Wednesday, July 21, 2010

Paradigm shift: Scorekeeping and intermediate investment vehicles!

Dear Colleagues

I picked up on this post for some reason ... and initially was not sure why it was. Then it clicked. Maybe there is a pattern emerging. This is the post ... its URL is:
Evolvence launches third India-focused fund of $400 Million
By PTI, Wednesday, 21 July 2010, 03:27 Hrs

Mumbai: Dubai-based alternative investment firm, Evolvence Capital, has announced the launch of Evolvence India Fund II-its third India focused fund. Evolvence India Fund II, which is a private equity fund of funds, is targeting a corpus of $400 million from institutional and high net worth clients from across the globe, a press release issued here said.

The fund aims to make select investments in the mid-market growth capital segment in the country's private equity market through fund investments, co-investments and direct investments.

This new fund from Evolvence Capital follows the successful closing of Evolvence India Fund I in 2007 and Evolvence India Life Sciences Fund, a healthcare and life sciences fund in 2008, the release said.

Evolvence India Fund II will invest with high quality private equity fund managers and established entrepreneurs in India and may selectively consider investments in secondary private equity opportunities, it said.

"Evolvence is committed to India and has been actively investing in this market since 2004. Our investors recognise India's potential and we strive to offer them exceptional returns by identifying attractive investment opportunities in the country," Evolvence Capital's CEO, Khaled Al Muhairy, said.
There is both bad news and there is good news.

The bad news is that the global capital markets are encouraging economic and social bad behavior in order to maximize profit and stockholder return. The last thirty years has seen many substantial changes in the way the global economy works, but the allocation of resources for investments has done less for social good than it has for the concentration of private wealth. The use of analytical techniques and the mass production of MBAs that understand simple financial analysis has made the business of banking better paid than the profession of engineering ... or worse, the business of health better paid than the profession of health ... or the business of law better paid than the pursuit of justice!

Most telling is that science and technology has become amazingly powerful ... but the number of people who are poor and hungry around the planet is at record levels. I use the figure of 4.5 billion people today who are poor and hungry ... not at all an acceptable achievement!

There is good news. The good news is that the capital markets and major decision makers would probably behave in a very different way if: (1) there was a more appropriate system of metrics; and, (2) there were investment vehicles that facilitated the allocation of resources in ways that would be more beneficial for both society and the investor.

This is what I saw in the post ... I saw some innovation in the post about the Evolvence India Fund II ... I saw a modest indication that there is interest in investment vehicles that are aiming to do different things.

Some people are engaged in innovation to have more impact on society ... but the wave is quite small. I am reminded of the Acumen Fund which sometimes describes itself as being "patient capital" ... but I am also reminded that the scale of innovation compared to the rest of the capital market is very very tiny.

In my youth I played rugby football ... I was a full-back ... the last line of defense! I was ... am ... quite small, but my tackling was very good. A small person can tackle ... pull down ... a fast moving big man if you do it right and use the right leverage. I used to tackle very low ... stop the ankles and the rest of the player is not going anywhere! Leverage!

So where is the leverage in the modern capital market? I would argue that the leverage is in the metrics. We have got to start measuring the right things, and do it everywhere, quickly and at low cost. If there are data about social performance and profit performance ... both ... and the profit performance is the same, but one has good social performance and the other does not, I think it is fair to say that the one with good social and profit performance will be valued more favorably. I would love to hear an argument that this is wrong ... but I am fairly certain that this is the way the capital markets would behave.

I do not know what the relationship would be between social good and profit good ... but that is what markets sort out. My guess is that the relationship is complex ... and that social good would have considerable value in the capital markets!

Intermediate investment vehicles have become an important part of the capital market in recent years ... and these could be another component of leverage. The Microfinance Investment Vehicle (MIV) is relatively new and has become a multi-billion segment of the capital market in just a few short years. A range of investment vehicles that embrace social performance as well as money profit could rapidly transform the way capital money resources are allocated to important activities that are needed in our modern global society.

From what I know of global economics ... the metrics make sense. With the information technology now available, putting the metrics together should not be an impossible task.

Stay tuned. You might be surprised!

Peter Burgess

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