This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 6 - June 12, 2016.
Impact Exchange, the world’s first social stock exchange, launched by Impact Investment Exchange Asia (IIX), is poised to introduce its first instrument — the Women’s Livelihood Bond — which is set to raise US$20 million from a pool of underlying issuers. IIX founder and chairman Durreen Shahnaz talks about this instrument and the other investment platforms the company has come up with for the social good.
Eight years ago, when Durreen Shahnaz told people that she was planning a capital market structure for social good, many were quick to dismiss her idea. But she was determined to forge on and develop it anyway.
Durreen’s brainchild — the Impact Exchange — became the first trading platform for social enterprises in the world. Incorporated in 2009, it began operations in 2014 and was listed as the third board on the Social Exchange of Mauritius Ltd (SEM). The two other boards were the Official Market and Development Enterprise Market, which focused on small and medium enterprises (SMEs). Through these platforms, investors the world over would be able to buy debt securities and stocks to finance the growth of their social enterprises.
“I was like Don Quixote, who goes and fights the windmills. It was insane like that,” the 48-year-old founder and chairman of Impact Investment Exchange Asia (IIX) recalls candidly, referring to the delusional protagonist in Miguel de Cervantes Saavedra’s 17th century novel, The Ingenious Hidalgo Don Quixote of La Mancha.
When the Impact Exchange was launched though, not a single social enterprise came on board, says Durreen. “It was because the ecosystem was not ready. So, we decided to get the target communities involved.”
Instead of waiting around for things to happen, she and her team worked on creating a social capital markets value chain, ensuring that there was alignment between the supply of capital from impact investors and demand for capital from impact enterprises. The team, which is based in Singapore, came up with three platforms — Impact Accelerator, Impact Partners and IIX Growth Fund.
The platforms are aimed at enabling impact enterprises to transition through the various stages of maturity, to help them grow and push the impact investing space into the mainstream, says Durreen.
Direct investments take place via Impact Partners, a vibrant private equity platform for sophisticated investors. It has facilitated more than US$12 million in investments and impacted more than 8.5 million people across Asia with US$19.5 million in social value generated. According to Durreen, an average of six deals are closed a year, with each deal ranging from US$500,000 to US$2 million. “We have raised close to US$13 million on that platform through about 26 deals. That platform is like our ‘rice and lentils’,” she laughs.
Impact Partners’ key sectors are sustainable energy, water, agriculture, healthcare and education in countries such as Bangladesh, Cambodia, India, Indonesia, the Philippines and Singapore. Through this private equity platform, investors have seen returns of 10% to 20%.
“We are creating accelerators across the region to help smaller entities that need customised training or tailored mentorship to become more sustainable, improve their operational efficiency and, thereby, enhance their ability to absorb and deploy capital effectively,” says Durreen.
“Even when these enterprises get some money, they still can’t go to the banks because they don’t have any collateral. They need growth capital, but there aren’t that many funds to tap in Asia. If you look at the US or Europe, there are thousands of funds. But there aren’t that many in this region. The exception is India, where they are assisted and coached by tech entrepreneurs.”
It was with this need in mind that the IIX Growth Fund was born. The idea came about as there was growing interest among angel investors, says IIX managing director Robert Kraybill. “There are very few organised funds here. So, we decided to build the IIX Growth Fund to bridge that gap. We are looking to raise US$50 million for the fund. We have raised some of that already and have started to make investments.”
The IIX Growth Fund will help direct funds from impact investors to social enterprises in high-impact sectors such as energy, water, healthcare, agriculture and education, with a thematic focus on last mile distribution, technology and urban resilience. The investments range from US$5 million to US$250 million.
To measure and scale the impact of the social enterprises, Durreen also set up Shujog, which means “opportunity” in the Bengali language. The non-profit entity scales the impact of social innovation, impact assessment, research and advocacy.
“Shujog is the culmination of my research when I was a professor at the Lee Kuan Yew School of Public Policy. At Shujog, we map the lay of the land — how we should be doing the things that we are doing on the IIX side. We also do research for outsiders. But it is really the advocacy work that pulls together the entire ecosystem,” she says.
After spending the last few years getting these social enterprises off the ground, IIX is now getting ready to unveil the Women’s Livelihood Bond (WLB) — a novel structure that will allow impact investors to fund enterprises that have been selected and vetted by the company.
The WLB will be the first instrument of the Impact Exchange and the first of IIX’s sustainability bonds, which are a series of replicable innovative financial instruments that mobilise private capital for social venture development, and a part of IIX’s commitment to the Clinton Global Initiative. IIX is set to raise US$20 million for a pool of underlying issuers, which are social enterprises and microfinance institutions focused on empowering women. The bond is expected to go on the exchange in the middle of next month (see accompanying story).
Impact exchange
The exchange was listed in Mauritius because of its interest in social impact initiatives, says Kraybill, although its first port of call was the Singapore Exchange (SGX). “What ultimately drove the decision to work in Mauritius was, most importantly, that it was quite interested in the social impact side. The SGX was not, and neither was Bursa Malaysia nor the Stock Exchange of Hong Kong. These entities just looked at it as a business proposition,” he adds.
“They looked at it and said that even if we were successful, we would be a tiny part of their business. So, they weren’t interested. But both the government and stock exchange in Mauritius were interested in the impact side as they were keen on making the island sustainable, even the financial markets. They have a policy to make the entire island carbon neutral in the near future.
“Also, it is a low-cost jurisdiction for doing business. Even on the FTSE ST Catalist index [comprising fast-growing companies listed on the SGX junior board] here, which is meant to be the small company exchange, it costs S$1 million to get an initial public offering done from start to finish, which is a very expensive process. In Mauritius, the cost is much lower and more suitable for smaller enterprises.”
Kraybill says the flexibility they found at SEM allowed the enterprises to find their footing. “We are dealing with relatively small companies, and in addition to all the normal things such as a business plan, financial model and growth plan — which investors want to see — we also ask them to report on their impact. We have to minimise the burden on them, and that means the cost [of listing on the exchange].
“The main difference between the impact exchange and the other boards on the SEM is simply the social and environmental listing criteria and reporting obligations. In order to list on the impact exchange, companies need to demonstrate that there is a social purpose and that it has a social and environmental impact. Just as public companies have to do their financial reporting, companies on the impact board have to do their impact reporting periodically.”
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