Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
between the level of invested capital and the revenues generated by that capital. In
order to confirm that hypothesis and quantify the relationship we studied 6,000
publicly listed non financial companies with market caps between $100m and $1bn
(excluding companies with sales less than $10m). The results are presented in
Appendix V and they suggest that there is on average a one to one relationship
between invested capital and the most recent full year sales number. We have
therefore applied this ratio to Year 10 sales in our model to estimate invested capital.
We note also that this invested capital will include retained earnings over the life of
the company. The amount of retained earnings in each case study can be estimated
by subtracting finance costs and taxes from the accumulated profits, less an assumed
payout ratio.
Case study
Indian affordable housing projects
analyzed by Monitor Inclusive
Markets, a consultancy working to
develop market-based solutions for
social challenges
Sector by sector analysis: Non-financial services
Starting with an example: Sizing affordable urban housing demand
Using the housing sector as an example, we now present our market sizing
methodology in some detail, walking step by step through the calculations in Table 7
below. The consequent sectors will follow the same methodology and will be
presented in summary form as a result. Further specific notes on the methodology
can be found in Appendix VI on page 86.
Potential size of investment: $214–$786bn; estimated profit opportunity: $177–
$648bn
In the following pages, we will elaborate on the resources used and assumptions
made to estimate the potential size of the impact investment market in housing. First,
however, we will note the results of the analysis, which are summarized in Table 7
below. Based on the information available, we concluded the potential impact
investment capital required for the housing sector to be $214–$786bn, which will
result in a potential profit of $177–$648bn.
Table 7: Sizing template, using housing as an example
Data point Source Housing example
Annual household income of target market Case study Brackets A–E, Urban
Target market (# of households, mm) N4B 393
Anticipated penetration rate Case study 50.0%
Anticipated customer base (# of households, mm) 196
Average price of unit Case study $6,000–$22,000
Aggregate revenues over 10 years, bn $1,179–$4,323
Estimated operating margin Case study 15.0%
Estimated profit opportunity, bn $177–$648
Total invested capital, bn $214–$786
Source: J.P. Morgan. Case study indicates the particular case study used for each sector. "N4B” indicates The Next 4 Billion, 2007,
WRI.
Customer base:
Focus on BoP, specifically
targeting a population that can
afford the price of the
product/service delivered.
Sizing the potential customer base: Not all the BoP will be served
In each sector sizing exercise, we begin by determining the potential size of the
customer base. In the case of housing we ask: how many people in the BoP
population can afford to buy a house from our case-study business model? The
World Resources Institute provides data on the BoP population size by income
brackets of $500 (2002 and 2005 PPP international dollars ) 47 . The bracketing is
47 International dollars calculated by World Resources Institute using 2002 purchasing power
parity (PPP) exchange rates. See glossary for more on international dollars.
44