Spotlight: Arctaris and Growth Debt Financing

By Connor Schoen

A conventional challenge for any start-up is not only gaining access to capital but also accomplishing this mission on terms that are favorable to their growth. While impact investing is commonly known for its efficacy in expanding access to capital, firms in this sector of finance have also turned to tackle the second problem. Namely, Arctaris, a 100-million-dollar impact investment fund manager headquartered in Boston has taken an active stance on providing growth capital on terms that are favorable to the companies they invest in.

On a call with HCIIG, Managing Partner of Arctaris, Jonathan Tower, emphasized the success of their “Growth Debt” strategy. This style of growth financing is “a blend between traditional bank debt and venture… [that] offers a flexible structure with variable payments that let companies grow without having to dilute ownership.” Essentially, the Growth Debt strategy allows shareholders to retain equity by utilizing royalties instead of the traditional financing methods employed by conventional venture capitalists and private equity firms.

According to Tower, this form of financing also alleviates the company’s pressure to sell while still closely aligning the interests of Arctaris and their investees. Unlike pure debt models, this blended system of royalties and debt ensures that both Arctaris and their investees strive towards the growth of the company. Moreover, another advantage of the royalty-based loan system of financing beyond equity retention for shareholders is that it involves “payments that hew to the company’s actual sales growth” instead of a fixed amount of debt to pay back.

Founded in 2009, Arctaris has been using this model over the past decade to start a variety of funds in Massachusetts, Michigan, and elsewhere. They are partnered with the U.S. Treasury Department along with a variety of state government agencies “to form fund programs with primary emphasis on economic development and jobs creation.” Some of their current investments include Planet FitnessBerkshire Hathaway Home ServicesAFCO Manufacturing, and, and–according to Tower–they are currently working to expand their portfolio with some larger investments this year.

Public Relations More Important than Bottom Line?

by Evelyn Donatelli

2017 marked the deadliest year in US mass shootings, a fact with which the public is acutely aware. Social media has magnified the outraged voices of groups across the country through campaigns like #BoycottNRA and #DemandAPlan, which aim to put pressure on businesses and lawmakers to effect meaningful gun control. 

Impact investing has entered the conversation after the most recent shooting, February 14th in Parkland, CA, when companies both private (e.g. First National Bank of Omaha) and public (e.g. $DAL, $UAL, $SIR) began publicly disavowing and severing business ties with the National Rifle Association (NRA). Through these public disavowments, it became transparent that companies had been offering NRA members discounts in exchange for favorable tax treatment. 

The decision to end business relationships with the NRA has been credited, by many companies involved, to consumer complaints. The cost on paper of the severing of this relationship is, in Delta’s case, the loss of a $40M tax break. Clearly, corporate leadership feels that the impact of this investment in consumer opinion will outweigh that of a tax break which has grown too controversial to maintain.

The Language of Impact

by Connor Schoen

In trying to quantify impact, coauthors of “Unpacking the Impact in Impact Investing”, Paul Brest and Kelly Born (Stanford Social Innovation Review), divide their metrics into three separate categories: enterprise impact, investment impact, and non-monetary impact. First of all, with enterprise impact, Brest and Born discuss how to most effectively measure the investee’s social impact (“social” being used here and throughout this piece to incorporate all aspects of traditional ESG considerations). They highlight product impact (result of their actual good or service), operational impact (effects on employees and local community through operations), collective impact (aggregate impact through partnerships with other NGOs, the government, etc.), and sector impact (wider expanse of their effects on the sector as a whole) as four key considerations when evaluating the investee’s overall social impact. Brest and Born also lay out a simple, mathematical tool for assessing social value: social value = (social benefit/production cost). 

Regarding investment impact, the authors first lay out the basic types of investors in order to separate classifications of how they should consider impact in their investments. Primarily, investors can either be socially neutral or socially motivated, and they can be concessionary (willing to sacrifice financial gains) or non-concessionary (unwilling to sacrifice financial gains). Ultimately, the basic classification of investors affects the major considerations driving investment decision-making and, thus, what metrics are preferred in making these decisions. For non-concessionary, socially motivated investors, for example, their program-related investments should be focused on allowing below-market-price investments/resources, providing loan guarantees, allowing for more favorable conditions and flexibility, etc.

Finally, nonmonetary impact encompasses everything from improving social enterprises’ operational environment to bringing more capital to their sector/mission from socially neutral investors to securing and protecting the enterprise’s social mission. These nonmonetary factors are critical in considering how an investor should measure his/her impact.

Can activist investing be impact investing? A look at Apple.

by Evelyn Donatelli

Over the past few decades, activist investors (ex: Peltz, Icahn, Ackman) have occasionally become stereotyped as power-hungry bullies who leverage their investments (typically 0.5-5% of a public company) to force their agenda on company executives at the expense of the company’s autonomy. But could this be used for good?

Apple’s ($AAPL) recent confrontation with 2 activist investors, suggests so. An unlikely pair on first look, NY-based hedge-fund JANA Partners LLC, and the California State Teachers’ Retirement System (CalSTRS) pension fund together own a combined $2B position of AAPL shares. In an open letter, the two activists urge Apple to deal with the “growing health crisis” Apple is currently enabling, and that the company has a responsibility to help parents limit phone use through developing new software tools, and to actively investigate the impact of excessive phone usage on mental health.

Though Jana and Calstrs own a small 0.2% of AAPL’s $900B market capitalization, an activist using his/her position to enforce social impact initiatives is noteworthy, and speaks to the improved support impact investing is receiving, at least publically, from investors and banks.  However, JANA and CalSTRS’ virtuous approach to investing is offset by investors like Ross Gerber, chief executive of Gerber Kawasaki Wealth and Investment Management. Gerber says simply “We invest in things that are addictive…Addictive things are very profitable.” Gerber also owns shares of Starbucks, MGM Resorts International, and alcohol-maker Constellation Brands Inc.

What is impact?

by Connor Schoen

While the investing world at large has spent centuries refining their methods and defining their key approaches to analysis, impact investing specifically is still at its early stages of growth; thus, metrics for defining this term have remained elusive and hard to quantify.

“Unpacking the Impact in Impact Investing” provides a useful framework for considering what factors should guide the decisions of prosocial investors; namely, coauthors Paul Brest and Kelly Born of the Stanford Social Innovation Review explore the complexity of the term “impact” and how it translates into investment decisions. Ultimately, Brest and Born udefine impact on the basis of additionality—the idea that the value of your investment is predicated on its ability to add social benefit that wouldn’t be there otherwise.

In “What Are We Talking About When We Talk about Impact,” C. Wallman-Stokes, K. Hovde, C. McLaughlin, and K. Rosqueta bring in a new idea that complicates this additionality idea. The authors argue that “what we talk about when we talk about impact” depends on who is talking—and who is listening!” Thus, depending on whether you talk to foundations, nonprofits, individuals, or another group, you will get a different answer as to what exactly “adding social benefit” means.

Overall, however, both papers agree that impact is measurable and definable. Just like there are debates between what financial metrics indicate and which are most important, a continued discourse as to what is the core foundation of “impact” is a necessary step in the development of this field.

Firm Spotlight: BlackRock, Inc.

by Sofia-Marie Mascia

If there is one man on Wall Street who can demand socially responsible investment, it is Laurence D. Fink, CEO of BlackRock – the world’s largest asset management firm. In an annual letter to his CEO’s, Fink stated,“Society is demanding that companies, both public and private, serve a social purpose.” He boldly asserted that as a fiduciary, BlackRock does have a responsibility to drive long term growth that meets the demand of their client’s growth. His belief is that, “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

This statement comes at a time where faith in governments are low, and influence of stock exchanges are high. BlackRock has set the stage for influencers of Wall Street to account for “governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining.” BlackRock is not alone in its participation in this seismic shift: in January alone,Wall Street has also seen Berkshire Hathaway, JP Morgan and Amazon team up to address America’s healthcare epidemic independent health care company for their employees in the United States. Neither initiative is without economic clout – Fink promises asset holders that if a company does not display a sense of purpose or commitment to social responsibility,“it will ultimately lose the license to operate from key stakeholders.” Fifty years ago Milton Friedman posed the question – “What does it mean to say that ‘business’ has responsibilities? Only people can have responsibilities.” To him I say, welcome to 2018.

Impact Investing Gathers Renewed Strength in First Days of Fall

by Mariana Garza

It’s not every day that Impact Investing makes financial headlines. So when it does, you know that the impact, will be of considerable monetary value. Some argue that for it to continue this upward trend, it has to go mainstream.

Although it’s working its way through the millennial ranks, it has yet to become a household name. Though these new renewed efforts do seem to be working towards that goal.

Salesforce, an American cloud computing company, is leveraging its own financial services to invest in companies that use its software to enact innovation in the fields of workplace development, equality, sustainability, and the social sector. How are they doing this? By using their own corporate capital to launch a $50 million Impact Investing Fund. The company has been inching its way to this big step by first starting Pledge 1%, an advisory program that over a thousand companies have adopted to donate 1% of their resources to charity. Then, the company decided that driving social good should be synonymous with driving good returns, the principle on which impact investing rests. The company went carbon neutral, 33 years before schedule, and started Salesforce Ventures, which has backed over 200 enterprise companies including Dropbox. This new impact investment fund is Salesforce Ventures baby, and the genius of it is that as each company they invest in succeeds, Salesforce succeeds along with a targeted part of society or an industry. A company they’ve already invested in, Angaza Design, is a pay-as-you-go platform for renewable energy products like solar lanterns; they largely operate in Africa and South Asia for off-grid costumers by means of mobile micro-payments.

In other news, Bono-backed Rise Fund raised $2billion, one of the largest impact investing funds ever. Similar to Salesforce Ventures, it targets deals that are ESG oriented in a variety of industries such as education, agriculture, energy, and healthcare. Of course, as product of collaboration between TPG Growth, Elevar Equity, and The Bridgespan Group, profits are important, so it’ll be interesting to closely watch their investments (and Salesforce’s) in the year to come.

Recent Natural Disasters: An Impact Investing Wake-up Call

by Mariana Garza

It’s strange to think that something positive can come out of the devastating weather events and natural disasters that have occurred as of late, or that the events themselves are what pushed investors over the edge to move capital somewhere where, yes, profits can still be made, and where positive impact can make a big difference.

Yet, this is exactly what has happened.

Hurricane Harvey and Irma not only left behind environmental destruction, but also massive economic destruction, wiping out nearly $200 billion of economic value. Unfortunately, this highlighted the lack of investment in sustainable infrastructure in the United States. This infrastructure not only needs to be sustainable in terms of longevity, but also in terms of how environmentally friendly these structures will be: will they be worked into the natural environment or will they inhibit habitats, will they add or subtract to the current CO2 levels in the atmosphere, amongst many other questions and concerns.

In response, the Environmental Defense Fund released the “Investment Design Framework”, a framework that will help local and state governments mobilize private investment. This is the first-ever organized written system that outlines how the private sector will fill in critical funding gaps. The report draws methods from already existing financial practices such as how DC Water uses Environmental Impact Bonds and how the New York Green Bank redistributes risk between private investors and public agencies to accelerate clean energy. This is where impact investing steps in, and I, along with the rest of HCIIG, am excited to see where this framework will take the field this coming year.

Stay tuned for updates!