A ‘unified investment strategy’ aligns a fund’s grantmaking programmes and financial investments with its mission to increase its social impact. How does this work for a medium-sized, private funding organization with a mission that is out of the mainstream? Dreilinden Gesellschaft für gemeinnütziges Privatkapital mbH had the chance to address this question with great freedom when we started in 2006.
We opted for flexibility wherever possible. As a gGmbH (charitable limited company) we are part of the corporate sector and subject to fewer legal restrictions than funders governed by German foundation law. Our original capital stock is only €100,000; the remaining €37 million are fund assets which we can, if we decide to, spend or invest directly in projects. The articles of corporation specifically call for an investment strategy in line with the social change mission.
We plan on 3 per cent per annum in total returns (after costs are accounted for); our stakeholders are committed to long-term strategic thinking and ready to seize opportunities, either in grantmaking or in investment. Three members of our investment board have specific expertise and very good networks in the field of ethical and impact investing as well as a solid commitment to the fund’s social mission and to finding creative ways to connect our philanthropic goals to our investments.
Finding an investment strategy that contributes to mission
Our mission is the empowerment of women and girls, and specifically LGBTI (lesbian, gay, bisexual, transexual, intersex) people, with a focus on the Global South. What investment strategy reflects such goals?
For long-term value gains, we opted for 41 per cent in quoted stock. To provide stable income, we have 42 per cent in quoted bonds. For both, we use the ethical ratings of companies and countries. Unfortunately, at the moment, such ratings tend to focus on only two explicit ‘gender’ items, boardroom diversity and work-life balance (and most ratings do not weigh them very highly in the overall count), and neither covers central gender equity issues in a non-northern context. The Women’s Empowerment Principles, a UN Global Compact initiative, are currently being made more applicable to the impact of multinational companies in developing countries. Until they become available as part of ethical ratings, we have adjusted our ratings to overemphasize developmental categories such as adherence to human rights, supplier standards and labour standards. Simply put, women and girls (including of course lesbians and transgender women) are the most affected by human rights violations the world over.
In the time since we began in 2006, both our SRI rated stocks and bonds have shown lower risk and higher returns than the relevant indices.
Regarding LGBTI, specific investment opportunities outside the Global North are Zukunftsmusik (music from the future). We take the gender concept as an entry point for future LGBTI inclusion for several reasons: for many stakeholders, the concept of ‘gender discrimination’ brings discrimination based on gender identity and sexual orientation into the picture. And, in the North at least, it is now recognized that companies that espouse gender diversity and reduce discrimination do prosper. The business case for LGBTI diversity is not far-fetched.
The value of direct investment
Most importantly, we believe that direct investments have the greatest potential social impact. The Dreilinden portfolio reserves 17 per cent for direct equity and funds thereof in developing countries. Ten per cent of this is for high-risk investments. High-quality microfinance investment (MFI) funds were an obvious first choice, given their proven development and gender impact.
To have even more direct impact, we are slowly replacing those with investments in funds of small and medium enterprises (SMEs) in developing countries with a gender agenda or an openness to developing such an agenda. There are two standard-setting and networking platforms for this asset class: GIIN, the Global Impact Investing Network sponsored by the Rockefeller Foundation, and ANDE, the Aspen Network of Development Enterpreneurs.
Our expected rate of return for this asset class is 0.5-1.5 per cent per annum. It is still too early to make judgements about value development. Our investments in SME funds in developing countries range from €200,000 to €500,000, making us one of the smaller investors. Nevertheless, we seem to be welcome, as the SME development finance community is currently aiming to reach private investors. Even our gender focus is embraced in many places. We meet management staff in larger development finance institutions who are happy to cooperate. We find fund managers who are open to Dreilinden expertise regarding how to incorporate simple but effective gender equality measures in a fund’s social monitoring; as a potential investor, our word has some weight.
Assessing the risk
We distinguish three types of risk: business model, team and country (political and currency) and we invest where only one of these is present. We tend to be more open to country risks because even if we do not get the return we aim for, or have to take a loss because of political instability or currency devaluation, there might still be positive social impact. To avoid risk, we have so far stayed away from direct investments in single companies.
After financial considerations, our guiding principle is added value: where do Dreilinden investments and involvement make a difference in favour of gender equality? Can our engagement trigger further investments (as happened with Selfina of Tanzania, where Dreilinden’s due diligence was instrumental in securing IFC investments)? Is the fund very specific in its gender focus and does it need investors to support the case? Are the fund managers open to input on how to implement gender measures?
It is too early to draw conclusions about our impact – our sense at this time is that it is far larger than the sheer volume of our investments would suggest. Now is definitely a good time for private social impact investors, as the groundwork is being laid. And it is certainly one way to increase a fund’s impact – and to learn a great deal along the way.
Comment Audrey Selian
Dreilinden’s investment strategy is a thoughtful and flexible one which appears designed to allow for some (limited) agility in funding a space that is greatly challenging in terms of deal pipeline. While the business case for supporting LGBTI diversity is not far-fetched at all, the means by which it is being achieved through this strategic approach is – perhaps by necessity – a stretch from what has been stated as the fund’s original vision.
Ise Bosch appears to imply that the reliance on ‘ethical ratings’ (that take into account two rather generic gender variables) sharply limits the scale and scope of what Dreilinden can accomplish in the bigger picture. This is particularly true given the strategic (yet understandable) decision to balance the majority of investments in quoted stock and bonds, which in theory would and should mitigate some risk for this kind of portfolio. The use of these proxies for impact on gender issues is reasonable given the risk profile of the fund, but the strategy of targeting an interest rate of just 3 per cent begs the question of whether a little more overall risk tolerance could expand the possibilities of direct fulfilment of fund objectives.
One approach to risk management in this context could be active co-investment with equity partners who have already paved the way for specific initiatives on the ground; another could be for the fund to take a more proactive approach in seed-funding the innovation process that could lead to more robust enterprise activities. This could at the very least allow for a more defined departure from the strictly ‘listed’ (and often far from the grassroots) investment opportunities.
With 17 per cent of the portfolio reserved for ‘direct equity’ and 10 per cent designated for ‘high-risk investments’, these elements constitute the brightest and most inspiring facets of the Dreilinden portfolio strategy. However, it appears that the fund deliberately avoids direct investments in single companies, which begs the question of which funds in the Global South have both a significant gender component as part of their strategy and a commitment to socially beneficial small enterprise investment. The challenge of allocating that ‘higher risk’ 10 per cent must be quite a big one.
The lack of a more robust, deliberate path to direct, higher engagement with appropriate enterprises working in the ‘South’ is probably the most significant gap here. Surely, as mentioned, the most obvious place to go with this strategy is to microfinance. However, expected rates of return for this asset class at 0.5-1.5 per cent per annum are quite conservative, even for cynics. It could be worth aiming at a slightly higher band of returns, in the hope that higher expectations may garner more stringency and commerciality in the diligence processes that support smart, sustainable deal selections. In other words, a little more ‘self-fulfilling prophecy’ by way of higher expected rates of return could go a long way towards actually uncovering the best performing women-led or targeted enterprises on the ground.
Audrey Selian is Director, Artha Initiative at Rianta Capital Ltd. Email email@example.com