Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
Potential profit opportunity
We also calculate the potential profit opportunity over the 10 year period, which is
simply the revenue opportunity multiplied by the operating margin. In the case of
housing, Monitor estimates a margin of 22% on the housing project they present; to
be more conservative, we round this down to 15%. This results in a potential profit
opportunity of $177–$648bn (line 8 of Table 7). Again, these profitability figures
will not take into account the cost of capital or expenditure toward assets, such as the
building in which a hospital might be located, and an investor would need to consider
these further financial constraints when analyzing a potential investment.
Sizing the capital required to generate that revenue
Finally, we use the revenues generated by the case study business model to identify
the amount of capital that would be required to realize that revenue potential. In each
case, we assume that the year 10 revenues generated in the sector represent an
adequate proxy for the total invested capital that would be required for the 10 year
period we are evaluating. In the case of housing, this results in required invested
capital of $214–$786bn over the 10-year period (line 9 of Table 7).
Nature of invested capital required
One further question will be to determine what kind of capital will be needed for
each sector: Will the business be funded mostly by equity or debt? While this is a
relevant question in helping investors identify where they should focus their capital
from a risk/return standpoint, we believe that both the debt and equity portions of
business financing will be impact investment.
Further considerations on our methodology
We have already mentioned the difficulty in our ambitious method of extrapolating
around the globe based on the success of one case study. In addition, a few other
methodological considerations arise that we wish to highlight.
The growth of financial access alongside the market will be crucial
Housing in particular is an industry that cannot grow alone. Without access to
finance, many of the households we have counted amongst our customers will not be
able to take advantage of even the lowest-price house. When CEMEX, a cement
company in Mexico, decided to stabilize its cyclicality by increasing its focus on the
more stable revenue streams that came from the low-income population, it realized
that financing was the most difficult hurdle for these customers to overcome 55 .
Our methodology has assumed that external support mechanisms such as financing
will grow alongside the business within some reasonable timeframe. In India, for
example, as a result of the National Urban Housing and Habitat Policy of 2007, the
National Housing Bank has established financing toward slum redevelopment
projects and upgrades/additions to existing dwellings 56 . With respect to our specific
housing case study – based on the work by Monitor – there is reference to tie-ups
with Bank of Baroda, DHFL, MAS, HDFC and MHFC (a selection of housing
finance corporations in India) 57 for the provision of financing. For BoP populations
without this access, incremental building models, such as Patrimonio Hoy
(CEMEX’s project) may be a more feasible starting point. In that Mexican business
55 The Fortune at the Bottom of the Pyramid, C.K. Prahalad, 2010.
56 http://www.nhb.org.in/Financial/Refinance_of_construction.PHP
57 Building Houses, Financing Homes, Monitor Inclusive Markets, July 2010.
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