Deal

Analysis and
Performance Measurement

Range of Mission-Oriented Investments

Adapted from F.B. Heron Foundation Graphic

What is a PRI?
PRIs are investments made by foundations in support of charitable
purposes, with the explicit understanding that those investments will earn
below-market returns, adjusted for risk and mission
The vast majority of PRIs are loans or loan guarantees, and although they are not
grants, they count toward a foundations payout requirement in the year a
disbursement is made

The primary objective of the PRI must be to accomplish a charitable

purpose
The production of income must not be a significant motivating factor

The investment must not attempt to influence legislation or elections; a PRI

may not be used to support candidates for office or lobby elected officials

Types of PRIs
Types of Program Related Investments
Loans / Debt
Equity
Loan Guarantees

PRIs versus Grants

PRIs should be used when there is a clear source of repayment
Grants are typically focused on capacity-building

Preferred when no means of repayment

Used to build capacity to absorb a PRI

Sample PRIs
PRI Loans

Loaning funds to a hunger-relief agency to finance the purchase of refrigerated

trucks to pick up and distribute food donations
Lending to a church, museum, or other nonprofit to begin construction on a new
facility while conducting a capital campaign

Loan Guarantees

Loan guarantees can expand financial services in underserved areas. The Erich
and Hannah Sachs Foundation purchased a five-year, $200,000-certificate of
deposit in the Santa Cruz Community Credit Union in California to expand access
of low-interest loans and financial services to residents and small businesses in
local farming communities.
The MacArthur Foundation awarded $970,000 to MB Financial Bank to provide
credit enhancement for their arts and culture grantees in the Chicago area

Sample PRIs (continued)

Equity Investments
The Bill and Melinda Gates Foundation made a $10 million equity investment
in Liquidia, a for-profit company whose technology could help accelerate the
development of vaccines for diseases such as malaria that primarily affect
poor people in the developing world
The Annie E. Casey Foundation made an equity investment of $1.65 million in
the Bay Area Equity Fund to capitalize companies that create jobs in low- and
moderate-income communities in Californias Bay Area. One company in the
fund, Revolution Foods, pro- vides affordable and healthy school meals for
over 120,000 children every day.

Use of PRIs
PRIs and grants can work together, however, they should be utilized for
different underlying reasons
PRIs should only be used when there is a source of repayment; the goal is
repayment or you have an unintentional grant

When to use PRIs?

There is an income stream that provides a reliable source of repayment

There is a sound business model
There is mission alignment
There are adequate resources to maintain and monitor the PRIs
Staff capacity
Operational efficiency
Technical support

Deal Diligence & Structuring

PRI Due Diligence

Sample checklist for considering PRIs

Mission alignment and programmatic fit

Why should the investment be a PRI rather than a grant?
History of financing/investment received by investee
Description of project and details for use of funds

Amount requested, including proposed terms, interest rate (if applicable), and
source of repayment

Is there a clear repayment source?

Business plan or strategic plan of potential investee
Audited financial statements, including cash flow statements
Organizational structure and leadership background
List of other funders in the project

Sample Diligence Questions by Investment Type

Source: www.learnfoundationlaw.org

Credit Underwriting
Areas of Review

Three Years of Unqualified (clean) Audited Financial Statements

In accordance with GAAP

Most recent Interim Statements

Be sure to read the Notes to the Financial Statements
Does the Balance Sheet balance?
Have all of the statements been included?

Balance Sheet, Income Statement, Statement of Cash Flows

Have Supplemental Schedules been included?

Spread the Financial Statements
Spreading is a method to present financial statement information so trends can be evaluated

CAMEL Analysis

Capital, Asset Quality, Management, Earnings, Liquidity

Credit Underwriting
q Capital
Capital structure
% debt; % equity

Characteristics (restrictions) of net

assets
Characteristics of debt (term, rate,
maturity, senior vs. subordinate)
Security of investment
Are some investments secured vs.
unsecured

Diversity, predictability, and sources

of capital
Historic growth in organizations
capital
Capitalization strategies
Contingent liabilities

Net Assets
Unrestricted
No donor-imposed limitations or
internally generated (from
surplus)
May be used for operations or
financing
May be designated by Board

Temporarily Restricted
Restricted for specific time

period or use by donor

May be for operations or
financing
May be released per donor
terms, converting to unrestricted

Permanently Restricted
Restricted in perpetuity by donor
For capital (cannot be released
or spent)

Credit Underwriting
q Asset Quality
Understand the composition and quality of the assets
Have any assets been pledged as collateral?
Have assets been fully depreciated or is there remaining
useful life?

q Management
Critical areas of focus

Strategy
Governance
Management and Staff
Infrastructure and Information Systems

Credit Underwriting
q Earnings

History and trends of operating results

Characteristics of revenues and expenses
Composition and reliability of earned and unearned revenues
Diversity and sustainability of grant revenue
Composition of expenses (financing vs. operating)
Appropriate matching of revenue and expenses
Ability to reduce expenses and maintain core financing activities
Strategies for sustainability, self-sufficiency, and efficiency
Operating Results

Liquidity - Key Areas of Focus

Balance Sheet structure

Liquidity management
Prudent policies and risk limits
Appropriate business plans, budgets, and projections
Contingency planning to meet unanticipated events

Availability of lines of credit, Cash flow budgets and projections, Policies related
to excess liquidity

Structuring the Investment

Understand Corporate Structure
Who is the obligor?

Structuring the Investment

Loan term
Loan type (amortizing, balloon)
Secured vs. Unsecured
Pricing (fixed, variable)
Covenants
Financial
Reporting

Performance Metrics

Performance measurement enables the social investor to control and monitor the work of the
social entrepreneur. Social entrepreneurs need to consider their impact value chain first.
The main questions
are shown in the following figure.
may also include environmental
or cultural).
ment initiative (IMI) expert group members. The manual does not consider how to measure

Our starting point Figure

has been4to devise
a process
of Impact
Impact
Value
Chain measurement for a VPO/SI wanting to measure the impact of their investment1 in a Social Purpose Organisation (SPO). The
(level of SPO) and how the VPO/SI itself contributes to that impact (level of VPO/SI). This
process is the how to of impact measurement and is often what is most needed by venture
philanthropy organisations and social investors in general to get started. Analysis of existing
methodologies for impact measurement and the experience of working together with VPO/
SIs showed that most methods and tools to measure impact share a general framework. We

5
AN .
D

MANAGING
IMPACT

2. AN
AL
Y
SI
STAK
N
E
H
G
OL
D
E

FYING &
ERI
V
.
4
G IMPACT
UIN
L
VA

1.
OB SET
JE
C

The 5 steps of social

impact measurement

G
N S
TI IVE
T

G
RIN
TO TING
I
R
N
O PO
M RE

Illustration based on Clark et al. (2004) and Roder (2010)

RS

3. MEASURIN
G
RESULTS

Source: EVPA

Inputs are resources that are put directly into the venture (e.g. assets, volunteering or money).
Clark et al. (2004) describe outputs and outcomes as follows:

M O T I VAT I O N S | R E S E A R C H B E H AV I O R S | D E S I R E D R E S E A R C H | O P P O R T U N I T Y

As we dive deeper1, we see that important nuances

arise regarding each groups specific preferences
Each group has a significant preference for the Consumer Reports style ratings
Ranked highest not only in stated preferences (page 18) but also in focus groups and
forced ranking tests; in fact, in other tests preference even more stark
Ranked first both for those that research today, and in terms of what would get non
researchers to look at information
Preferences driven by trust (additional transparency drives trust in rating), and fact that it
keeps decision personal (provides info but lets user determine how to use it)

While the groups share broad information preferences, the specific types of
information and data that they are looking for differs
Individuals and advisors look for data that helps them ensure they arent wasting their
money: how much going to OH, how donation will be used, fraud accusations, etc
Foundations look at specific impact and effectiveness data

Foundations are much more information hungry than advisors or individuals

Foundations desire 2-3x the amount of information as the other groups
1. These points are elaborated in the appendix
NOV 2011

H O P E C O N S U LT I N G

21

Preface to Metrics
management information systems for fund managers and other data
aggregators, who otherwise often rely on a patchwork of Excel
spreadsheets to track impact data on their portfolios
impact ratings (performance standards) for asset managers and owners,
who reported lacking the tools needed to assess their pipeline and active
portfolios on the basis of non-financial performance
standardized definitions of impact performance measures that serve as
building blocks for the above as well as enable benchmarking

providing quality jobs, enhancing energy efficiency, facilitating local asset

accumulation and/or purchasing inputs from local or smallholder providers. Other
businesses deliver positive social outcomes by providing customers with access to
needed
and cost effective products or services,
including agriculture, water, housing,
Impact Investments:
Global Research
An emerging asset
class
29 November 2010
education,
health,
energy or financial services.
Figure 3: Ways in which businesses can deliver impact
These means of impact might be part of the impact investment thesis motivating an investor

Means of impact
Means of impact
Process
Job creation

Figure 6: Business sectors for impact investments

Products for BoP+

Business sectors
Business sectors
Agriculture

Basic needs

Health
EnergyBasic services

Energy efficiency

Water

Facilitating asset accumulation

Impact Agriculture
Investments:
Education
Housing
An emerging asset class Financial Services

Utilizing BoP+ suppliers

Education Water

Source: The Rockefeller Foundation, J.P. Morgan.

Housing

Global Research
29 November 2010

Health
Energy
Financial services

Defining an emerging asset class

Sizing
methodology,
in summary
Table
1: Potential invested capital to fund selected BoP businesses over the next 10 years
Over the last two decades, the definition
of an
asset
class has
shifted from one
based
Source:
IRIS,
J.P. Morgan.
$
bn
solely on the financial characteristics ofThe
a given
set
of
assets
to
one
based
on
how
methodology we employ to
Potential invested capital
Potential profit
mainstream institutional investors organize
themselves
around
those
The or an impact objective as primary focus
Investors
choose
a business
produce
the often
headline
numbers
in assets.sector
Sector
opportunity, USD bn
Table
combines
the analysis
of a the demand
identifying characteristics of an asset class
in1 today's
markets
include:
An impact
investor
might
approach
investment
decisions by first choosing a business required, USD bn
Housing: Affordable urban housing
$214$786
$177$648
successful
impact
investment
for professionals with a unique set of investment/risk
management
structures
sector or by
first
identifyingskills;
an impact
objective. Yara, a global fertilizer company
Water:
Clean
water
for
rural
communities
$5.4$13
$2.9$7
business model in each sector with
on the buy side that organize around and
allocate
capital to
these along
skilledthe agricultural
based
in Norway,
invests
value chain to leverage its existing
Health: Maternal health
$0.4$2
$0.1$1
an analysis of the potential
professionals; industry organizations and
networks
the investment
class;Primary education
core
competency,
generating
impact through
productivity, food security
customer
basededicated
for such
a to
business
Education: agricultural
$4.8$10
$2.6$11
and the adoption by the investment community
of scaled
metrics,
and ratings
and reduced
emissions
of
fertilizers.
A
were
it to be
up benchmarks
andfrom the production
Financial Services: Microfinancefoundation dedicated to
$176
Not measured
transferred
regions.
Wemight
use use this impact objective as its primary investment
that standardize performance and risk measurement.
mitigatingacross
climate
change
Source: J.P. Morgan.
the
economics
of ourcross-business
case study in sector
criterion,
making
investments in renewable energy, green real
each sector to ensure that the
Hedge funds and emerging markets areproducts
both relatively
recent
examples
of
alternative
Why
thefull
BoP
opportunity of
exists
estate
orsold
sustainable
agriculture.
We
list
the
categorization
social and
are affordable to our
11
assets where underlying investments cut
across
traditional
debt
and
equity
products.
environmental
impact
objectives
in
Table
2,
as
outlined
by
the
IRIS
.
Markets
at
the
base
of
the
economic
pyramid are typically under-served by
target population (the BoP) and to
However, the unique characteristics of ensure
the people,
processes
and risks
that the
business structures
is
traditional business, which may exclude this population from being considered part
operationally
profitable.
Table 2: Breaking out impact objectives in more
detail
of its potential customer base. BoP populations are also often unable to access
Increase incomes and assets for the poor
Improve basic welfare for people in need
Mitigate
climate change
services
provided
by the government. Academic research has shown that the BoP
1(from IRISs social impact objectives)
(from IRISs
social
impact objectives)
(from IRISs
environmental
impact objectives)
The Next 4 Billion, World Resources Institute
and
International
Finance Corporation,
2007.
population
will
often manage
its finances to buy affordable products or services
Employment generation
Conflict resolution
Biodiversity conservation
improving their productivity and reliability of income4. It is a market introducing
Access to energy
Disease-specific prevention and mitigation
Energy and fuel efficiency
operational
challenges to otherwise proven business models requiring innovative
Access to financial services
Access to clean water
Natural resources conservation
approaches to accommodate what can be unreliable income streams or to deliver
Access to education
Affordable housing
Pollution prevention and waste management
services to remote rural areas. While government or philanthropic solutions will
Income/productivity growth
Food security
Sustainable energy
sometimes provide these products or services (such as healthcare or education),
Agricultural productivity
Generate funds for charitable giving
Sustainable land use
impact investment can complement government and philanthropic capital to reach
Capacity-building
Health improvement
Water resources management
more people.
Community development
Equality and empowerment
Source: IRIS. As defined at iris.thegiin.org.

Managing impact investments

The risks for impact investments are similar to those for venture capital or high yield

Introduction to ESG
ESG stands for Environmental, Social and Governance. There is growing evidence
that suggests that ESG factors, when integrated into investment analysis and
decision making, may offer investors potential long-term performance
advantages.
ESG factors offer portfolio managers added insight into the quality of a company's
management, culture, risk profile and other characteristics. By taking advantage
of the increased level of scrutiny associated with ESG analysis, ESG Managers
seek to identify companies that are believed to be:

Leaders in their industries

Better managed and are more forward-thinking
Better at anticipating and mitigating risk
Able to meet positive standards of corporate responsibility
Focused on the long term

Environmental, Social & Governance (ESG)

Key Assessment Systems

Impact Reporting & Investment Standards (IRIS)

IRIS is a set of standardized metrics that can be used to describe an organizations social,
environmental, and financial performance. IRIS' independent and credible performance measures
help organizations assess and report on their social performance. IRIS metrics span an array of
performance objectives and include sector-specific metrics for areas such as financial services,
agriculture, and energy among others.
The IRIS framework consists of six parts:
ORGANIZATION DESCRIPTION - metrics that focus on the organizations mission, operational model, and
location
PRODUCT DESCRIPTION - metrics that describe the organizations products and services and target markets
FINANCIAL PERFORMANCE - commonly reported financial metrics
OPERATIONAL IMPACT - metrics that describe the organizations policies, employees, and environmental
performance
PRODUCT IMPACT - metrics that describe the performance and reach of the organization's products and
services
GLOSSARY - definitions for common terms that are referenced in the metrics

IRIS Stakeholders
Investors in Funds: As more investors dedicate a portion of their portfolios to mission-driven funds, they are
demanding data about the social and environmental impact of their investments. IRIS provides a credible
set of standards that can be applied across multiple sectors and geographies to serve as the basis for impact
reporting by funds.
Direct Investors: Using IRIS standards enables direct investors to credibly track and report the social and
environmental performance of their portfolio companies. Using IRIS also allows investors to compare the
performance of an individual company with its peers across the industry who have also adopted IRIS.
Companies: Companies raising capital can attract impact investors by measuring and reporting both financial
and non-financial performance. IRIS provides an objective set of performance measures that are compatible
with many existing reporting standards so that alignment is straightforward and low-cost.
Member organizations/Intermediaries: Member organizations can use IRIS as the basis for a shared
reporting framework to assess their individual member and aggregate impacts.

Introduction to GIIRS
GIIRS, a project of the independent non-profit B Lab, assesses the social and environmental
impact (but not the financial performance) of companies and funds using a ratings approach
analogous to Morningstar investment rankings or S&P credit risk ratings. GIIRS provides both
company and fund impact ratings, each with current and historical analyses of impact
performance for comparative use.
The GIIRS Company Assessment is comprised of approximately 50-120 weighted questions
divided into four distinct impact areas: Governance, Workers, Community, and Environment.
Key Features
Integrated with IRIS, an industry-recognized taxonomy and reporting standard co-developed by B
Lab;
Ratings methodology developed and governed by an independent Standards Board;
Ratings subject to the GIIRS verification process, executed with the support of a third-party
documentation review.

GIIRS (continued)
GIIRS includes the following features:
Verified Company Ratings and Fund Ratings;
Ratings for developed and emerging markets globally;
Aggregate ratings, as well as ratings within numerous impact areas and industry sectors;
Social and environmental performance metrics and key performance indicators specific to different
industries, impact areas, and investor preferences; and
Benchmarking and analytics for longitudinal comparability.
GIIRS provides value to numerous stakeholders in the impact investing community:
Fund managers and companies can raise capital from mission-aligned investors based on the social
and environmental impact of their underlying businesses or portfolio companies;
Institutional and high net worth investors can conduct better due diligence, make better investment
decisions, track and improve social and environmental performance throughout the investment
lifecycle, and analyze absolute and relative impact;
Consultants, investment bankers, and other investment advisors can use data and analytical tools to
improve their own proprietary products or value-added services.

GIIRS Index

Comprehensive Ratings for CDFI Investments

AERIS, the CDFI Assessment and Ratings System, is the only comprehensive,
third-party assessment of a CDFIs impact performance and financial strength and
performance. AERIS helps investors confidently assess CDFIs that match their
social objectives and risk parameters.
An AERIS assessment includes past performance, current financial position, and
risk factors in the future. Ratings are based on five years of historical performance.
AERIS analyses are conducted by experienced professionals who are experts in
underwriting CDFIs. Rating assessments are based on an on-site examination
including:
A comprehensive analysis of financial and programmatic information
An extensive review of loan files and risk management systems
In-depth interviews with management and board members

Benefits of AERIS
FOR INVESTORS

Efficiency. AERIS allows investors to go beyond standard due diligence and effectively zero in on risk factors and mitigants
that are most critical to their investment decision-making and monitoring. AERIS analyses are built on a set of metrics that
bring transparency and standardization to the CDFI sector and simplify underwriting complexity created by the variation in
CDFI structure, focus, and operations.

Focus. Leading CDFIs in the community investing sector are AERIS rated. Investors can use AERIS to identify new investment
opportunities that match their social objectives and risk parameters.

Value. An AERS subscription provides investors with more than ratingsit includes a comprehensive Ratings Report and an
Annual Review Report for each of the two years following the rating to update financial information and highlight significant
changes in the CDFIs impact and financial performance.

FOR CDFIS
The benefits of being AERIS rated include:
Identification with a leading group of CDFIs that have subjected themselves to rigorous scrutiny and demonstrate a
commitment to transparency.
Increased exposure to community investors that seek to match their social objectives and risk-return criteria.
Access to an objective, third-party analysis of your organizations strengths and weaknesses from the perspective of an
investor. Rated CDFIs have remarked (and investors have noted) that they approach investors differently after going
through a rigorous AERIS ratings process.
Inclusion in AERIS press releases about the availability of new Ratings Reports.
Access to a password protected AERIS Garage with customized marketing and communication tools for use with
investors and local media outlets to publicize that your organization is AERIS rated, committed to transparency and
rigorous performance standards.

Participation in annual conference seminars exclusively directed to AERIS-rated CDFIs and subscribers.

AERIS Rating Distributions

Policy Plus (indicated by a +)

Policy change is an integral part of this CDFIs strategies. The CDFI leads initiatives to change government policy to benefit the community development finance industry or disadvantaged people and communities. The CDFI can provide evidence of its leadership role in recent policy changes that produced benefits beyond
additional resources for the CDFI itself, and management can clearly articulate the CDFIs leadership role in current policy activities.

AERIS Rating Distributions (continued)

Other Tools

PULSE
PULSE Impact Investing Management Software was a software platform that was
available free to non-profit companies that was designed to help organizations
better demonstrate impact.
PULSE was designed to track financial, operational, social and environmental
metrics, and features a range of qualitative reporting to complement quantitative
performance management data. It allowed organizations to aggregate and
benchmark financial, operating, social and environmental performance metrics at
the portfolio and sector level, allowing for meaningful comparisons of
performance against a relevant peer group.
On September 30, 2013, Acumen Fund and B Lab announced PULSE would be
integrated into the B Analytics platform and no longer offered on a standalone
basis

Caprock Group iPAR

iPAR stands for Impact Portfolio Allocation Review, an innovative tool
which could revolutionize how impact is classified, analyzed, and
communicated.
A proprietary impact assessment and reporting framework, iPAR was
created to help our clients understand the impact they catalyze with
their capital. By categorizing impact intentions, anchoring
investments in a clear geographical framework, and tracking ongoing
performance, iPAR supports our ability to deliver investors deep
insights into their portfolios impact performance.

The kleissners
Portfolio Approach to Impact Investing

KL Felicitas Foundation
The KL Felicitas Foundations programs consist of: (a) broad-based support for social
entrepreneurs and social enterprises; and (b) ecosystem building for impact investing.
Our Values
We believe a grass-roots approach can be more successful and sustainable than a top-down
approach.
Cross-sector partnerships and hybrid solutions have greater potential to achieve lasting results.
We want to leverage market forces where possible.
We want to leverage the Foundations structure and programs.
We will always consider the holistic impact of the Foundations work, including social,
environmental, economic and community dimensions.
In emulating the social enterprises in which we invest, we want to take an entrepreneurial
approach, with measured risks and the potential for significant impact.

Toniic
Toniic LLC is a global network of impact investors, including individuals,
family offices, impact fund managers and foundations.
The Toniic network collaborates to fund and nurture early stage enterprises
and innovative social venture funds.
Toniic Institute is fiscally sponsored nonprofit designed to amplify the
effect of Toniic network via research to analyze investment practices.
Focus is poverty alleviation, social justice, and environmental progress
around the globe.

Investment Strategy
Impact First investments seek to optimize social or environmental returns and may accept a
range of financial returns, from simply principal to market-rate. Impact first investments
can accept lower rates of financial return in order to seed new, higher-risk investments that
can generate sizeable social or environmental returns.
Program Related Investments offer low-interest financing, loan guarantees, lines of credit or equity
investments; and Corpus Impact First Investments are typically Program Related Investments that are
made directly from the Foundations corpus (rather than from the annual payout).

Financial First Investments seek to optimize financial returns that simultaneously yield
some social or environmental good.

Mission Related Investing which provides financial support (typically grants or equity investments) to
investees that have programming that is closely aligned to the mission of the Foundation.
Sustainability Investments, typically equity investments into companies or funds that focus on
sustainability, particularly in the environmental, economic and social dimensions.
The least numerous in our portfolio, Social Component Investments are typified by equity investments
into funds whose proceeds/profits are subsequently invested into social programming.

The KL Felicitas Foundation provides grants alongside many of its impact investments in
order to help build the capacity and strength of the recipient enterprise. Often, in the early
stages of starting a social enterprise, a subsidy is required to help pay the cost of
operations until breakeven or profitability is reached. In other instances, these highpotential social enterprises may need some technical assistance, such as more robust
accounting systems, to perform to their full potential and attract additional investment.
Grants from KL Felicitas can be single events, or may be part of a multi-year strategy to
help social enterprises gain scale and increase social impact over time.

AND impact objectives. The KL Felicitas Foundation has

established the following investment policy by asset class:

KL Felicitas Foundation Investment Policy Guidelines

Cash, 4.00%
Timber, Other Real
Assets, 2.00%
Real Estate, 4.00%
Private Equity,
15.00%

Notes/Debt Obligation,
3.00%
Bonds, 5.00%
Less Equity
Correlated,
14.00%

US Large Cap
Equity, 6.30%
Equity Long/Short,
25.00%

US Small/Mid Cap
Equity, 3.30%

International Equity,
Emerging Markets,
3.00%

International Equity,
Developed Markets,
15.50%

Chapter 5: Developing an Impact Investing Policy

71

Questions & Discussion