BY VARSHA MEGHANI
The founder of the $2 billion The Rise Fund dismisses the idea that businesses have to compromise on returns to generate impact
As a $2 billion (around ₹13,000 crore) impact investment fund, managed by the US-based private equity firm TPG Growth, The Rise Fund is one of the most ambitious of its kind. Launched in December 2016 by Bill McGlashan, 54, founder and managing partner of TPG Growth, U2 lead singer Bono and Jeff Skoll, the billionaire former president of online marketplace eBay, the fund aims to deliver “complete returns” by generating financial benefits alongside social and environmental impact.
The Rise Fund will target investments in education, energy, food and agriculture, financial services, health care, information and communication technology, as well as growth infrastructure across the world.
Its investments include US-based EverFi, a provider of subscription-based digital learning, and California-based Brava Home, makers of ovens that use about 90 percent less energy than conventional ovens.
Forbes India met McGlashan, who serves as the CEO of the fund, to understand how he intends to make real the promise. Edited excerpts:
Q. With The Rise Fund, TPG is one of a number of mainstream entrants—including BlackRock, Bain Capital and Bank of America Merrill Lynch—in impact investment. Is this sector reaching a new high within the capital markets or is it still early days?
Globally, there’s about $20 billion of private capital in impact investment today, compared with the $2.5 trillion in private equity. Hence, it’s a very small space.
The good news is that there is more institutional interest in this space and what we’ve done with The Rise Fund ought to accelerate that, if we do our job right. Our mission is to develop a credible way to measure impact, in a way that is auditable and reportable. That discipline will be made available for others to use.
That’s a commitment we’ve made to our limited partners and the founders’ board.
Interestingly, a substantial majority of the capital in The Rise Fund is from institutions that have never invested in impact and have no particular mandate to invest in impact. We need to educate these investors and demonstrate co-linearity between great returns and impact. Historically, many impact funds have operated with the notion that you have to compromise on returns in order to generate impact. We don’t believe that to be the case. In fact, all of our [TPG’s] investments in the impact space have been successful ones, with as good returns as any other investment.
Q. Measuring an investment’s success is a challenge in this space. How do you create a credible way to measure impact?
This has indeed been one of the key challenges, but the good news is that both in the world of philanthropy and in the impact world, including government efforts, a lot of work has gone into figuring this out.
So we started by leveraging what is already some great work and then spent several years working with The Bridgespan Group, a US-based consulting firm in the space of social impact that was spun out of Bain & Company. In fact [the Bridgespan Group] founder Tom Tierney led our effort, working on a method to underwrite impact and ultimately measure it.
We then pressure-tested our approach with 80 organisations all over the world to see if they felt we had figured it out.
For us to credibly underwrite future impact, we have to know there’s a correlation between business output and social/environmental outcome. So we back-tested it against 100 deals to see if it worked. Once we ensured the veracity of the relationship between a business output and its outcome, we [created] key performance indicators and operating metrics to track it.
Finally, we got KPMG involved to provide the assurance around the credibility of our approach to investors.
Most of the capital is from institutions that have never invested in impact.
It wasn’t an easy process because each vertical, be it health care, education or energy, has a different way of measuring impact. Health care itself is an enormous sector: There are health care services, devices, pharma and much more, and each of these has a different approach to impact measurement. So the devil is in the detail. And these questions are best answered in the detail.
Q. The Rise Fund’s only investment in India so far has been $50 million in Hyderabad-based Dodla Dairy. What made the company an attractive bet?
Dodla Dairy works with 2.5 lakh small stakeholder farmers from 7,200 villages who collect a million litres of milk every day. They have 72 cooling centres and 11 manufacturing plants in southern India.
What was fascinating is that the underwriting of impact related specifically to the increase in household income of these farmers. Dodla works with them to improve yield and productivity through training and technology, which in turn is directly related to improving profitability. So their success is our success.
And Sunil Reddy, the founder and MD, wasn’t thinking about it as impact per se. Yet, he’s deeply committed to these 2.5 lakh farmers and part of the model was, if I can deliver a long-term contract that you can rely on, and if I have a system by which I can pay you every day, which they do through mobile payments. The farmers can then invest in scaling up because they know they have a reliable offtake agreement.
The milk productivity per cow in India is a fraction of what it is in other parts of the world. It’s not that there are no high-yielding breeds of cows here, it’s about the inputs. So there’s a huge opportunity to create a great financial outcome as well as a high multiple of money, related to impact. We call it high IMM—impact monetary multiple. So our bets have to have great returns and high IMMs.
Q. How much of The Rise Fund’s $2 billion corpus is for India?
We don’t allocate to a given country or region. That is religion for us. From running TPG’s growth business for over 15 years, I learnt that you have to avoid the hammer-and-nail problem. Everything a hammer sees is a nail. The problem with having a commitment to doing deals in a given market is you’ll do the deals, but it may have been a good idea or it may have been a bad idea. Instead we want to find some great businesses, run by some great entrepreneurs where we can create significant impact and great returns. That’s the only lens we care about. And if it’s in India, great, if it’s not, great. That said, given the evidence so far, I think we’re going to see a lot of investment in India.
Q. What makes you so upbeat about the Indian market?
India is a fertile environment for impact investing. Much of the natural bias and favour of impact investing, I think, is cultural here, given the sort of existential challenges in India and the bottom of the pyramid [consumers]. But I think a more interesting dynamic that’s taken place over the last four years is that with the UIDAI initiative, with Reliance Jio [owned by Reliance Industries, the publishers of Forbes India] and the proliferation of mobile wireless capability across India, it’s an environment where there’s a chance to truly develop some great companies. They can generate great returns but also have impact that can yield real, significant change across scale in India. So I’m quite excited.
Moreover, the entrepreneurial community here is extremely resonant with this topic [of impact investing]. And, by the way, that’s not unique to India. In the US too, the level of interest in impact investing among young entrepreneurs, millennials in particular, is tremendous. [This September, The Rise Fund ran a $500,000 competition for under-30, for-profit entrepreneurs driving positive social and environmental impact, in partnership with Forbes and Echoing Green.] The youth have no patience to first make money and then do good. They want to do good now, which gives you real hope for the world.
Q. What kind of returns are you looking at?
Outstanding returns. We’re not allowed to talk about returns, but we [TPG] have always done quite well. The reality is impact companies are no different from non-impact companies in character. I think the world in general favours them [the former], because we as consumers want to buy from good companies. There’s an advantage there, but, in general, unit economics, margins, competitive dynamics, and such factors are the same for both kinds of companies.
So the notion that somehow returns would be better or worse in a company that’s an impact company is totally absurd. Why would it be? It’s either a good business model or it’s not. By the way, if it’s an impact company with a bad business model, it’s not going to generate a whole lot of impact because it’s not going to scale.
Source: Forbes India