impact investing Archives

Over the Next Five Years, the Private Capital Market is Expected to Double

Posted on October 12, 2022November 18, 2022 by Oscar Jofre

Over the past decade, fiscal stimulus and opportunities for liquidity have caused a surge within the private capital markets. Even though this year’s outlook is challenged by increasing borrowing costs and economies cooling, London-based research firm Preqin forecasts that the industry’s global assets under management will double to $18.3 trillion by the end of 2027, from $9.3 trillion currently. The study highlights how investors desire to seek alternative investment types in an economic environment characterized by uncertainties. While the first half of 2022 did see a fundraising drop in private capital by $337 billion from $495 billion in the same period last year. However, by 2023, private capital fundraising is expected to return to 2019 levels as the growing trend of private capital continues.

Private equity fundraising hit a record $561 billion in 2021, with North America leading the way, followed by Asia-Pacific and Europe, according to Preqin. According to McKinsey North America had about a 22% growth in private capital markets, compared to Europe with 17% and Asia with 13%. This means that for investors and companies raising capital, the US is a more attractive market than Europe and Asia and is a great place to market your private capital offering, notably through JOBS Act regulations like Reg A+ and Reg CF.

Private markets have been able to continue to grow during this pandemic because of the growth in digitalization and the internet. This has allowed for a decrease in face-to-face interactions, which has made it easier for managers to connect with LPs, as well as an increase in online tools and resources. For example, many fund managers have started using online data rooms, which allow investors to access documents and due diligence materials remotely. In addition, online investor portals have become more popular, providing LPs with 24/7 access to information on their portfolios.

The study found that the average private equity fund size has increased over the past decade, while the number of first-time funds has declined. The report attributes this to the “maturing” of the industry and the rise of large institutional investors, which have become an increasingly important source of private capital. Institutional investors, such as pension funds, insurance companies, and endowments, are allocating more of their portfolios to private capital as they seek higher returns. Private markets have outperformed traditional public markets in recent years, but that outperformance is expected to moderate over the next decade. Preqin’s study predicts that private equity returns will net 7.6 percent annually between 2018 and 2027, compared to 6.4 percent for public markets.

According to Preqin, the interest in impact investing has also increased in recent years. The firm estimates that there are now more than 3,000 impact funds globally, with assets under management totaling $228 billion. In particular, environmental, social, and governance (ESG) considerations are becoming increasingly important to private capital investors. A majority of private capital firms say that they consider ESG factors when making investment decisions, and almost half of firms say that they have adopted policies or strategies specifically focused on impact investing. As the private capital markets continue to grow, firms need to consider how they can best position themselves to capitalize on this growth.

The private capital markets are expected to continue growing in the coming years, presenting a unique opportunity for raising capital. In addition, the growth of the private capital markets may lead to more regulation, as policymakers seek to mitigate risk and protect investors. Overall, the study provides a positive outlook for the private capital markets. For firms looking to take advantage of this growth, it’s vital to consider how they can best position themselves to capitalize on these opportunities. For investors, this means considering which private capital investment opportunities offer the best potential returns. But regardless of how the private capital markets evolve, one thing is clear: they are likely to play an increasingly important role in the global economy.

Attracting Impact Investors

Posted on February 28, 2022May 9, 2022 by Matt Foley

Founders and executives of startup and early-stage healthcare companies seeking funding historically were limited to appeals to Venture Capital firms, Angels, and bootstrapping – struggling to survive by internal growth alone. In many cases, the founders resort to selling their businesses for values well below their potential. Fortunately, their options have increased due to

1. The Emergence of the Impact Investor

The economic devastation from the coronavirus and its evolving variants is a once-in-a-lifetime event that super-charged the nascent trend of individuals and institutions to invest in ventures intended to improve the quality of life. The dollar value of “impact investing” – experienced “remarkable growth over the past ten years, reaching $2.1 trillion in 2020, according to the International Finance Corporation (IFC).[i] Impact investments are investments made to generate positive, measurable social and environmental impact with a financial return. The bottom line is that impact investors look to help a business or organization complete a project, develop a new life-saving treatment, or do something positive to benefit society.

2. Exposure of Venture Capital Myths

For years, companies seeking funds avoided the tag of “social responsibility,” afraid that investors would avoid any company whose profit objective is compromised by non-financial returns. Nobel Prize-winning economist Milton Friedman ridiculed the idea that business has a “social conscience” and asserted that businessmen who believed such ideas were “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” [ii] Consequently, company leaders and investors unwittingly accepted

Myth #1 that impact investing produces lower financial returns that take years to materialize. A report by McKinsey & Company in 2018 found that investments in socially beneficial organizations produced returns comparable or exceeding those dedicated to profits only. Furthermore, the median holding period before exit (IPO or M&A) was about the same as conventional VC investments.
Myth #2 – An article in the 1998 Harvard Business Review[iii] challenged the belief that VC funding is the underlying force of invention and innovation in economic systems, finding that only a tiny percentage of VC capital (6%) invested in startups or research and development. A VC’s investment focus is on companies that have proven success and need funds for scaling.

Doing Well by Doing Good

Healthcare — where success is measured in improvements in disease progression and quality of life – is the focus of my firm. We promote Impact investing because the strategy provides an avenue in which people can do well by doing good, i.e., buying the securities of companies that positively affect the health of themselves, their families, and others. From the discovery of bacteria to the first artificial organs, significant medical discoveries have extended the quality and length of humans’ lives. Take a look at some of my clients and how they’re positively impacting the world of health and medicine.

EyeMarker: developer of non-invasive assessment and tracking devices for traumatic brain injury (TBI) improving the speed, accuracy, and consistency of concussion detection and diagnosis.
Facible: developer of revolutionary biodiagnostics technology for infectious disease which simplifies the diagnostic testing process while increasing the accuracy of results, empowering patients to better understand their personal health and the quality of products treating their wellness.
HealthySole: disrupting the infection prevention market with ultraviolet shoe sanitizer technology clinically proven to kill 99.99% of infections, contaminations, and pathogens in only 8 seconds.
Kurve Therapeutics: provider of compact liquid drug delivery devices significantly enhancing the efficacy and safety of formulations treating Alzheimer’s, Parkinson’s LBD, and ALS.
McGinley Orthopedics: manufacturer of orthopedic surgical devices employing cutting-edge sensing and navigation technology reducing surgical time and cost while improving patient outcomes.
Medical 21: reshaping the future of cardiac bypass surgery with an artificial graft which eliminates the harvesting of blood vessels, significantly decreasing procedure time and cost as well as the risk of infection, scarring, and pain for patients.

The recently updated JOBS Act of 2017[iv] offers founders of healthcare companies an alternative channel for fundraising to running the gauntlet of impersonal VC managers focused solely on extraordinary growth as quickly as possible. Using a Regulation A+ offering in place of venture capital allows company management to target those investors who believe in the company’s objectives and want to support them. For healthcare companies, the potential investors include the

doctors who work in the company’s field and know first-hand the impact your solution could have,
patients who have been affected and their family members and friends, and
people who support the non-profit organizations around those you help diagnose/treat.

Founders of healthcare companies will find a wide variety of investors eager to help them reach their objectives, according to the Global Impact Investing Network 2020 Annual Impact Investor Survey.[v] Their research estimates the current market size at $715 billion, attracting a wide variety of individual and institutional investors:

Fund Managers
Development finance institutions
Diversified financial institutions/banks
Private foundations
Pension funds and insurance companies
Family Offices
Individual investors
NGOs
Religious institutions

Rather than having one or more VC shareholders anxious to make a profit and move on to the next deal, Regulation A+ offers access to thousands of potential advocates – a legitimate community of people with a shared sense of purpose — for your business.

A Reg A+ offering allows investors to contribute to life-saving research, clinical trials, or tools and technology to assist victims in returning to everyday life, possibly within their families. For example, small biotechs are more likely to invest in research, spending up to 60% of their revenue on R&D.[vi] They account for up to 80% of the total pharmaceutical development pipeline in 2018,[vii] making small companies the driving force behind innovative new therapies, and 64% of all new drugs approved by the FDA in 2018 originated from small pharma.

Final Thoughts

Founders seeking new funding should ask, “Do I want a group of shareholders that focus solely on my bottom lines or investors who care about our company’s objectives for the full community – patients as well as shareholders?” The question is especially pertinent since an alternative process is available with less hassle, cost, and time. We believe that Regulation A+ offerings should be in the toolbox of every founder, owner, CFO, and Treasurer in the United States. Their use provides excellent upside potential with little downside risk.

Resources:

[i] Gregory, N. and Volk, A. (2020) GROWING IMPACT New Insights into the Practice of Impact Investing. International Finance Corporation. (June 2020) Access through https://www.ifc.org/wps/wcm/connect/8b8a0e92-6a8d-4df5-9db4-c888888b464e/2020-Growing-Impact.pdf?MOD=AJPERES&CVID=naZESt9

[ii] Friedman, M. (1970) A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits. New York Times. (September 13, 1970) Accessed through https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html

[iii] Zider, B.(1998) How Venture Capital Works. Harvard Business Review. (November-December, 1998) Access through https://hbr.org/1998/11/how-venture-capital-works

[iv] Littman, N. (2021) Healthcare-Focused Impact Investing: Another Way To Invest For Change. Forbes Magazine. (April 28, 2020) Access through https://www.forbes.com/sites/forbesfinancecouncil/2021/04/28/healthcare-focused-impact-investing-another-way-to-invest-for-change/?sh=3f4c7f501e5c

[v] Staff. (2021) WHAT YOU NEED TO KNOW ABOUT IMPACT INVESTING. Global Impact Investing Network. (August 25, 2021) Access through https://thegiin.org/impact-investing/need-to-know/

[vi] Coskun, M. (2020) How is R&D spending affecting Biotech company growth? Data-Driven Investor. (May 11, 2020) Access through https://www.datadriveninvestor.com/2020/05/11/how-is-rd-spending-affecting-biotech-company-growth/#

[vii] Kurji, N. (2019) The Future of Pharma: The Role Of Biotech Companies. Forbes Magazine. (May 29, 2019) Access through https://www.forbes.com/sites/forbestechcouncil/2019/05/29/the-future-of-pharma-the-role-of-biotech-companies/?sh=43d88c5f6bb3

What is Sustainable Investing?

Posted on December 20, 2021December 21, 2021 by Raise Green

This blog was originally written by our KorePartners at Raise Green. View the original post here.

OK, How Does Sustainable Investing Work?

Some investors seek to make a positive social and environmental impact with their investments and thus, they don’t simply look at the companies who will make them the most money from the get-go. Rather, they seek those companies who are working tirelessly to address a vast array of societal problems. As a result, sustainable investing is also referred to as socially responsible investing (SRI) or ESG investing, as it encompasses the idea that the investor is strongly influenced by environmental, societal, or governmental factors, before contributing money to a particular company. With this type of investment, people are seeking not a short-term financial return, but a longer-term financial return in which their money is being used as a medium for societal progress, environmental impact, and corporate responsibility. In fact, financial return goes hand in hand with ESG progress, as companies with stronger ESG profiles may generate more sustainable profit and cash flow because they tend to be more competitive than their peers (“ESG factors and equity returns – a review of recent industry research,” 2021). Sustainable investing places increasing emphasis on how investments contribute to the good of society, irrespective of how much money was made in the short run.

Sustainable Investing Objectives

Sustainable investing, as a catalyst for societal change, has seen it’s popularity rise in recent years in the face of the climate crisis and compounding social issues. Impact investing serves as one of the catalysts, alongside millennial investors driven by principles, that is lighting a fire under investors to invest their money in companies whose “intrinsic values” drive positive change (“What is Sustainable Investing?,” HBS). Sustainable investing pushes companies to embrace sustainable principles, which can lead to more impactful social and financial returns later on. With respect to Raise Green, sustainable investing is particularly crucial, especially within the context of environmental factors that investors look for in companies to contribute to money. The realm of environmental factors focuses on the impact that a company will have on the environment, such as its carbon footprint, waste, water use and conservation, and clean technology.

Growing Investment Opportunities

Furthermore, this marketplace for sustainable investing is only growing. The United States’ Forum for Sustainable and Responsible Investment identified $17.1 trillion in total assets under management at the end of 2019 using one or more sustainable investing strategies, a 42 percent increase from the $12.0 trillion identified two years prior (“Sustainable Investing Basics,” USSIF). This type of investing has become more desirable because “investors do not have to pay more to align their investments with their values, or to avoid companies with poor environmental, social or governance practices” (“Sustainable Investing Basics,” USSIF). Therefore, with sustainable investing, investors can propagate social impact without losing money. As a whole, sustainable investing is important because it can help contribute to vast infrastructure changes needed in our society to tackle the challenges we face. It allows us to move towards a better and more sustainable future.

The Evolution of Reg A+

Posted on December 13, 2021December 14, 2021 by Oscar Jofre

During the recent Dare to Dream KoreSummit, David Weild IV, the Father of the JOBS Act, spoke about companies going from public to private, access to capital Reg A+, the future of small businesses raising capital, and the future of the broker-dealer system. The following blog summarizes his keynote address and what Wield believes will be the future of raising capital for small businesses.

Reg A+’s Creation

The JOBS Act, passed in 2012, helped address a significant decrease in America’s IPOs. “When I was vice-chairman of NASDAQ, I was very concerned with some of the market structure changes that went on with our public markets that dropped the bottom out of support for small-cap equities,” said Weild. “80% of all initial public offerings in the United States were sub $50 million in size. And in a very short period of time, we went from 80%, small IPOs to 20%, almost overnight.” The number of operating public companies decreased from about nine thousand to five thousand. The changes in the market significantly restricted smaller companies from growing, unable to go public because of prohibitive costs and other expenses.

Effect on Small Business

After years of lobbying and the passage of the JOBS Act, only one of the seven titles went into effect instantaneously: RegA+. With this new option for raising capital, startups could raise $50 million in money without filing a public offering. The previous maximum was $5 million; this would eventually be increased to $75 million. It also expanded the number of shareholders a company can have before registering publicly, which is essential as companies can raise money from accredited and non-accredited investors through this regulation. RegA+ and the other rules have had a significant impact on the way startups do business. This has been a significant benefit for small businesses, as it has allowed them to raise more money without going through the hassle and expense of becoming a public company.

Reg A+ into the Future

The capital raising process was digitized by taking the investment process and making it direct through crowdfunding, removing economic incentives for small broker-dealers who could not make their desired commission on transactions. This resulted in many of them consolidating out of business and leaving a gap in the private capital market ecosystem that supports corporate finance. Changes to the JOBS Act are beginning to reintroduce incentives for broker-dealers, which will continue to shape the future of private investments as it will continue to facilitate the growth of a secondary market. Wield’s thoughts on the future of capital raising marketing are that the market is not yet corrected, but it is on track. He said: “I would tell you that there’s a great appetite in Washington to do things that are going to improve capital formation.”

Getting more players like broker-dealers involved in the RegA+ ecosystem will do nothing but benefit the space. In his closing remarks, Wield said that this would provide for a “greater likelihood that we’re going to fund more earlier stage businesses, which in turn gives us the opportunity to create jobs and upward mobility. Hopefully, since much entrepreneurial activity is focused on social impact companies to solve great challenges of our time, whether it’s in life sciences, and medicine, or climate change, you know, I firmly believe that the solutions for climate change are apt to come from scientists and engineers who’ve cracked the code on cutting emissions or taking CO2 out of the atmosphere. And so from where I said, getting more entrepreneurs funded is going to be important to have a better chance of leaving a respectable environment for the next generation.”

What is Impact Investing?

Posted on November 29, 2021November 30, 2021 by Oscar Jofre

Impact investing is the allocation of investments in companies, organizations, and funds to generate social and environmental impact alongside financial returns. Impact investments can be made in developing and developed markets and target various social and environmental issues, including poverty alleviation, climate change, education, and healthcare.

These types of investments come in various forms, each with varying levels of risk and potential returns. Investors should consider the kind of risk they are willing to take and their personal beliefs when considering what kind of impact investments to put their money in.

Some spaces where impact investing is prominent are healthcare, education, and energy, especially renewable energy. There are three main categories of impact investments; debt financing, equity, or mezzanine financing, which involves investors purchasing shares in a company, and direct investments such as buying land for conservation purposes. These represent just a small number of possibilities; there is no one-size-fits-all approach to this style of investing.

Thoughts on Impact Investing

More and more, socially and environmentally responsible practices attract investors, benefiting companies that commit to those practices. Impact investing appeals mainly to younger generations, such as millennials, who want to give back to society; this will likely expand as these investors gain more influence in the market. However, because impact investments are often profitable, they are also attractive for traditional investors looking for ways to make their money work for good without compromising their principles. In 2020, the Global Impact Investing Network released a survey that found more than 88% of impact investors had their financial expectations met or exceeded.

Since the popularity of impact investments has grown, there have been asset management companies, banks, etc., who have tailored funds to meet the demands of socially responsible investors. Another form of investments, called socially responsible investments, or SRIs, are a subset of impact investments. However, the investment focus of SRIs are more narrow, with an affinity towards companies that align with their views of human rights, responsibility to consumers, and environmental protection.

How Impact Investing Works

Generally speaking, impact investors enjoy an ROI that falls just below the average market rates. But, some instances can see impact investments outperform. Recent data from the University of California shows impact investments have a median return rate of 6.4%, which was one percentage point lower than non-impact focused funds. There are a few significant examples of impact investing in the real world. One example is the work that the Gates Foundation does in developing countries. The Foundation’s initiatives are focused on areas like healthcare and education, creating a positive impact on the people who receive the services and having a ripple effect throughout the community.

Another example is Acumen’s work in Africa, focusing on issues centered around clean water and affordable housing, which significantly impact the quality of life for people in poverty-stricken areas. Finally, Kiva is an organization that allows individuals to loan money on their website at 0% interest. The lender receives tokens every month, which hopefully will turn into capital gains when they are sold. While impact investing is helpful to the planet, it differs from philanthropy in that it requires measurable social or environmental impact and profits. Philanthropy is help given with no expectation of any repayment or benefit. Impact investing must positively impact society and make financial gains for investors; it can’t just be money donated with no return.

KorePartner Spotlight: Steve Distante, Founder and Chairman of Vanderbilt Financial Group

Posted on September 10, 2021 by Oscar Jofre

With the recent launch of the KoreConX all-in-one platform, KoreConX is happy to feature the partners contributing to its ecosystem.

Steve Distante is an entrepreneur and has been his entire life. As a graduate of St. Johns University with a degree in accounting and finance, he intimately knows their struggles and success. Before starting his own business, Steve ran an Office of Supervisory Jurisdiction (OSJ), where he learned the experience from the regulatory side. It was a great use of his degree and his intrinsic skill for planning.

Steve’s journey began when his father told him to look at financial services as a career path. What he found was the rewarding business of empowering entrepreneurs to create impactful products and services for good. That is at the core of the business he founded and is the CEO, Vanderbilt Financial Group, “an investment firm disrupting traditional finance by focusing on socially and environmentally responsible, ethical, and impactful investments.” With Steve at the helm, the ship is set up to ensure that entrepreneurs do not have to go through the same struggles he did as he grew his business.

As if it was not already clear that helping entrepreneurs is a driving factor in his life, Steve is also the CDO for Impact U, an educational community for students, investors, and financial advisors on impact investing. He has made two documentary films for it and is currently writing a book about Impact Investing. In addition, Steve is a former president of the Entrepreneurs’ Organization and served as the UN Ambassador for EO for nearly three years. He is very passionate about helping entrepreneurs building impactful companies with missions to better the world.

Steve is thrilled about the partnership with KoreConX to streamline business processes so he can continue his excellent work for the community of entrepreneurs around the world.

Tag: impact investing