Tom Kagerer, Partner and investment specialist at LGT Venture Philanthropy, explains the main differences between venture philanthropy and impact investing.
Initially, both grant-funding and equity/debt-investments were deployed through LGT Venture Philanthropy. What where the reasons, that in 2016, the impact investment platform Lightrock evolved as a separate entity in charge of all new impact investments?
In the early days of the LGT VP Foundation, we had a broad mandate of achieving impact, which included multiple geographies, themes and financial tools. We did grant investments into non-profits and equity/debt-investments into for-profits, all of it driven by the mission to improve the quality of life of disadvantaged people. What led to the evolution into two separate entities, was the realization that a higher degree of specialization was required in order to achieve the next level of excellence in both approaches. On the impact investing side, it was clear that in order to grow, a more institutional set up and access to larger amounts of capital were required. By contrast, in order to maximize the impact of our philanthropic funding, we needed to refine our strategy to a geographically and thematically more focused approach that builds on what worked in the first stage of LGT VP’s grant making.
Does the world need both venture philanthropy and impact investing? And what is the value of each approach?
Yes, the world needs both, since they are complementary approaches sitting on a spectrum of financial and impact returns. There are different ways to improve the quality of people’s lives. Whether to do so through investing debt or equity – typically referred to as impact investing – or a grant – as we do in venture philanthropy – often, among other factors, depends on the economic situation of the target group. If a company is operating in an environment with a high concentration of customers with sufficient buying power, a market-based solution is often a good strategy. For example, to provide affordable high-quality healthcare services in large cities in Brazil, an impact investment into a for-profit company can be a good way to support the growth of such impactful solutions. This is the value of impact investor Lightrock’s work. But if you want to do the same in remote communities in Liberia, you are faced with a very different scenario. There is a low concentration of people and extremely low purchasing power. People are often subsistence farmers; they grow food to survive and don’t have much, if any, disposable income. The long-term support in the form of grant funding, strategic advice or access to talent for non-profit organizations providing health services in these communities is the value of our work at LGT Venture Philanthropy (LGT VP).
So, people living in the communities you just described probably have very little or no money to spend for better healthcare or education.
Exactly. There are billions of people in the world with minimal disposable income, which is why their ability to pay for services is extremely limited. This is why LGT VP focuses on supporting non-profits that have developed products and services that are high in quality and by and large free for their clients.
Can you give us an example?
Of course. For example, we support ARMMAN, one of our portfolio organizations that works to improve maternal and child health in India. Part of ARMMAN’s model is to leverage the high mobile phone penetration in India’s remote communities to provide health information and outreach programs through automatic, pre-recorded audio message phone calls – an effective, affordable and highly scalable model. Since inception, ARMMAN has reached 18 million pregnant women and families.
What about government? Are they involved as well?
In a context in which most clients have no disposable income, non-profit organizations working hand-in-glove with governments have proven effective and efficient. Our portfolio organizations typically work in strong partnership with government to provide services such as good healthcare or education. Hence, our catalytic support is often structured to build the case for a partnership between our portfolio organization and government to replicate solutions in the wider public system. For example, you might have an organization that provides quality community healthcare services. With the right amount of financial and capacity building support, the organization can strengthen and scale its model to a point at which the government looks at it and says: “That works. We can afford that model and it’s replicable and we want to introduce it to the rest of the country.” Now the government can use elements of the organization’s model as a blueprint to inform and implement a national community healthcare strategy.
I remember reading about a health organization you support in Liberia, which had this type of evolution.
Yes, our portfolio organization Last Mile Health (LMH), whose effectiveness in curbing the effects of the Ebola epidemic in 2013/14 caught the Liberian government’s attention. LMH had been working in a single county and that region had fared far better than others. These positive effects could be linked to LMH’s model of training and equipping Community Health Workers (CHWs) which has proven incredibly effective in getting the local community to follow health protocols. The vital support of LMH to fight the Ebola crisis convinced the government to launch the National Community Health Assistant Program to spread an LMH informed CHW model across the entire nation.
And how exactly do you help the organizations grow and get to the stage at which a government might notice them?
At LGT VP, we are convinced, that strong organizational capabilities, such as finance, marketing and communications, IT and data are critical for an organization to implement high quality, cost-effective solutions at scale. Hence, a large part of our funding is allocated towards strengthening organizational capacities critical for success. When addressing a specific challenge, governments often seek to collaborate with organizations who can demonstrate that their solutions to the challenge are scalable, impactful and affordable. LGT VP support organizations to fulfil these requirements.
And you typically engage with organizations over many years?
Correct. Our Board mandated us to work very strategically in a few thematic areas. We spend a lot of time conducting due diligence on our organizations, in order to choose those that have the highest potential to build solutions with long-term and sustainable impact on vulnerable communities. We typically engage with organizations in their growth stage and seek to drive their impact, which often takes years to reach significant depth and scale. In some cases, such as with our portfolio organization Educate Girls, which we have funded for 11+ years, we realize that we can still support them in reaching the next level of geographic expansion and in leveraging technology to improve their efficiency. Once we believe in an organization, we back up that belief with the full panoply of our resources – financial, operational, managerial, networking and capacity building.
I have one final question. Earlier we addressed LGT VP’s three strategic areas: education, environment and health. What do you hope to achieve in each area in say the next three years?
By the end of 2023, our portfolio has the potential to have provided better access to quality healthcare to 65 million people, to have improved the learning outcomes of 30+ million children and to have made significant headway with reaching the global goal of protecting 30% of land and ocean by 2030.