At pension fund PKA, big plans are underway for increasing the amount of so-called impact investments, which, in addition to good returns, also have a measurable impact on the societies of the developing countries in which the investments are made.
For this reason, Pelle Pedersen, Head of Responsible Investment at PKA, recently made the trip to the UN headquarters in New York to participate in a number of meetings with the shared focus of impact investments.
The potential is big, but impact investments often lack structure and volume before they can really attract the interest of institutional investors.
"We have an ambition to make more impact investments, but there's simply not enough options or understanding of the fact that collaborations between different players are crucial for the mobilization of private capital. These meetings in New York have helped explain this to managers with focus on impact investments, and also establish a lot of new contacts to be followed up on," Pedersen tells FWAM.
10 years ago, impact investments were viewed as the most noble way to lose your money. Today we should no longer doubt that focus on impact is a condition of good long-term returns.
Among PKA's investments are DKK 400 million (EUR 54 million), divided equally between two funds in Danish money manager Maj Invest, focusing on microfinance loans to developing countries so that primarily women can start their own businesses. The first fund of DKK 400 million is fully funded, and the second fund is expected to be ready in June with around DKK 1 billion (EUR 134 million).
"Our goal is 15 percent returns for investors per year. In the first fund, we are above that goal, and we expect to see the same in the the other fund, seeing as it's the same type of investments. We're very satisfied with those results," says Kasper Svarrer, Managing Partner at Maj Invest and responsible for impact investments, to FWAM.
Hoping for more volume
FWAM meets up with Pelle Pedersen at the Danish Consulate General in New York after three days of UN conferences. One of the reasons he was invited was to participate in two panel debates regarding impact investments focusing on women in developing countries.
From his bag, Pedersen produces a stack of business cards that he has exchanged with others. There is great interest in collaborations with an institutional investor that already has exposure to impact investments and thus knows how to attract investors. Plenty of constructive networking has taken place, says Pedersen, not elaborating further.
He participated in the panel debates as a representative of institutional investors in order to improve the collaboration between private and public investments in impact projects. His point was clear: Create more volume, then private investors will become interested.
"Of course we also pay attention to the risks in this type of investments, where things such as unreliable infrastructure and poor framework conditions are adverse factors. For this reason it's also better to pool the loans in order to spread the risk," says Pedersen.
Kasper Svarrer from Maj Invest believes that this development is underway. He highlights funds that PKA invests in as an example. They invest in developing countries where local banks grant loans to small start-up businesses.
As mentioned, the first fund was DKK 400 million strong, while the next one is expected to be ready in June with a total capital of DKK 1 billion. The first DKK 700 million have been pledged by a number of investors – PKA among them with DKK 200 million.
"It is possible to increase the volume of investments, and the size of our second fund compared to the first reflects this. The banks that we invest in are growing, so we have to pay more to obtain the ownership share that we want. Volume also means that we can buy some significant positions in the banks, which creates more diversity," says Svarrer.
Market segment of more than 5 billion people
PKA has a total of DKK 17.5 billion allocated for investments that can be categorized as impact. The objective is that impact investments are to create both financial and social returns. That is why the annual returns are supplemented by a final reporting of the investments' effects in the Sustainable Development Goals, which are UN approved definitions in the field.
"10 years ago, impact investments were viewed as the most noble way to lose your money. Today we should no longer doubt that focus on impact is a condition of good long-term returns. Due to the low bond interest rate, there is plenty of capital right now, which makes it possible to create the investment products necessary to make impact investments more attractive and scalable," says Pedersen.
At Maj Invest, Svarrer agrees that impact investments contain untapped potential. He believes that there has so far been a distinction between the traditional financial sector and the more development-oriented sector, including impact investments.
This will change going forward, becoming increasingly integrated in the traditional investment universe, says Svarrer, He points out that there are 2 billion people in existence who currently have no access to financial services, when counting countries such as India and China.
"There are also 3.4 billion people in this market segment who could use a wider and more sophisticated product range. The demand is overwhelming compared to the current supply," says Svarrer.
Investing in banks in developing countries
PKA's investments in Maj Invest's two impact funds are made with an aspiration to train principally women in developing countries in financial management so that they can make a profitable business with their microloans. The investments have spread across Asia, South Africa, and Africa.
Maj Invest buys significant minority stakes in unlisted banks that mainly service the group of customers below middle class. Maj Invest is part of the board of directors, aiding in the day-to-day operations for five to seven years, then selling the 10-30 percent stake on.
"These are growth cases, but we invest in the mature banks. We have known them for many years and know that they have enough management capacity to keep the growth going. This can have a colossal social impact, because these people get a professional bank to turn to instead of the black market, so banks are welcomed locally," says Svarrer.
Maj Invest reports from banks in the portfolio so that investors get data on e.g. the quota of women and the measurable efforts to make an impact via investments. Thus PKA and other investors receive more traditional final reporting regarding returns, as well as reporting focused on social impact.
"When we are out in the boards, we make sure to monitor that the social impact is happening. Including this customer group is part the DNA at the banks, so we have made sure beforehand via due diligence and the banks' certification that it is indeed the case," says Svarrer.
"It's not easy"
He explains that it requires a great deal of insight to invest in these banks where the loan portfolio grows with 20-30 percent annually. If banks want to be a part of this growth, then it requires a lot internally and strategically when new offices constantly open and new, qualified staff is needed.
"If you are not strong enough in that field, then it will be difficult to keep up and maintain the credit policy, or by having too heavy expenses from distribution. We have to invest in good banks with the right management capacity to develop the governance and strategies necessary to grow in this sector," says Svarrer.
For this reason, the company has, in addition to dedicated employees in Denmark, also established offices in Peru and Vietnam, and a multicultural staff in all locations. But it pays off, proven by the annual returns of more than 15 percent so far.
"It's not easy. The boards of directors are busy in these companies, because they need to make sure at all times that systems and strategies are in order. The situation tomorrow is never the same as yesterday when you are growing so much. So the companies are also interested in attracting international investors – both in order to get capital and to get governance and strategic management to maintain the substantial growth. There is a very big barrier to break through in order to become a good bank in this segment. But if you succeed, there is huge potential," says Svarrer.
Collaboration between the public and the private
At PKA, Pedersen believes that Denmark and the rest of Scandinavia currently have the right qualifications to put private investors, public stakeholders, and operatives in local areas together to make an attractive market for creating the right financial products for impact investments.
"The ideal would be to make big Scandinavian coalitions to create a demand that could influence the financial sector," says Pedersen.
It is also an indication that there is political focus on the area. On March 31, the Danish Minister of Finance, Kristian Jensen, and Danish Minister for Development Cooperation, Ulla Tørnæs, presented a plan of action to fulfill the UN goals for sustainability.
"We want to fulfill the UN's global sustainability goals by collaborating between authorities, companies, and civil society," said Kristian Jensen, according to Ritzau.
Traditionally, Denmark especially grants development aid to poor people and women. The Danish Minister for Development Cooperation, Ulla Tørnæs, pointed out that the global goals are not only about development aid, but also about international partnerships.
"The plan of action is the framework for making 1+1 equal 3. So that we can make civil society, companies, and authorities collaborate. So that we can get much more out of our development aid," said Tørnæs, according to Ritzau.
Svarrer from Maj Invest points out that there are also obvious advantages for the entire financial sector. It is especially about risk diversification when the global financial markets suffer hard times again.
"This type of equity investments is independent of the financial markets, because the customer group is not directly influenced by the global financial world. A customer in Senegal or Bolivia does not immediately feel the impact of recessions or increases in the stock markets in New York or Shanghai. Equity capital build-up in these banks should continue uninfluenced by small movements around the world, and that makes it attractive to many investors," says Svarrer.
English Edit: Marie Honoré