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 Impact
Investment
The Wiley Finance series contains books written specifically for finance and
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 Impact
Investment
A Practical Guide to Investment
Process and Social Impact Analysis
+ Website

KEITH ALLMAN
XIMENA ESCOBAR DE NOGALES
Cover image: Top: ©iStock.com / Media Mates Oy; Bottom: ©iStock.com / PonyWang
Cover design: Wiley
Copyright © 2015 by Keith Allman and Ximena Escobar de Nogales. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
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Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
 Contents

Preface vii

Acknowledgments xi
CHAPTER 1
Introduction to Impact Investing 1

CHAPTER 2
Sourcing and Screening 11

CHAPTER 3
Investment Analysis and Valuation 61

CHAPTER 4
Due Diligence and Investment Structuring 129

CHAPTER 5
The Term Sheet and Definitive Documentation 167

CHAPTER 6
Post-Investment Monitoring, Management, and Value Building 207

CHAPTER 7
Impact Investing Funds 235

CHAPTER 8
Investment Alternatives, Challenges, and Outlook 255

About the Companion Website 269

About the Authors 273

Index 275

v
 Preface

Lebanon is a beautiful country, with picture-perfect coastlines, lively cities,

and, unfortunately, abject poverty in many regions. It was there, in Beirut,
that my venture into impact investing began. I was conducting a pro-bono
workshop on credit risk, for local microfinance analysts that were supported
by the charity Relief International. On the Israeli border towns I took my first
onsite visits to clients who received loans and observed how they utilized the
funding to operate and expand their businesses. I was truly impressed with
the effect the funding had, as I was able to see real businesses in expansion.
At that time in my career, I had just left banking at Citigroup and was
still primarily engaged in private-sector finance. I thought critically about
that trip, though, and questioned whether I should make impact investing
my full-time effort. I hesitated because of prior experience with nonprofit
entities that operated very inefficiently. I also struggled with finding clarity
on whether my experience and skill set were best utilized in existing impact
investing organizations. For years, I maintained my private-sector focus, but
furthered my work with Relief International, consulting on microfinance
capital market’s issuances, and eventually joining its board of directors.
I persisted with traditional finance and combined my prior securitiza-
tion experience with early-stage company analysis to work on venture debt
transactions. As I learned more about venture company drivers and private
equity fund operations, I couldn’t get the thought of impact investing out
of my head. And as fate would have it, right around that time a former
Citigroup colleague informed me about a new private equity fund that had
spun off of a large commercial microfinance debt investor. The Oasis Fund,
managed by Bamboo Finance, was created to invest for profit, in early-stage,
private companies that also had significant social impact. When I researched
its investment criteria and the impact it sought, I was enthralled.
I decided then that I would give impact investing my full attention and
moved to Switzerland to work for the Oasis Fund, where I became an invest-
ment manager tasked with sourcing, structuring, and managing for-profit,
impact investments. My first year at the fund was mainly getting oriented
with the fund’s existing investments and simultaneously building my net-
work for new investment opportunities. I also started learning more on
topics foreign to me, such as what defines social impact and how to source
investments within a social criteria.

vii
viii PREFACE

By my second year, I had become heavily integrated into the impact

investing industry. I was in the field every few weeks, combining trips to work
with the Oasis Fund’s portfolio companies, meeting with new companies for
potential investment, and conducting due diligences for companies that had
progressed through the investment process. I regularly attended and some-
times hosted industry events such as general and sector-specific conferences,
dinners, and talks. The second year culminated with successfully sourcing
and closing two investments for the Oasis Fund and joining the board of
directors for two of its existing portfolio companies.
In what would be my final year with the Oasis Fund, I was promoted to
senior investment manager and started working on new fund strategy and
fundraising. Those tasks and responsibilities provided a more encompassing
perspective on the industry. However, over the course of that last year, I
encountered undercurrents of problems that I felt were systemic in nature.
Difficulty sourcing investments that met most investors’ social criteria was
a theme that echoed across my peers. This led to very competitive situations
where some nontraditional investors took approaches that lacked rigor and
led to inflated valuations. With costs of capital near zero for these entities,
the problems could be sustained, but ultimately, it was no longer commercial
investing at that point, but a charitable intermediary.
There is efficacy in the models in between commercial investing and
pure charity, but the scale is restricted by the sources of capital. Unlock-
ing consistent sources of capital from pension funds, insurance companies,
and traditional investors requires a meticulously designed investment thesis
that is executed professionally, from sourcing to exit, and provides reliable,
measurable financial and social returns. I believe that in order to build the
desired volumes for a replicable, scalable investment model, there will have
to be different social criteria for varying financial return expectations.
Creating investment portfolios that deliver such financial returns and
demonstrate that a specific social impact has been generated is what will
define entities in impact investing. This is why the brunt of this book and
the electronic files accompanying it focus on the investment process and
social impact measurement. There are many publications available that
have striking images of rural villagers using innovative technologies and
compelling stories of impact-oriented companies, but these are largely
motivational and show basic causality. It’s the day-to-day tasks of impact
investors—which involve accounting, corporate finance, valuation, statis-
tical measurement, and social metric analysis—that are the most difficult,
but the most important.
Although I left impact investing as a full-time endeavor because of some
of these issues, I remain committed through select investments in solar and
energy efficiency that my current position allows for and pro-bono work
with impact investing entities. I anticipate a full-time return at some point.
Preface ix

In the interim, I can offer this book that tries to address proper investment
execution and social impact measurement. As with any of my books, I stand
behind the learning process and offer my email directly if you have questions:
keith.allman@enstructcorp.com.

Keith A. Allman
New York 2014

I have had the privilege of walking the narrow streets of Mumbai slums and
speaking with micro-entrepreneur women whose endurance and creativity
merit recognition and respect. I have also heard businesspeople in luxuri-
ous offices in Geneva argue that it is not possible to build an ethical gold
supply chain. Impact investing builds a bridge between apparently discon-
nected realities. Impact investing is the promise of channeling private capital
to solve intractable social problems while delivering impact, inclusion, and
sustainability.
But, is impact investing delivering on its promise? Keith Allman’s kind
invitation to be a contributing author of this book sparked a desire to share
the lessons learned by Bamboo Finance on the importance of adding rigor
and accountability in defining, measuring, and assessing impact. Even if we
are only at the beginning of the learning journey, we follow from due dili-
gence to exit a responsible investment process aimed at delivering impact.
The impact promise begs for more accountability. Too much money has
been deployed with little analysis on effectiveness. Impact investing mar-
ries the rigor of the industry of investing with the (nascent) rigor of impact
measurement. If impact investing wishes to deserve its name, it needs to be
evidence-based investing. Building evidence on what works and what doesn’t
requires a collective effort. The broader the participation is, the richer the
learning will be. The voices of customers at the base of the pyramid, on
whose behalf we too often speak, are central to our learning. Also, the
entrepreneurs, investors, and academia need to join the conversation. This
book seeks to contribute to that learning. I am grateful for the opportunity
and excited to read your reactions. ximena.escobardenogales@gmail.com

Ximena Escobar de Nogales

Geneva 2014

A NOTE ABOUT THE WEBSITE

Readers will find professional-level investment material on this book’s

website: www.wiley.com/go/impactinvestment. See the appendix for
more details.
 Acknowledgments

While impact investing demands a large body of financial knowledge, it

would simply be traditional investing without the social impact analysis. I’m
thankful that Ximena joined this project to provide her expertise in social
impact and be the counterweight that allows this book to cover the full spec-
trum of challenges and solutions for impact investment.
Also, while I identify the inception of my work in impact investing
many years ago through Relief International, it was my work with Bamboo
Finance that accelerated my understanding of direct investments and
industry-wide issues. I’m thankful for all of the collaboration, discussion,
and engagement with Jean-Philippe de Schrevel, Christian Schattenmann,
Eric Berkowitz, Keely Stevenson, Natalia Mouhape, Florian Ulmer, Ana
Maria Aristizabal, Marlene Mueller, Elvira Espejo, Anu Valli, and Geetali
Kumar.
Finally, it’s been three years since I’ve worked with the team at John
Wiley and Sons and I still can’t thank them enough for the opportunity to
publish on their platform and work with their talented staff. In particular,
Bill Falloon has worked with me throughout the years and is a great sound-
ing board for ideas and bringing a concept to reality. I’m also very thankful
of the work Meg Freeborn, Helen Cho, Maria Sunny, and the rest of the
Wiley team completed.

Keith A. Allman
New York 2014

Many people have contributed to the learnings and insights on impact

management shared in this book. I am particularly grateful to the individuals
whom this industry seeks to serve. In a quest to better understand their needs,
we often intrude in their lives. They generously allow us in, even when our
“studies” do not always result in gains for them. Thanks also to our investee
companies who help us seek evidence of what products and distribution
models deliver the expected impact.
Much of my learnings on impact investing come from over four years
at Bamboo Finance, and I am most grateful to Jean Philippe de Schrevel,

xi
xii ACKNOWLEDGMENTS

whose tenacious belief in the power of private capital to solve intractable

social problems inspires many of us in this industry. I am also thankful to
my colleagues at Bamboo Finance and in particular to Sarah Djari, Ana
Maria Aristizabal, and Anu Valli for many hours of engaged discussions
on identifying, measuring and expanding impact, and to Tracy Barba, for
helping us articulate our achievements and challenges.
I have also benefited from the insights of industry-wide social perfor-
mance and impact management initiatives, specifically the Global Impact
Investing Rating System (GIIRs), the Social Performance Task Force (SPTF),
and the European Venture Philanthropy Association (EVPA). Many thanks
to Neha Kumar, Olivia Muiru, Flory Wilson, Emmanuelle Javoy, Kelly
McCarthy, Laura Foose and Lisa Hehenberger. On a more personal note,
I would like to thank my daughter Camille for ongoing stimulation.
My greatest gratitude is to Keith Allman for having invited me to con-
tribute to this book.

Ximena Escobar de Nogales

Geneva 2014
 Impact
Investment
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