Fulcrum Funds - Final Presentation - v4 by dandanhuanghuang


									Fulcrum Funds, LLC
Social Impact Assessment

Peter Kennedy, Founding Partner

             Final Presentation
             Steven Aronowitz, JD ‘08
             Michael Pearce, MBA ‘08

             May 2, 2007

   Overview
       Project Scope
       Background on the industry
   Social Impact Assessment Options
   Applying to Fulcrum Funds
       Metrics
       Illustrative example
   Implementation and Conclusions
Project Overview

   Client: Fulcrum Funds, LLC
       Targeted $100m private equity fund focused on
        investments primarily in the healthcare industry
       Currently fundraising – seeking to offer potential
        investors both financial and social return
   Scope:
       Refine methodology and criteria to measure and
        report on social impact of portfolio companies
Blended value investment
   CSR of the investment management sector
       Investors increasingly want to invest their values – potential
        strategic differentiator for managers
       One in ten investment dollars in the US is managed in
        accordance with some type of social criteria (Social
        Investment Forum)
   Private equity relatively uncharted territory
       At least 59 funds with assets over $2.6 billion (RISE
       Arguably a better vehicle for blended value investment
        since public company issues are removed
Social Impact Assessment                      You’re looking for the
                                                  Holy Grail!!!

   Investment managers historically judged only
    financial performance
       How well they track an index, what return they
       If they are going to have social investment criteria
        as part of their mandate, it needs to be done in a
        systematic manner
   Desire to quantify social impact
       Huge challenge defining standards
The Quest for the Holy Grail
SIA Industry Example
Social Return on Investment

   Calculate an absolute dollar value
    of social return on investment
       Select specific criteria to examine       Magic Wheels - Social Return on Investment
            Company by company basis (specific
             product impact)                      Company-specific criteria        Year 1   Year 2   Year 3   Year 4   Year 5
                                                  Employment of disabled             100      120      144      173      207
            General metrics (environment, job    Improved Health                     50       60       72       86      104
             creation, average wage, etc.)        ETC                                 xx       xx       xx       xx       xx
       Investment decisions based on social      TOTAL                             $150     $180     $216     $259     $311
            Able to monitor social performance   Standard criteria                Year 1   Year 2   Year 3   Year 4   Year 5
             versus projections                   Environmental impact                25       25       25       25       25
                                                  Jobs created                        35       37       39       41       43
                                                  Women/Minority owned                25       25       25       25       25
   Advantages                                    ETC                                 xx       xx       xx       xx       xx
                                                                                     $85      $87      $89      $91      $93
       Provides absolute numerical value
       Removes ambiguity                         TOTAL Social Return               $235     $267     $305     $350     $404

                                                  Based on multiple assumptions…

   Disadvantages
       Doesn’t have impact relative to similar
       Many assumptions required to make
SIA Industry Example
Relative Analysis: Stakeholder Quotient
                                                         Perennial Healthcare Management - Stakeholder Quotient
   Analysis based on demonstrating                                                        10   20   30   40   50   60   70   80   90   100

    relatively strong performance                        Shareholders
                                                            Perennial Healthcare      80
                                                            Skilled Nursing Ind Avg   50
       Criteria:
           Standardize categories of comparison            Perennial Healthcare      50
            and apply to all companies within a sector      Skilled Nursing Ind Avg   70

       Maintain baseline industry standards to          Employees
                                                           Perennial Healthcare       60
        measure against                                     Skilled Nursing Ind Avg   30

                                                            Perennial Healthcare      80
   Advantages                                              Skilled Nursing Ind Avg   50

       Standardizes for all portfolio companies         Community
                                                           Perennial Healthcare       90
       Demonstrates best-in-class versus                   Skilled Nursing Ind Avg   40

        individual performance                           Environment
                                                            Perennial Healthcare      90
                                                            Skilled Nursing Ind Avg   80

   Disadvantages                                        Overall
                                                            Perennial Healthcare      75
       Does not have absolute dollar value                 Skilled Nursing Ind Avg   53

       Perhaps less relevant for projected
        social impact
SIA Industry Example
Fund Scorecard

   Compare Fulcrum Funds to other
    similar funds
       Criteria:                                         90
           Stakeholder Quotient and/or                   80
           Social Return on Investment                   70
       Compare with healthcare sector funds              60
                                                 Relative 50
   Advantages                                    Value 40                          SQ
       Apples to apples                                  30                        SROI
       Speaks directly to investor choices               20
   Disadvantages                                          0
                                                               FF      X        Y
       Difficult to get data from other funds
       Calculation may be arbitrary                                Companies
Possible Hybrid Model
   To combine the advantages of both the absolute
    dollar value (SROI) and relative scorecard (SQ),
    calculate both

                       Fulcrum     Average Medical Device
                       Funds       Fund – Average of rest
                                         of industry

        Company     Magic        Hot Wheels   Classic
                    Wheels                    Wheels

        SQ          90           74           62
        SROI        $1.2M        $.9M         $.6M
Key Insights from Industry Research
   Identifying specific 2nd bottom line goals is most
    important initial step
       PCV is focused on three specific criteria: capital to underserved geographies, jobs
        creation and minority/women-led businesses
       CalPERS California Initiative Program has the specific goal of investing in
        California’s underserved areas

   Analysis that shows social impact relative to industry
    norms and baseline metrics has the most credibility
       Demonstrating why a portfolio company has superior social potential relative to
        peers, not in absolute terms
       However, sourcing data about private comparables to do a relative analysis will
        be a challenge

   Quantifying social impact received mixed reviews in
    terms of value and ability to measure
       Absolute dollar value versus “score”
Linking Insights to Fulcrum’s Priorities
   Fulcrum’s priority is to quantify impact in terms of dollars
       Need to communicate with investors
       Looking for corresponding value to financial return
       Strong preference for quantitative data
   Impact on what? Utilize first insight and identify Fulcrum’s values
       Create strategic focus on existing core competency or develop a competency
       Trade offs between impact goals requires clear priorities
       Universe of potential impact is so broad it is difficult to measure

                “You have to measure                          “We have to choose between
                what is important to                          solar panel companies focused
                your client, any metric                       on fair labor standards or
                must have meaning for                         focused on toxics recycling.
                them.”                                        Both are important goals but
                                                              which matters most to us now?”

Sara Olson,                                Brian Dunn,
SVT Group                                  Aquillian Investments
Fulcrum’s Social Impact Focus
   Fulcrum Fund has identified three main areas to focus the
    Social Impact of portfolio companies

                     Product – the impact product / service

                     Environmental – sustainable operations

                     Community – employee practices,
                                 donations, etc.
Measuring Impact on Fulcrum’s Focus
   Identifying expected results from reaching general goals
       Indicators of success
       Measurable outcomes
       Baseline comparisons
   Deciding on specific metrics
       Assigning dollar value to each outcome
       Incorporate Fulcrum’s existing portfolio metrics
       Linking to established and accepted measurements

                          “Where there’s smoke, there’s fire.”
Detailed Metrics
   Product Impacts
       Social value of access to care in previously underserved areas
             Value of one additional Dr. visit per year
             Value of availability of medical consultation
             Value of hospital care being closer (a $ per mile closer calculation)
             Value of primary physician being closer ($ per mile or $ per increased visit)
             Value of reducing costs to Medicare
             Value of in home care v. hospital care
       Social value of product impact
             Increased mobility
             Social value of longer life
             Social value of higher quality life
             Novel products that are increasing quality of life, but also lowering costs short term and long term
       Social value created by product after patent period ends – option value potential

   Environmental Impacts
       Reduction in carbon footprint
             Use of environmentally sound transportation
       Increase in recycling/reduction in waste
       Sustainability of facilities construction and renovation
       Smart growth land use or redevelopment (infill)

   Community Impacts
       Under employed population employees
             Higher quality jobs/higher wages/better benefits than traditionally available
       Charitable/in-kind donations
             Company by company
       Support for local civic activities
    Fulcrum’s Metrics in Action
    Fulcrum Hypothetical Investment – Rural Healthcare Facility

   Rural Healthcare Facility providing
     5 new physicians; 10 new nurses
     Population of 25,000 within service area
           Within 75 mile radius from facility
       Provides general family practice, emergency
        care, in-home nursing care
       $5,000,000 required investment

   SIA Components
     Product: Improved access to healthcare
     Environmental: Better practices for travel

     Community: Contribution to local economy
Product Metrics – Rural Healthcare
   Public Health Service classifies counties as primary care shortage
    areas if they have more than 3,000 persons per physician
   Nationally, residents of the most rural counties have the:
       Highest death rates for children   Type of Market                 Deaths/100k   Rate
        and young adults                   Large central                    886.8       0.89%
                                           Large fringe                     834.5       0.83%
       Highest mortality from ischemic    Small                            887.6       0.89%
        heart disease and suicide          With city >10k                   923.1       0.92%
                                           Without city >10k                936.1       0.94%
       Higher percents of adults with
        chronic health conditions          Fulcrum market - now              140.415
                                           Fulcrum market - potential        125.175
       Highest obesity rates              Difference - Lives Saved            15.24
       Lowest Physician rates             Average local salary              $37,564

                                           Implied Total Value - Year 1     $572,475
    Environmental Metrics
   Carbon emission reduction value - $7.75 per ton
       Market price from range of carbon offset prices
   Asses Clinic Carbon Footprint
       Clinic Emissions
            Energy, supplies, shipping, labs
       Home visits by caregivers
       Employee commute
   Identify carbon reduction areas
       High gas mileage vehicles for home visit staff
       Energy efficient appliances and lighting
       Paperless filing systems
   Compare reduced emission rate with previous or standard carbon output and calculate value of
    carbon saved
                   Basic Carbon Analysys - Vehicle

                         Annual tons of carbon reduced per car                  2.68
                         Times social value of carbon per ton                 $7.75
                         Equals social value per upgraded car per year           $21
                         Times number of cars in the fleet                        15
                         Total social value of upgrade                         $312

                         Total Predicted Carbon Value - Year 1                $312
Community Metrics
   Rural physicians are key young professionals
       Various studies to analyze the economic impact of
        additional doctors in a rural community
           Additional jobs created
           Economic multiplier effect of doctor/nurses salaries
              Summary of rural studies

              Doeksen: Value of a Rural Doctor                  $1,718,530
              University of Minnesota                           $5,000,000
              Center for Rural Health Hazard                   $10,000,000
              National Center for Rural Health Professionals    $1,589,500

              Average Total Value - Year 1                      $4,577,008
Total SROI of Investment
   Combine the various impacts
   Calculate total return on investment for
    defensible period
       $$$ value
                                        Value - Year 1
       SROI        Product                  $572,475
                    Environment                  $312
                    Community              $4,577,008
                    Total Year 1           $5,149,795

                    Total Years 1-5       $25,748,974
                    SROI                          43%
Implementation Guidelines
   Focus on refining metrics
       Envision a “desired state,” and work backward to find the
        statistics that will support that goal
   Constantly monitor and update
       Unlike financial ROI, SIA will and should continue to evolve
   Participate in industry consensus building
       SVT open source database of criteria being built
   3rd party auditor to validate the calculated social
       Especially given the lack of transparency of the private
        equity market
       Including direct conversations with portfolio companies
Conclusion - Measuring Social Impact in $$$
   Powerful tool
       Absolute value
       Accurate cost benefit analysis
       Accountability
   Difficult to implement
       Endlessly spreading ripples
       Separating impact from turbulence
       Non-dollar impacts
   One step at a time
       Many people are working on the problem
       Creating database of metrics
       This is the start
Value Added to Client

   Understanding of Competitive Landscape
       Difficult to approach potential competitors on what might be
        considered a differentiating competency
   Expert insight
       SIA structure best suited given Fulcrum’s goals
   New SIA in practice
       Verifiable data to apply to portfolio companies immediately
   New contacts
       Like-minded professionals with a vested interest in seeing
        Fulcrum succeed
Value to Students
   Understanding SIA field
        Speaking with giants in the industry
        Learning about the many models for measuring
        Important and growing area of investing
   Exploring early dollar valuation of SROI
        See how knowledge builds over time
        Joining debate over why and how to value
        Working to establishing standards

   Mike got an internship!!!
        “Just another brick in the wall.”

   Project Scope - Detail
     Scope of Project / Timeline
          The Project was divided into three phases
               Phase 1: Survey industry trends and standards for SIA
               Phase 2: Identify key metrics and refine existing SIA
               Phase 3: Analyze results of new SIA with applied to current
                portfolio company
                                                                                                   1   2   3   4   5   6 7 8   9 10 11 12

          Analyze FSIA and research industry      - Interview industry thought leaders
Phase 1
          standards                               - Online guidelines/ published methodology

          Identify relevant criteria, formalize   - Focus on healthcare relevant categories
Phase 2
          methodology and modify FSIA             - Use respected data sources to create metrics

          Apply refined FSIA to Fulcrum           - Perennial Healthcare Holdings SIA
Phase 3
          portfolio                               - Compare to original analysis

FSIA = Fulcrum Social Impact Assessment
Project Scope - Detail
   Stage 1: Research and analysis of Fulcrum’s                   Stage 3: Application to an existing or potential
    current evaluation system.                                     Fulcrum investment
       Step by step breakdown of Fulcrum’s screening                 Apply improved Fulcrum social evaluation to an
        and forecasting system.                                        investment.
       Comparison of Fulcrum to industry best                        Compare improved results with results from prior
        practices.                                                     Fulcrum evaluation system.
       Analyze specific key metrics that are used by                 Analyze the impact of improvements.
        social investors industry-wide                                Confirm applicability of evaluation to calculate a
       Analysis of purpose and effectiveness of                       total social impact value for Fulcrum’s fund
        Fulcrum’s evaluation.
       Identify specific key metrics that are applicable to      Additional:
        Fulcrum’s industry focus (e.g. rural or low income
        healthcare, clean tech)                                       Consider organizations best suited to developing
                                                                       and maintaining industry-wide social impact
   Stage2: Suggestions for improvements.                              measures
       Identify key areas of improvement for evaluation
        system in methodology and specific criteria.
       Suggest modifications to improve Fulcrum’s
        social measurement accuracy and efficacy for
        specific criteria
       Develop a methodology to approach social
        impact assessment that can be applied broadly
   Individual Interviews
     Brian Dunn, Aquillian Investments

     Lloyd Kurtz, Nelson Capital Management
     Yvonne Lu, Long Life Clinic Network
     Sarah Olsen, SVT Group

     Jason Oppenheimer, Pax Water
     Beth Sirull, et al., Pacific Community Ventures

     Pierre Trevet, Innovest

   Other firms – various individuals
     Acumen Fund

     Bay Area Equity Fund
     Good Capital

     REDF
Key Resources
   GSVC website: http://socialvc.net/index.cfm?fuseaction=Page.viewPage&pageId=58
   RISE Project: http://www.riseproject.org/
   UNC: http://www.ccc.unc.edu/documents/cccDoubleBottomLine.ppt
   REDF: http://www.redf.org/resources-general.htm#sroi

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