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F3 Co-Investing in Deals

F3 Co-Investing in Deals

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F3 Co-Investing in Deals
F3 Co-Investing in Deals

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Published by: kevin_teo_22 on May 26, 2014
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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
doesn’t 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
 –
 
it’s 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, it’s 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.
It’s 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 importa
nt. It’s
not so much about filling out the wrongs, but what do the
se people bring that we don’t? W
e 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?

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