March 13, 2018 | Based on Tideline’s experience advising impact clients, as well as our work in traditional financial markets, we have found there’s a common set of best practices for creating a new investment fund or other vehicle, be it single bottom line or impact:
#1 – Sweat the details
As much as launching a new impact investment vehicle is about vision, passion, and mission, it’s also about being prepared. Step one is to align key stakeholders around a clear and compelling market opportunity and strategy.
We meet many visionary leaders who want to rush an investment idea to the market, with the admirable goal of solving a critical problem as soon as possible, but they fail to recognize the need to stop long enough to define the vehicle’s key elements.
Much of our work designing fund vehicles at Tideline has focused on helping clients turn their visions into a concrete investment thesis. Whether a manager decides to engage an advisor to help navigate the upfront process or do it in-house, thoughtful work to define the vehicle’s clear rationale is essential before going to market.
#2 – Go elephant hunting
With a well-defined strategy, next up are discussions with potential anchor investors and other partners. These are ideally your closest friends or relationships with the willingness and ability to deploy large sums of capital.
When I was responsible for raising private funds at a large investment bank, we told any group without anchors to come back to us when they had them. First, we wanted the validation ourselves that comes from anchor investor commitments. Second, we knew that as a third party, we were unlikely to be able to help bring in anchors ourselves – this is the job of the principals: it’s about their networks.
Finally, because of signaling and typical investment size, anchors provide momentum to a broader marketing process, which was key to our assessment of the likelihood of success. For any manager, single bottom line or impact, put aside the investors that follow and focus your initial efforts on the short list of potential anchors, or “elephants.” Their support is the key to fundraising success.
#3 – Keep it as simple as possible
There is no doubt impact innovators have adopted structures with some complexity out of necessity. Blended finance vehicles, for example, have been enormously successful crowding in capital by shifting risk and/or returns from one set of investors to another.
That said, complexity has costs. It can signal an undesired message (e.g., the vehicle is relatively high-risk or low-return); it is often unfamiliar to new investors (e.g., I don’t know what this is so I’ll look at the next product on my financial advisor’s list); and it adds structuring challenges (e.g., which tranche is right for me?).
Research and market testing we’ve completed at Tideline have borne out that, all things equal, simple and familiar is better while complexity adds friction to the process. We look forward to a time when mainstream investors are familiar with what today are structures primarily used by impact vehicles, but in the meantime, if it’s viable to market a familiar – and typically simpler – structure to investors, it will almost always be easier to take that course of action.
#4 – Prepare the runway
Launching a new fund is hard. Excruciatingly hard – which is why passion really matters. Every new fund sponsor I’ve known is a highly driven person. One manager comes to mind who persevered through a very lengthy process to launch a first-time fund in the financial inclusion space. She graduated from West Point and served in the Army, which prepared her to follow through long after most people might have thrown in the towel. There needs to be a design and development runway, and a plan for the resources – both human and financial – it will take to get the job done.
In sum, a well-organized approach can help a sponsor overcome the inevitable twists and turns of a fund formation process. While some challenges can be anticipated and others can’t, being armed with key foundational elements and a process that creates momentum can help the sponsor push through to achieve a successful result.
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