solar panels so that renewable energy can displace traditional fossil energy and bring new power to rural areas. Another example of a similar opportunity is in China, where there is a significant need for public transportation infrastructure, leading to massive numbers of replacement buses needed every year. These buses could be and should be replaced by electric versions that are better for the environment and for the health of the population there. In fact electric buses are economically and technologically better alternatives. For example, a large-scale electric bus fleet could take advantage of regenerative breaking because of the frequent stops required in densely populated areas. There is nothing more exciting than thinking about the total amount of diesel that can be displaced by these new and disruptive technologies.

GIIN: Do you have a sense for what exits will look like in impact investing, and if they will look different from traditional venture capital or private equity exits?
AC:

Exits will be a fascinating area to watch. A lot of the specific exit strategies are still developing. For some of these businesses having real impact - like distributing power for the rural world, for example - it's actually not a strange business to exit. There are a lot of existing comparables in the old line-power industry. It's an economic reality that distributed power is power, whether it's renewable energy or fossil fuel energy. One kilowatt hour is one kilowatt hour, so in some ways the end product is no different than what used to be generated by the fossil fuels, except that we have cleaner air and we don't have to worry about contributing to climate change or the health of the people around the manufacturing plant. So, a lot of the existing investment exit methodologies are applicable to certain types of businesses with positive impact.

GIIN: What do you see as the critical challenges that need to be addressed in the impact investing industry?
AC:

There's a need for infrastructure that enables entrepreneurs to grow - tangible things like paved roads, but also training and experience. Right now, entrepreneurs working in emerging markets not only need to have a great business and a social vision, they also have to spend a lot of time and energy managing tasks that may initially seem trivial - tires getting stuck on a dirt road, or unavailable equipment, or wind that interferes with a solar panel. Our entrepreneurs are overcoming these hurdles with sheer willpower and very high levels of energy. Already, some massive for-profit organizations are developing unique ways to distribute valuable services to the rural poor. I think some of these less tangible infrastructure things will develop soon as well.

There's also a need for more robust financing opportunities for these projects. Sometimes there's financing available, for example, in a company's early stage but not late stage, or if there's late stage financing, maybe there aren't funds available for debt. Often it's like a jigsaw puzzle with pieces missing. The GIIN Investors' Council is helping to address this by organizing a unified group where different types of investors can share knowledge and think together about how to solve these problems. That's a big step for those of us focused on the investing side. It's particularly exciting to see these solutions develop, and to be involved in this industry which has the possibility to literally change the world on a massive scale.

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.

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