Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
appropriate approach to addressing certain sub-sectors, such as healthcare, education
and water, in particular, is an intensely political discussion in many countries. These
variations and constraints impede the transferability of business models and/or the
degree to which the private sector may be able to participate in these markets.
Nonetheless, we recognize that in order to arrive at a global measure, we are forced
to sacrifice some of these region-specific considerations. We have made conservative
assumptions where possible to compensate for the crudeness of extrapolating from a
business model that has been proven in only one country or region. In extrapolating
from the case studies identified, we are also forced to assume that the necessary
business management capacity can be identified or developed to meet the demand of
the BoP consumer base identified.
General assumption #2: All potential business can be impact investments
In working through each sector, we extrapolate from the economics of case studies of
impact investments that conform to our definition: a business that operates with the
intent to create positive impact beyond financial return. In estimating the potential
market opportunity, we assume that all of the potential businesses that would address
that opportunity would be impact investments as well. In reality, not every business
that attempts to address these needs will be designed with intent, but we assume, for
simplicity’s sake that they are and include them all within our potential market size.
Additionally, we undertake our sizing methodology with significant concerns around
the management capacity of companies and funds to invest prudently in these
potential transactions. This current constraint is a real barrier to mobilizing capital
for impact investing. We believe this constraint is surmountable over time as
investors gain expertise. We instead focus on the aggregate demand over a finite
period, consistent with the methodology outlined in this chapter.
General assumption #3: Investment for the next ten years
We incorporate a finite time frame over which these investments are meant to
support these businesses, arbitrarily considering the next 10 years. In calculating
revenues we modeled 10 years of revenues and profits for each business. We
assumed 10% of our target market would be captured in year one and this would
grow at defined rate until the entire target market was satisfied in year 10.
General assumption #4: Operating margins indicate profitability
When considering profitability in our case studies, we choose to use the operating
margin as a measure of profitability that takes into account the cost of providing the
service or product and the administrative, sales and marketing costs that might be
affiliated with distribution. We are, however, excluding finance costs as interest
payments are not included in this measure of profit. Part of the reason for excluding
these costs is that finance costs can change dramatically from region to region
(particularly in local currency, sector by sector and over time). This measure also
excludes taxes, which again vary widely among different jurisdictions.
General assumption #5: The relationship between invested capital and annual
revenues is a constant
Our methodology estimates potential revenues based on the number of BoP
consumers to whom these goods and services are affordable. Determining invested
capital, defined as shareholders equity plus net debt, requires us to make some
assumptions on the relationship between a company's capital base and its size as
measured by revenues. We have assumed that there is a constant relationship
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