<Title of session> Parallel Breakouts on Intellectual Capital: Effective Due Diligence

<Date and time of session> Wednesday 14
May 2014 – 3:30pm – 4:30pm
Moderator: Cindy Ko (Endeavor)
Panels: Liesbet Peeters (D. Capital Partners), Dweep Chanana (Benefit), Sandeep Aneja (Kaizen
Management Advisors), Mona Kachhwaha (Caspian Advisors India)
Session reporter: Yumi Fujita

Summary of the content of the session:

1. Brief introduction of the panelists

Sandeep: Kaizen is the first private equity fund that focuses on the education sector in India, which
in the past did not have access to enough capital. Effective Due Diligence (“DD”) is not limited within
the board room, but it is all about finding out what kind of person the entrepreneur is.

Liesbet: D. Capital advises individual investors, multilaterals, family offices and foundations, as well
as commercially oriented investors, on how to make effective impact investments. In order to make
such effective investments, it is important to ensure the alignment of objectives and expectations
among investors, in terms of impact and commercial return, during the course of DD.

Dweep: Benefit is an association of professionals who are interested in making impact investments.
Although large number of people has capabilities and means to make impact investments, the
barrier for doing so is quite high. One of the issues is the high cost of DD due to the fact that the size
of many deals in the space is rather small. In order to bring down that cost, Benefit focuses on co-
investment, where DD is conducted on lead investors instead of the each deal. Benefit also uses
formal and informal feedback from people on the ground, who are closer to entrepreneurs. Hearing
and understanding why someone has said no to certain deals especially helps to make effective
investments. As for what kind of DD is conducted, it largely depends on the characteristics of the
lead investors – socially oriented investors and commercially oriented investors would ask totally
different sets of questions.

Mona: Caspian Advisors runs financial inclusion investment funds focused in India. From the DD
perspective, one of the most important things is to be part of the network of entrepreneurs.

2. (To Sandeep) Why do you define yourself as a private equity, not explicitly focusing on social
impact? And how does that affect your DD process?

Sandeep: We are a private equity fund, which is classified as an asset class, and can deliver the
financial return. We believe that anything to do with education should have an impact by design.
There are two points that we concern when conducting DD. One is whether we can quantify the risks

and put that risk measurement into a term sheet, which is more traditional way of looking at
companies. Another perspective is that such exercise also helps us to understand and be able to
predict how the companies react to unforeseen circumstances.

3. Cost of DD: The size of social investment deals tend to be small and therefore as a
percentage, the cost of DD can be quite significant. Should it be an investor or an investee
who bears the cost of DD? What are the ways to bring down the high cost?

Sandeep: If the investors pay for the cost, there should be more transparency, whereas if the
investees pay for the cost, they can influence the result of the DD to some extent, which will be less
transparent. Therefore, in order to minimize the conflict of interests, we think investors should bear
the cost of DD.

Liesbet: The whole spectrum of investors, whether they are seeking for financial return or for impact,
defines how to work around the high cost of DD. The discussion is around what it takes to do what
you need to know, as well as how deep you go in the DD in order to feel comfortable about the deal,
considering what the investors are seeking for. Co-investment lets you share the practices with
others and bring down the cost of DD, which contributes for deal origination and sourcing to be
done more effectively. Working with other investors is beneficial because it makes it possible for
investors to understand each other better over the course of recurring co-investments. Also, the
costs of bringing on board technical / legal experts can be shared in co-investments, which make the
DD much easier.

Dweep: For individual investors, we think that the transparency plays a big driver in bringing down
the costs of investment. Particularly in the social investment space, a lot of investors do not know
what the standard or benchmark could be for financial and impact return, since information is not
always available for individual investors. Being able to bring in more of such information is a major
driver of reducing costs.

Mona: For the case of Caspian, the fact that our investments are sector focused helps to keeping
some of the costs low (e.g. research). Another aspect that contributes to bringing down the cost is to
outsource some functions related to investment and monitoring.

4. There seem to be lots of investment managers/funds that have tough times in making
investments. Is this impression correct? Are we in an “Impact Investment Bubble”? Should
the capital be deployed in a different manner?

Mona: Generally speaking, there are limited good opportunities while there is more funding, which
might be because of the cycle of investment environment. However, the role of impact investors

should not only be providing the capital but also providing other support such as incubating great
ideas and working with early stage entrepreneurs for longer period.

Sandeep: We need to understand what the investors are looking for and define what the good deal
is for you. In the education sector, there are not many investable cases to start with. However, in the
cases where we carved out businesses from non-profit organizations and made it commercially
viable, the money was not the aspect we were looking at but the fact that the organizations had
deep understanding of success factor in education. Therefore, being able to create such partnerships
means what “a good deal” is to us.

Liesbet: Impact is something that is defined differently for each investor. It is crucial to know what
the important impact the investor really wants to achieve is, how to translate it to the social
enterprise search criteria, and when to use those criteria at the right time. In addition, the
investment structure in this sector is currently still limited, but there can be more innovative
structure happen around Public Private Partnerships, project finance, using non-profit model, and

Dweep: Whether we are in the impact investment bubble or not depends on geography. For
example, when we were looking at East Africa, there are many good companies with good teams but
with ridiculously high valuation, where the bubble was clearly happening. The question is whether
you are in a right place at the right time, and whether you are patient enough to find a deal that
matches with your criteria.

Questions from the Audience:

Q: To what extent do you see DD helps the growth of the social organization you are looking
at? What process of the DD would potentially be a motive of capacity building for the

Liesbet: The ultimate premise of doing DD is to build a partnership with the organization, and
align on what the investment can achieve overtime. Therefore, identifying the weak spots of the
organization and what it is going to take to get to success eventually. This approach is similar to
the Venture Capital model, in that you invest in a company with the business model and
management team that you believe in.

Sandeep: As part of the DD process, we usually try to see whether we can effectively work with
the team of the organization in the areas of operations, human processes and strategy. Value
creation of a partner is a critical element of DD.

Q: How does the ultimate financial structuring of a transaction affect and/or change the DD

Liesbet: You need to find the right balance of between what an enterprise needs and what
investors want and feel comfortable with. Key discussion with entrepreneurs is around (i) what
they need to achieve (ii) in what part of the operational line (iii) according to what time line.
How you are going to use the money to make the business work. We have to find the right
balance in terms of the deal structure in order to make it equitable for all the parties involved in
a deal.

Q: What do you think makes more sense, conducting DD through third parties or by yourself?
What are the advantages and disadvantages?

Sandeep: If you have the right resources and expertise, DD should not be outsourced in order to
understand exactly what is going on.

Dweep: People take different judgment calls. In general, I would place more emphasis on the DD
done by an investor who has put more money than the one who put less.

Liesbet: DD process is a start of building a relationship with a social enterprise. Therefore, if you
outsource DD, then you need to build that relationship afterwards.

Q: Should investors, funds, corporates, etc. be running the business instead of the social

Sandeep: We should get involved in advising on how to run the business, assisting making
strategic decisions, and other business related issues. However, social entrepreneurs are really
the ones who understand the situation on the ground. Our role is to be a partner who provides
entrepreneurs with external advices and perspectives.

Major conclusions of the session:
1) Co-investment and speaking with other investors are highly effective in bringing down the
cost of DD for impact investment, which tends to be high due to small size of the deals, as
well as in understanding the business and management of the social enterprises.
2) It is important to understand what impact investors are seeking and to translate that to deal
search criteria. Whether there are enough “good deals” or not highly depends on such
3) DD is a process of building a relationship with entrepreneurs and becoming a partner.
4) Finance structure also affects the perspectives of DD. There needs to be deep discussions
with entrepreneurs and investors to balance what all the parties expect in the deal.