Bob is a Managing Director at SEAF, leading its impact investing strategy and management, as well as serving on its Global Investment Committee, supporting new fund launches, and working on select operational and fundraising initiatives.
Prior to joining SEAF, Bob was Chief Operating Officer for the Grassroots Business Fund, a leading impact investment fund, from 2011 to 2013. He then led his own boutique consulting business, Planet Ventures, which advised on impact investing and small business risk capital. Mr. Webster has been an active trainer in impact investing, including for SEAF, the GIIN, ANDE and Harvard Business School’s Impact Club. He also serves as mentor for the social enterprise accelerator at Santa Clara University.
Bob holds an MBA and a BA in Mathematics from Indiana University. He completed Harvard University’s Financial Institutions for Private Enterprise Development Executive Program, and he has completed post-graduate work in agricultural economics at the University of London.
Christopher P. Skroupa: How do you define impact investing? Why is impact investing so important for emerging markets?
Robert Webster: Impact investors seek both financial returns along with social and environmental impact. For SEAF, that means targeting commercial financial returns and a tripling of impact that we can clearly project and measure post-investment. To achieve this level of impact, the impact must be inherent in the business model, meaning that as they sustainably scale on a financial and operational basis, the expected impact scales right along with the business scaling.
Impact investing is so important for emerging and frontier markets because the social and environmental needs are so great. Fully developed markets also have needs, of course, but the gaps can be much greater in other markets given the lack of local capital, particularly risk capital, for private sector solutions, and government and donor funding for the provisions of services in health and education, which are traditionally provided by the public sector. For example, SEAF is now evaluating an expansion investment opportunity in Southeast Asia in an OB/GYN facility, which if completed, should result in significant impact in three areas: the provision of quality OB/GYN services, jobs for female nurses and health technicians, and an upgrade in its health practitioners’ knowledge and skills through the company’s onboarding training program. The expected impact, which would not otherwise be realized, would be significant for the “third tier” city in which the new facility would be located.
Skroupa: As an investment management group focused on SMEs in emerging markets, how do you target applicable businesses?
Webster: Targeting applicable businesses obviously starts with the investment strategy of any given fund. Any fund, in one form or another, has a different investment thesis and strategy, whether it be in terms of market opportunity, geography or sector focus, chosen investment instrument(s) or size, impact theme, etc. A fund’s investment thesis and strategy in itself is determined jointly with interested limited partners in a proposed fund based on an iterative process that begins with an assessment of the need and opportunity for a given market.
On a day-to-day, operational level, targeting applicable businesses begins with having qualified local teams on the ground that have strong local networks to source deals, vet entrepreneurs, understand customer and supplier markets, appreciate legal nuances of the local context, apply local norms of communication in due diligence and deal supervision, etc. This established local presence is particularly important in the more frontier markets where trust is such an important element in obtaining deal referrals. For this reason, SEAF funds are always staffed with local nationals, with expatriate managing directors in place only when there is no alternative. In general, a local network for potential deal sourcing include the banks, professional service providers (e.g. attorneys), general and sector-specific business associations, other funds, and, of course, existing portfolio companies.
Skroupa: From a strategic perspective, do you see an inevitable tradeoff between achieving both financial returns and social or environmental impact?
Webster: Of course, this is a common question in the impact investing space and there are different schools of thought. As noted above, SEAF does not see a tradeoff in its own strategy.
My personal view is that this is not an either-or answer, meaning that different investors can have, and often do have, their own impact investment thesis with perhaps an emphasis on impact over financial returns. For example, an investment fund might be operating in a market with high risks, small markets, high cost-of-doing business and small expected ticket sizes for investments, all of which is a recipe for lower net returns for LPs. But, if the investment activity is viewed as crucial from the fund LPs’ perspective, perhaps in order to create much needed employment, access to health care for low income households, or even providing a demonstration effect for foreign investment, this could make perfect sense. The key in doing so, in my opinion, would be to minimize market distortions as much as possible while accepting those lower returns. Other funds and strategies may be focused on countries and themes which can generate commercial returns which are comparable to the returns sought by typical private equity funds lacking an impact mandate.
Skroupa: What other challenges are there in impact investing? For example, what challenges do you face in measuring impact? Are there specific metrics you use to determine the social or environmental impact of your investments?
Webster: Having impact inherent, or “baked” into the business model largely addresses the challenges of intentionality and measurability, as it is quite clear of the business’ intent with regard to impact and it should be easy to measure and track. For example, if a business sources from smallholder farmers, a common impact target group, the firm’s records should already track such supplier payments.
There are other challenges. First, how does one actually collect the data? Many funds collect self-reported data through a survey form, perhaps using Excel. However, more funds, including SEAF, are moving towards impact data platforms, such as GIIRS, as portals for investees to report on impact. Beyond collection efficiency, these portals allow real-time aggregation and dashboard information on status of the data collection. Second, how reliable is the data, especially if self-reported? Again, the more impact is inherent in the business model the more reliable the reported impact will be, as impact is tracked as a normal part of operations. Finally, it is difficult to really understand impact at the household level. That is, an investment might create quality jobs, but one might not understand the ultimate outcomes at the household level. For example, are family education or health outcomes better as a result of these jobs?
For measuring impact, SEAF relies heavily on the IRIS metrics catalogue as it fits our investment activity well. It provides metric options that invariably match with the impact thesis of each deal and it also finds a good balance between rigor of definition and flexibility. IRIS has been widely adopted, even having been aligned with the HIPSO framework of the DFIs, so it makes sense to follow our partners and peers.
Skroupa: How do you see the impact investing field evolving over the next five years?
Webster: We all see more mainstream capital interested in social and environmental impact. Millennials are pushing family office portfolios in this direction and foundations are increasingly “putting their money where their mouth is”, using core endowment funds for impact investing. Perhaps surprisingly, given their high fiduciary responsibility, pension funds are increasingly looking at this space. This obviously represents a great opportunity for impact investing fund managers, but it also raises some interesting questions as the space moves forward. It is critical in the private equity space that committed capital for impact does not overly exceed the demand in the market. Particularly in public securities, investors should be wary of offerings that are marketed as impact but in essence are not.
Another trend is the coalescing of impact capital around certain impact themes or sectors, such as quality job creation, environmental sustainability, agribusiness or even gender. On gender, SEAF has seen a great deal of interest in this based on social media metrics, interest from co-investors, and hearing in the marketplace about potential fund-of-funds focusing on women entrepreneurs. Clean energy is of clear interest to mainstream investors as sustainable sources of energy such as wind and solar become increasingly economically competitive with oil and gas.
Finally, some interesting questions on impact investing will perhaps be answered over the next five years. Will impact investment fund managers go full bore on impact, establishing clear impact achievement thresholds, alongside financial return thresholds, for investment decision-making? Some managers do have minimum impact requirements for making investment decisions, while others have do not or have impact achievement guides. Some fund managers feel they do not yet have enough experience and data to establish firm impact decision-making thresholds. Conversely, will there actually be a push back on impact metrics themselves, as occasionally there are informed voices that question if the insistence on full rigor on impact management can cause investors to lose sight of the real impact being achieved and hence be counter–productive. Perhaps more importantly, what will another five years of data tell us about these questions, such as the possible tradeoff between financial returns and impact, the suitability of impact metrics and thresholds, and what impact themes, sectors and/or geographies and asset classes will be of most interest to investors?