Impact investing from a Fof perspective
Bertrand Gacon, head of Impact Investing and SRI at Lombard Odier, oversees an impact investing fund of funds.
The impact investing universe shelters about 500 funds aiming to both generate a positive societal impact through investments and seek returns in line with the market.
Bertrand Gacon (pictured), head of Impact Investing and SRI at Lombard Odier is managing an impact investing fund of funds, the LO Gateway – Development Finance fund, since May 2014.
The Swiss manager has chosen to focus on development finance; besides considering it essential to fight poverty, this sub-sector is seen as the most established in the impact investing universe.
Gacon says the number of impact investing funds available has been rising at a fast pace in the last two or three years.
Among the estimated 500 funds available “55% of them are private equity funds and 15% focus on real assets. A small part of them, which are invested in private debt, are reasonably liquid,” he says.
“At best, these funds offer investors monthly liquidity. Liquidity is a real issue for the impact investing space. It is a key factor in our process,” Gacon adds.
Lombard Odier’s Fof (fund of funds), has some $125m (€110m) in AUM, split in two parts: a core for large impact investing funds and a satellite that can account for up to 40% of the overall portfolio for niche and innovative strategies.
Illiquid funds cannot exceed a 10% cap in the Fof, while from 2% to 20% of its assets can be allocated to direct investments.
Also, about 15% of the Fof is invested in non-hedged local currencies, because in some countries loans cannot be made in US dollars and the hedging cost is prohibitive.
“Depending on the currency used for the loan, spreads on yields can reach 6% to 7%. As long as local currencies do not drop further than 6% to 7% against the dollar, it is still a good bet,” Gacon argues.
The average investment made by the Fof is about $11m (€9.7m). ”We wanted our fund of funds to address three major loopholes in the impact investing industry: liquidity -funds in the portfolio must be monthly/quarterly- absorption capacity -half of the funds in the market have less than €35m of assets invested- and affordable costs,” Gacon explains.
”Funds are neither ESG nor SRI,” Gacon stresses.
“SRI is part of a rating process used by companies looking at different factors: wages, respect, and environment.”
“While we take those criteria into consideration we do not put special emphasis on them. What matters is the final social impact of the products offered by companies on poor and underprivileged populations,” Gacon answers.
The fund selection process follows Lombard Odier’s internal due diligence procedure. A detailed analysis of the funds’ social impact is added. As a result, 11 funds or instruments are picked for the Fof.
Strategies backed by institutions or governments do not impact the selection.
In geographic terms, the LO Gateway – Development Finance fund has exposure to more than 80 countries. As of December 2015, Cambodia, Peru and India were the top three exposures this way.
“We invest in countries traditional managers typically ignore because of a lack of investable instruments. We do not invest through stock exchanges,” Gacon underlines.
The main risk remains political. Gacon describes how the few microfinance institutions that went bankrupt did not fail because of default, but because of political interference.
But, Lombard Odier tracks exactly in which cooperatives and other social institutions the Fof assets are invested.
One example is Solarnow, a firm setting up solar panels in Uganda. Individuals use a per-minute payment system; consequently, shops can stay open late at night.
The LO Gateway – Development Finance fund targets some 3-4% net returns in dollars.
“The fund of funds has been in positive territory in 2015 but below its target. A negative currency effect has cost the fund 1.5% to 2% performance,” Gacon says.
Since inception and as of December 2015, it has delivered returns of 1.9%.