Financing Capital: Co-investing in deals

Wednesday May 14
Session reporter: Anh Ton
Speakers: Raya Papp of LGTVP; Hareesh Nair of Quadria Capital
Moderated by Nick Lazos of Insitor Management

Summary of the content of the session:

Hareesh Nair (HN): Quadria is a leading investor in healthcare innovation. Our main form of
investment is private equity. We enjoy collaborating in our funding efforts.

Raya Papp (RP): LGTVP was started by the princely family of Lichtenstein. We are a wealth
management firm with a division focused on philanthropy and impact investing. We run an
accelerator program, where we invest up to 50k and provide a yearlong fellowship. We take a
private equity approach to social and environmental outcomes. 20 families have co-invested
alongside the princely family. The prince is invested in creating an investment platform from a
philanthropic POV. He believes in local representation on the ground, and he wants others to come
use that platform.

An example of collaboration: we made an equity investment and loan in an organization in the
Philippines, and then a European foundation made a seven-year loan to the organization. The
investment manager in Manila sourced, streamed, wrote, and manages the deal it is active on
weekly basis. The foundation received quarterly reporting and there are investing calls.

Question from Nick Lazos (NL): What are the positive aspects of co-investing? What is it like being
lead investor vs a co-investor?

HN: An example: We fund a leading hospital in Calcutta. That investment has a number of current
investors who participate as co-investors. Investors need to align with us as LPs it makes the
funding more transparent and helps determine how to make financial targets. It was easy to share
this info because they were already part of the team. A charter company usually doesnt want to
deal with multiple parties because you have to agree on a pathway to due diligence. But, if you
agree up front on the deal structure, it is helpful. Upfront agreements keep things orderly.

Challenges for us: we work with DFIs and it takes time for them to get comfortable making an
investment.

RP: If you don't have a very visible lead (e.g. no ownership of the deal), or if you have multiple
parties with a piecemeal approach and no trust, the end result is time [lost]. We are currently
trying to close deals with 3 co-investors. The other party is a well-endowed foundation, but they

come from a historically grant-making background -- this is their first impact investing venture. It is
new for them. But with local partners, you need to know your roles. It takes a long time and can be
frustrating, but the foundation got on board and is now investing in other orgs that LGT is working
on. The second and third co-investments with the same partner get much easier. Partnership
might start passive, and then become more active.

Question from audience: You have talked about the learning curve of getting partners involved in co-
investing can you go into the specifics of how co-investing gives an opportunity to scale up
knowledge and engagement?

RP: In our experience, there are many people who are very successful in the business world, but
when it comes to philanthropy, people take off their thinking caps and pull out their hearts. Due
diligence goes out the window. BUT, a formalized process helps reconnect people to the business
setting to help understand what a professional investment applied to the social space looks like.
Families and foundations tend to have more flexible capital.

For LGTVP, we have three stages in reviewing a deal:

1) Fact sheet we create a business model that we believe in
2) Preliminary Review it is like half of an investment memo
3) Deep due diligence its 20 page investment memos (coming about 1 -3 months after the half
investment memo)

We ask our partners: who are you and what can you bring? LGT does debt, equity, and grants, but if
the co-investor has restrictions, then we take that into account - e.g. if a foundation can only invest
500k and can only do debt (or grants), we structure the deal accordingly.

Question from audience: When to use debt or equity or investment?

RP: For grants, its a by-country perspective. We look at how difficult it is to get capital in. But even
with grants, we manage the company [investee] as a non-grant one.

Q: Why do people like co-investments?

HN: Pure financial investors, DFIs, funds they all have different interests. We look for partners with
no conflict of interests as co-investors. For us, they learn about dynamics of hospitals in India.
Corporate strategist can learn how business models are changing; how they can deliver the same
service with lower costs.

Q: What are your thoughts on underwriting?


RP: We don't do a deal that relies on co-investment. The reach out to partners comes after [we have
found a deal that we are interested in]. After that, we figure out when they do fit in. We
communicate that to the investee too. The concern is really in getting too long a list of co-investors.
Its a time consuming process.

NL: We have been talking about alignment of interest and timing, now what about commercial
investment vs. social investments what kind of questions are you asking your partners?

HN: Our philosophy is to get alignment at the fund level. There should be a good clear working
relationship at the fund level. 1) We target deals that are appropriately sized and leave room for co-
investors. 2) After identifying investment, identify LPs they want to understand costs and fees;
they usually leave the evaluation to us too 3) Use of proceeds and timing of proceeds need to be
clearly defined upfront 4) Tranche deals agree upon monitoring as well. Our key thesis is alignment
up front

Q: Why would a lead investor share their best deals? What would encourage you to do more of
that?

RP: Personally, I think this is where we see the difference between impact investing and traditional
investing. It is about getting more ideas to scale. It is competitive, but collaborative. The benefits are:
1) diversifies risks (biggest one from our perspective less so in terms of capital, but getting good
brains around the table and how they can take organizations forward through networks and
expertise); 2) getting more capital into impact investing space. A fair amount of the work we do is
ecosystem building so we share all of our due diligence and notes.

NL: For us, diversification of people around the table is important. Its not so much about filling out
the wrongs, but what do these people bring that we dont? We need to find the good partners that
can fill that out.

NL: What about the post-investment? How do they manifest? Is it through board? Management?
Etc.?

HN: We are a sector-focused fund, so the relationship with company is maintained with us. We do
proprietary deals based on relationships with the industry. We are a mid-sized fund, but we go after
large deals. When we go after co-investments, we believe you can diversify risks. I was on the
investment team for Medtronic--all deals were syndicated.

Question from audience: So what is the value-add? Is it a systems change?


Q: who are the co-investors?

RP: Different co-investors bring different traits brought to the table. For some, they bring access to
international sales and distribution channels. e.g. Organic foods in Southeast Asia: international co-
investors help bring businesses to consumer market (market linkages). Co-investors can bring
mentorship more locally. Be agnostic and take the ego out of it ask who is the best to bring the
table.

HN: Some co-investors have strong regulatory and political relationships, which can be helpful to the
portfolio. Some bring very flexible capital and lower the costs of capital.

Q: Can you clarify what you consider the size of deals?

HN: It is limited in Asia because deal sizes are usually smaller. I would say mid size: 15 million 75
million. Large is 100 million and up.

NL: We invest in early stages: 200,000 to 2 million. But usually it starts smaller, with multiple
tranches.

RP: 50,000 up to 10 million is our range. Our sweet spot is 1 or 2 million. Theres a lot of really early
stage proof of concept ideas though, because governments are now encouraging social
entrepreneurship (e.g. through university challenges). Theres a gap between an idea and getting
revenue through the door and getting through the first pivot. Entrepreneurs tend to be younger in
this space and need a lot of guidance. Small deals are around 50,000 to 200,000. Mid sized:
200,000 to 2 million. 10 million would be a big deal in impact investing in Asia.

Q: How do you align expectations from different stakeholders and co-investors?

RP: if youre not aligned within a round, its very difficult and next to impossible. If you have a
completely commercial-led investor and impact investor, their perspective wont mix it. You have to
find balance within the series.

Q: Within the Asian context, what kinds of statistics are there for when you should to pull out of a
deal? Is there any physical benchmark?

RP: Success is when an org is financially sustainable, break even, or raise additional capital. Are we
the ones that put in that additional capital? That is how we determine whether we continue.


HN: Try build enterprises that other groups want to emulate. DFIs and impact investors are usually
more patient. Even at large institutions, you can track impact very closely and apply that into your
business model through operational efficiency.

Q: where do you draw the line between social and ROI?

NL: The organization has to be financially sustainable.

Q: Which is easier? Taking a business to help it become more social? Or taking something social and
making it become more business?

RP: We usually go the social to become more business path. We are looking for how to bring in more
scale. The conversation is starting to take off labels, and more towards asking how do we achieve
what were trying to achieve?

Audience comment: Its hard to teach a commercial business to become social. Its something you
cant bring in from the outside. You have to unmask the masquerading does an organization really
want to help the bottom of the pyramid, or is just trying to make a profit of the bottom? Under what
circumstances does this model cease to be social? Don't let just look at a business that uses the
marginalized as inputs.

HN: Scale is the name of the game.


Major conclusions of the session:
Co-investments are a great opportunity to diversify assets. There is usually a learning curve in the
beginning, but as you work on investments, it will unlock more opportunities. The most important
thing to remember is to align interests and expectations.

Feedback/Take-Aways for the EVPA:
-Bring the right investors into the right project; dont look for LPs who are diametrically opposed in
their investment theses and bring them into the same deal. Co-investing is all about aligning
interests.
-Be upfront and think structurally. When you are clear from the outset about what you both want to
achieve in your investments, things will go more smoothly. There is a long pre-investment phase.
-The first co-investment you undertake may be an arduous process, but it opens the way to future
co-investments with other groups.