Strategic Investors: Profiles of investors with strategies to consider.

Nisa Amoils, named one of 30 Women in Venture Capital to Watch by Business Insider in 2018, had a different journey in mind when she began her career in the 1990s.

As a securities lawyer, she worked for several large media companies during the dot.com boom, shepherding the acquisition of such early Internet names as Citysearch, Ticketmaster and WebTV. She worked at USA Networks under Barry Diller, at Time Warner, and spent five years at NBCUniversal.

“I learned a lot being in big media, and it taught me that I had to be on the disruptive side of things,” she says. “Eventually, though, I had learned enough, and then I took the jump into entrepreneurship.”

Amoils says her front row seat during the start of the dot.com disruption served her well as she focused on investments in new technologies that emerged to challenge incumbents and inefficiencies in industries. Amoils recently has stepped up her involvement in funding female-led startups to help address the stubborn gender imbalance in both the finance and technology sectors.

She is setting up her own investment fund, which has yet to be named, and invests her own portfolio through her family office, Morden Capital. And she has just released her first book, WTF is Happening? Women Tech Founders on the Rise, that highlights current female pioneers in the technological field.

Amoils makes the case in her book that women have been outperforming men in finance and technology for years, a stance backed up by research including this 2018 study by the Boston Consulting Group that shows ROI is higher for female-led startups. Still, the percentage of private equity funding that goes to women-led startups has been stuck at about 2% for years.

She notes that there about 80 gender-focused funds operating today, along with a large number of angel investors who fund only female-founders. Yet that 2% number won’t budge.

“Why is that?” she asks. “It’s because only about five of those funds have AUM of $100 million or more. So most are pretty small and even though the female founders might get seed rounds, they might get “A Rounds,” a lot of them don’t make it through the funnel all the way till an exit.”

Blockchain Opportunity
Blockchain, in particular, has been a focus of her VC activity both in her own portfolio and at her last position with New York-based Scout Ventures, a firm with an impressive list of exits, from 2016 to 2019.

She is a well-known investor in frontier tech at this point, having taken early positions in a number of startups, including Securitize, a Blockchain firm that has set the standard for digital securities issuance; Coinmine, a home cryptocurrency mining platform; Highcastle, a UK-based alternative investment marketplace powered by Blockchain and Visual Vocal, a virtual reality collaboration platform. She also advises Vertalo, a digital, tokenized asset management specialist, and CityBlock Capital, which offers a new option for retail investors in the form of freely tradeable, digital shares with low minimums. The firm is betting that the current wave of asset digitization will adopt Blockchain as the standard for global infrastructure.

“Whether it’s the fractionalization of real estate or of transfer agents, issuance platforms or the KYC (Know Your Customer / Anti-Money Laundering (AML) platforms, they’re all building up that infrastructure,” Amoils says.

As with Securitize, Amoils likes to target inefficiencies in financial services, in areas like issuance, treasury, trade finance, and other labor-intensive functions often requiring reams of documentation.

“So many different parties need to sign off on documents,” she says. “Supply chain is another one and Walmart’s already involved. Being able to track food from other countries and know the source of it, its age, how it was stored during the voyage, that’s huge.”

Vertalo describes its product as “Carta for Crypto,” a reference to the cap table management firm familiar to corporate treasurers and CIOs everywhere.

Dave Hendricks, CEO and co-founder of Vertalo, says he took note of Amoils at various conferences and on media outlets like CNBC and Fox Business News soon after he founded the firm in February 2017. It struck him that her particular skill set – a VC who is also a securities lawyer who is conversant in digital ledger technology – sounded like someone he needed to know.

Currently preparing for a Series A raise, Hendricks says Amoils “keeps us on message. Her knowledge across the issues we have to deal with, well, that’s a very rare Venn diagram.”

Amoils accrued this reputation the hard way: by throwing herself into it. She admits that she had very little knowledge of frontier tech – AI, Virtual Reality, Blockchain – when she began transitioning out of the law and into investing.

“At New York Angels, I started the frontier-tech committee several years ago and just started bringing in companies to events as guest speakers,” she says. “This was how I learned the technical side. So even before I was at Scout, I was interested in those disruptive areas and I just started self-learning.”

Another place she sees potential for Blockchain is in gaming, where kids learn at an early age what a “token” is. She’s currently pondering an equity investment in a gaming company that depends on distributed ledger technology, though she would not reveal the company’s name. But gaming, in general, is a great Blockchain play.

“The customer behavior is already there, so they also don’t require that much infrastructure build out like other areas of Blockchain,” she says. “The idea is to use Blockchain to eliminate platform risk and then you would be able to own non-fungible tokens and own that asset going forward through other gaming platforms, which means here is an interoperability aspect, as well.”

Investing in Women as a Part of ESG
In her book, Amoils looks at the realm of tech startups, profiling a dozen such female entrepreneurs starving for capital despite their achievements. “I decided to focus on hard-tech in part because those founders don’t get as much press as the female founders in food and fashion e-commerce and beauty,” a kind of discrimination in itself.

She was also an early investor in The Wing, a female-only co-working company that has just closed a $75 million C funding round led by Sequoia Capital and Upfront Ventures.

Kara Nortman, a partner at Upfront, marveled at the speed of The Wing’s expansion. Since its founding in 2016, it has opened workspaces in San Francisco, Manhattan, Brooklyn, Washington, DC and has some 6,000 members. Monthly members pay $215 for access.

“It’s particularly special when I get to invest in a great business that also has positive social impact and aligns with my values,” Nortman wrote on Venture Inside.

Amoils notes that in spite of the enormous boom in ESG (Environmental, Social, Governance) investment strategies in the past decade, funding to female leaders and female founders continues to lag.

Among her other investments in gender-focused ESG are SheEO, which aims to make more capital available to female entrepreneurs around the world; Vbeaute, a female-founded skin-care company; and Lightwell, the software developed by Suzanne Xie’s Hullabalu.

“Most of the impact investors I’ve spoken to are looking for environmental impact,” says Amoils, who is also an advisor to the nonprofit Girls Who Invest. “They don’t really pay so much attention to gender issues. It’s really the missing ‘G.’”

The post Frontier Tech VC Pioneer Nisa Amoils Sees Opportunity in Finance’s Gender Gap appeared first on Karma Impact.

The fund, with a lead investment from New Jersey-based Prudential Financial, takes LeapFrog’s total commitments to $1.6 billion, making it one of the largest private equity managers dedicated to impact investing.

“We are delighted to be supporting the largest equity fund by a dedicated impact manager in emerging markets,” said Philippe Le Houerou, CEO of International Finance Corp., the private-sector arm of the World Bank Group and a lead investor in the new fund, in a statement. “Together we will drive this investment toward financial inclusion and health access.”

LeapFrog provides startups with essential supports through its deep connections with banks and diverse portfolio, said Chris Sheehan, founder of crop insurance startup Worldcover. LeapFrog and Sheehan’s company are in talks for potential funding, he told Karma Network. Worldcover aims to help farmers mitigate losses caused by natural disasters by providing low-cost crop insurance in Africa via mobile phone.

The $700 million fund has already invested in five companies, including an East African healthcare services provider Goodlife Pharmacy, and an Indian digital payment disruptor NeoGrowth. Since being established in 2010, LeapFrog has made 33 investments in financial services, information technology and healthcare. It exited eight of them, including the $107 million exit of BIMA, a mobile micro-insurance company focusing on emerging markets.

“They’re in a very unique position to create an ecosystem of companies that relate to each other,” Sheehan said.

Sheehan recognizes that a startup must possess two key characteristics to attract investors like LeapFrog. The first one is a funding team that’s highly competent in a targeting market. While it’s not necessary for an Africa-focused startup to have a local founder, the team must demonstrate experience and expertise in building companies there.

The second is a scalable product that could work across regions. An ideal startup would start with a product that focuses on a small group of customers, and then scale the business to reach a wide range of customers. For example, Worldcover’s crop insurance is powered by satellite climate data and risk modeling, and it initially relied on salespeople going into rural villages to explain the service. Now it has pivoted to companies and even governments for distribution, as it expands from East Africa to Kenya and Uganda and Mexico.

In April, LeapFrog CEO Andrew Kuper helped World Bank’s International Finance launch a new global standard of impact investing, aiming to quantify social impacts.

“It is time for a better kind of capitalism. LeapFrog was founded on a philosophy of profit with purpose, rejecting conventional trade-off thinking in financial markets,” said LeapFrog’s founder Dr. Kuper.

The post LeapFrog Elevates Startup Morale in Emerging Markets With $700 Million Fund appeared first on Karma Impact.

Strategic Investors: Profiles of investors with strategies to consider.

Impact investing doesn’t mean settling for lower profits. Veteran impact investor Stephanie Rupp discussed the importance of authenticity in impact investment with Karma Network and how it can enhance financial performance.

Ms. Rupp, former head of impact investing at Tiedemann Advisors, boasts more than 20 years of experience in ESG investing.

In conversation with Karma, she explained why investors should focus on social goals as more big players like Blackstone get serious about impact investing.

Scarlett Kuang: Blackstone launched an impact investment platform on Monday. Why do you think they are doing it now?

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Stephanie Rupp: From my experience working with ultra high-net-worth individuals and some large family offices, I see this as a movement driven by asset owners instead of asset managers.

On one hand, it’s the threat (of) women and millennials (who) are coming into control of assets. They are more socially conscious and want more social good and social justice. Asset owners are requesting (impact investing), then (asset) managers are following. There’s a fear of missing out. Everybody’s scrambling to have an ESG portfolio.

The other reason is that bigger institutions, such as pension funds, retirement funds, sovereign wealth funds, are starting to see climate change as a true global threat and financial risk. They see climate change, global warming and the ensuing impacts on coastal populations and food systems as really problematic, so they want some form of environmental overlay to their investments.

Scarlett Kuang: You’ve said that you take a “100-year view” with your client relationships. How do we reconcile investors’ expectation for short-term financial returns and the fact that positive impact takes a long time to realize?

Rupp: In wealth management, we work with individuals, families and institutions, and they usually have a long-term goals. When you think of a diversified portfolio, it is usually structured to both preserve and grow capital, and in the “growth bucket” a lot of the asset classes are actually illiquid. If you look at any private equity and venture funds, you are looking at least 7 to 10 years lock-ups. The same can be true in real estate investment. In these categories, you can find some great impact investments with potentially high returns. Generally, you can meet your risk, return, liquidity and impact goals over the long run – the sector has enough proof points now, with 10+ year full diversified impact portfolios with foundations aiming to exist in perpetuity.

Scarlett Kuang: You have also urged investors to refocus on social impact, people in need, and rethink how to pick managers. What do you say to those investors who think this impact-focused approach can negatively influence financial returns?

Rupp: The industry’s definition of impact investment is really to have financial return alongside social and environment impact, and to move beyond the “trade off” conversation. We need to strike a balance between conducting financial and impact due diligence as much in private equity as we do in public markets. We need full blown impact analysis of strategies and to keep asset managers accountable to their “intended impact”.

There’s a true disconnect right now between many ESG asset managers and what they claim. Investment managers don’t verify the underlying impact and many decisions are made based on unaudited ESG data.

This is less a problem in private equity, but still exists. Let’s (take) a private equity firm that invests in education technology. What they usually do is that they’ll meet the entrepreneurs and engineers to try to understand the technology. That’s great, but then you should also go visit the schools and the students, and see what impact that technology has on the ground.

Too often, the investment professionals will just look at the company without actually visiting the beneficiaries or stakeholders. I think that’s an extra step that has to be done. If you know the customers well, you actually have a greater chance of success in terms of adoption and usage.

Scarlett Kuang: Can you talk more about how doing due diligence would benefit financial returns?

Rupp: I’ll give you an example. In the microfinance space where financial institutions issue small loans at low interest rates, if you don’t meet the borrowers, you risk making bad investments.

A few years back, I’m talking specifically of India, hundreds of millions of dollars were moving quickly into the microfinance space without (investors) doing sufficient interviews of the loan borrowers. It turned out that those borrowers were over-indebted, specifically in the state of Andra Pradesh. Eventually what happened is that the market collapsed because these individuals were unable to repay.

The reactions were suicides of borrowers for cultural reasons around shame and indebtedness. It’s a tragedy from a human perspective, and bad from a financial perspective, because there were loan write-offs. The institutional investors, who had plugged in so much money thinking they were going to get a healthy 14 to 18% return, actually lost their principal.

All this because no one bothered to do due diligence on the ground, to meet the borrowers and see what their actual situation was and how they were managing the debt. In a way, it is just good business to be able to do field visits and understand the needs of customers and communities.

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On Our Radar: Deals we are paying attention to, for their impact on industry.

Blackstone launched an impact investing platform this week, signaling that major investors are becoming more active and seeing competitive returns in the social impact sector.

The platform will focus on health and well-being, financial access, sustainable communities and green technologies, the company said in a statement on Monday.

The Blackstone impact investment platform will be a part of the firm’s Strategic Partners group, which has $28 billion in assets under management.

“As a firm, we seek to deliver value for our investors while also having a positive impact on the communities in which we operate,” said Jon Gray, Blackstone president and COO, adding that the impact platform is a natural extension of their business.

Devin D. Thorpe, author of Adding Profit by Adding Purpose: The Corporate Social Responsibility Handbook, told Karma Network that the move was a positive sign for the sector and a signal that industry players are attracted to returns as much as the social impact of the platform.

“If we don’t focus on the financial returns, social impact enterprises will never attract enough capital,” he noted. “I’d be shocked if Blackstone is not financial-return focused.”

While some analysts think impact investing would yield lower-than-market rate returns, because it focuses more on social goods than monetary gains, others note that impact investing essentially mitigates risks by actively addressing systemic problems and therefore would have a higher return than a market rate.

Thorpe pointed out that there are vast amounts of opportunities in investing for social good while having a reasonable return. One example is investing in public transit, which helps reduce carbon dioxide emissions drastically and has a similar return track record as portfolios with the same level of risks.

Tanya Barnes will be heading the initiative, Blackstone announced. After working at Goldman Sachs as managing director for 15 years, the Harvard-educated executive served as principal for Reverence Capital Partners, a New York private equity firm, for two years before joining Blackstone as the managing director for its impact investing platform, according to her Bloomberg profile.

Barnes said she would leverage Blackstone’s expertise and scale to expand the role of private capital “to create solutions that address the world’s most pressing social and environmental challenges.”

The post Impact Investing Gets More Cred with Blackstone’s New Platform appeared first on Karma Impact.

Strategic Investors: Profiles of investors with strategies to consider.

Finance is a humming factory of confusing terminology, as anyone old enough to remember the damage done by SIVs and RMBSs did to the global economy in 2008-2009 can attest. While “special investment vehicles” and “residential mortgage-backed securities” no longer pervert the market (we hope), the various ways people describe investment strategies meant to bring about social good – or at least avoid doing harm – are generating plenty of confusion today.

Is “impact investing” different from “socially responsible investment” (SRI)? Do ESG (environmental, social, governance) strategies automatically qualify as SRIs? Can an oil company be part of an ESG strategy?

Purists and ideologues have their own opinions. Jeffrey Gitterman, co-founding partner of Gitterman Wealth Management, is a recognized expert in the field. He explains the differences and much more to Karma Network’s Contributing Editor Michael Moran.

Michael Moran: How do you define ESG, impact and sustainable strategies?

Jeffrey Gitterman: We call ESG the “GPS of investing,” and the reason that we use that metaphor is simple. Twenty-five years ago, when you wanted to take a road trip, you had this one-dimensional view, a backward-looking view, of the trip that you were about to take in the form of a map. It didn’t tell you anything current, it told you nothing about traffic or road closures or detours or potholes or cops hiding in the bushes. So, you had all these obstacles in your path that you weren’t aware of, things that we can adjust for today as you get in your car and you have a GPS working for you. It makes that road a lot smoother and that’s how we look at ESG data. Twenty-five years ago, 80-85% of the S&P 500 in market value was based on tangible assets on the balance sheet and financial disclosure items. As of 2015, 85% percent of the S&P 500 market value is now based on intangible, non-financial disclosure items. So that one-dimensional view – the K1 or your quarterly reports about stock prices and the S&P 500 – [is] the same as that old roadmap.

By comparison, ESG data is this huge data set which is growing every day, and as Big Data gets more robust, ESG will grow more influential. [ESG data] gives you a lot of live, current data, news sources, feeds, Glassdoor-style intel about all these non-financial disclosure items having to do with employer-employee retention, customer loyalty, brand identity. These are all things that are critical to, for instance, Amazon and Google and Netflix and Tesla. Just because Wall Street can’t find justification for those stock prices in the financial disclosures of these companies right now doesn’t mean they are wrong. This also has to do with the coming of age of millennials and the fact that they are the largest percent of the workforce. Millennials work and invest and spend differently. They punish perceived misdeeds, and we’re starting to see material impact on stock prices based on non-financial disclosure items – whether that’s Facebook or Equifax or Wells Fargo or any of these companies. To be a fiduciary in today’s world, you have to be looking at that data.

Michael Moran: So ESG is the biggest, and least constrained, of the three buckets?

Gitterman: Yes, that’s right. Now in the GPS after you put it in your address in the search bar, you are given choices of route preferences. You could take a route that has no toll roads or take the shortest route or fastest route. That’s what we look at as “values” or “SRI investing.” In SRI strategies, you are excluding things very deliberately for reasons not contained in financial statements. ESG is something completely new because we didn’t have these data sets before. And if you want to do SRI investing, you know that taking a different route might have an effect on your trip, and that’s true of SRI investing too.

The third category, impact investing, is more constrained still. You have both the route and the destination in mind from the start – everything is very intentional. The impact should be intentional and measurable, and in many ways this is comparable to the United Nations Sustainable Development Goals (SDGs), which are a framework for human survival and development that many people are starting to adopt today around impact investing.

Michael Moran: So how do you draw the line on various industries? For instance, you could make an ESG case for frackers who are turning out the natural gas that is greener than many alternatives and seen as a transitional fuel to a future renewable system. You could probably make a similar case for nuclear power. Where do you draw those lines?

Gitterman: For us, we only make exclusions in impact and SRI strategies, and we allow at a certain level – over $1 million dollars of investable assets, for instance – for the client to define those exclusions. To us, that’s not ESG. If I’m investing in oil companies, there’s still a huge difference between the various oil companies as to how they’re working, especially in developing countries, in regards to how they’re treating the population, the environment, the governance issues, how many lawsuits they’re facing, whether they have women on their boards and all of these other ESG data sets. This makes one company comparable with another within each industry, whether it’s nuclear or oil and gas or tobacco. If I’m owning for a client that is just a massive, affluent client and needs exposure to all markets, I still want to own the best in class of each industry. So, I want to screen my stocks through ESG data and try to avoid companies that have big risks that I can see through those data sets.

A perfect example of this is Pacific Gas and Electric. It was the darling of a lot of ESG investors, especially passive index companies, because PG&E was on track to convert the greatest number of people to alternative energy in the fastest amount of time based on California regulations. But they were also publicly disclosing on the governance side that they had huge risk of losses to wildfire and that, in a worse-case scenario, it could even lead to bankruptcy. They were off the chart compared to all other energy companies on that risk. So, for us, PG&E has to be a “no” because its climate risk was accelerating off the chart. So, from an ESG perspective, I can’t own that, even though on the energy side they are converting and moving to clean energy faster than everyone else. I believe, unfortunately, that we have to move toward climate adaptation in our portfolio models and away from trying to stop climate change, which, you know, is a terrible thing to have to say, but it’s the truth because we’re not moving fast enough. So, there’s conflict between fiduciary duty and what we’d like to see happen in the wider world.

Michael Moran: When you founded Gitterman Wealth Management in 2010, ESG and impact investing were little-known concepts and you pursued a more traditional portfolio allocation approach. Yet you’ve quickly developed a reputation for ESG. At what point did the ESG model really become what you wanted to emphasize in your investment advice?

Gitterman: In 2009, I published a book called Beyond Success: Redefining The Meaning of Prosperity. I started thinking about our cultural definitions of success and prosperity in a different way. Then in early 2014, I got involved as a producer in a film project called Planetary with executive producer Guy Reid, a film based on conversations with astronauts who have witnessed the fragility and beauty of the Earth from space, and also with environmentalists and spiritual thinkers like Bill McKibben and others. The idea was to redefine our relationship with the Earth. There’s a line in the film which had a profound impact on me: “We’re not on this planet, we’re of this planet.” And I realized that if people started asking me what I was doing about all these problems, I knew that my business life really wasn’t affecting change in the way that I could be. I also saw that unless the capital markets really shifted in a big way with regard to where we’re investing, we were not in any way going to achieve what the SDGs are aiming for or ultimately have (a) sustainable, survivable planet.

So, I made a commitment before the film came out, which was Earth Day in 2015. Beginning in 2016, I began the process of converting 100% of my personal practice to ESG investing. Then last year, I presented at the United Nations Sustainable Investment Conference. Some 588 advisors and multiple asset managers attended [the conference] and we will be doing it again this year. I’m doing that because I realize that there’s only so much I can do with my direct client base, and advisors are really the stumbling block to more widespread adoption of ESG and sustainable strategies. All of this is heavily driven by millennials and women, but even baby boomer men are coming around now. There’s a proliferation of ESG and SDI production coming from all the big investment houses because they realize that unless they engage with this, they’re going to lose the millennials. The millennials are going to inherit all the money of their clients, so they’re panicking. But there’s still this bottleneck in the middle, which is getting advisors to really adopt it. So, I decided I would do both: We would focus on our client base but we also focus on educating advisors, and the more we’ve done that, the more press and PR [we received]. As of this year, we now work with Fidelity and Schwab and TD Ameritrade and others just trying to help support advisors who don’t have the depth of knowledge or the bandwidth.

Michael Moran: You mentioned that millennials and women are driving much of this trend. Can you expand on that?

Gitterman: Things are definitely changing. I don’t want to say it’s changing Wall Street because I don’t think fundamentally it’s changing anything there yet. There’s still a belief on Wall Street that people are product driven. But what they’re not understanding is that millennials, and women as well, but millennials particularly, they’re really identifying with the purpose and the brand behind the product. They’re leapfrogging the product – right into its purpose, and it’s going to take some time for Wall Street to figure out that they can’t just name a product “ESG” or “impact” and win over the millennial generation. This is a generation that will change jobs if they don’t feel that their work has purpose. They will spend money differently based on brand and purpose identification. And certainly, as they inherit the bulk of the wealth from the baby boomers over the next 15 years, millennials will also invest differently. I think some of the big banks and investment companies are starting to see those outflows driven by millennials and they’re getting panicky about it. But I don’t think they bridge the gap that they actually need to yet.

Michael Moran: How do you detect greenwashing and how do you define it?

Gitterman: It really is a hard thing to completely identify because once we get into values-based investing beyond ESG, it’s really down to personal preference. Your personal preference about what your values are and how my company can match your values with investments depends on product and what stands behind that product. That’s a complicated situation. Most impact has to be done in private companies because it’s one company addressing one issue that’s important to you and that’s their function and their measurable, and they can report back to you what their impact has been. Goldman Sachs and JP Morgan and Morgan Stanley – they’ll never be able to achieve that in a way that will satisfy the desire many people want for impact. But in ESG, there’s also greenwashing. It’s what are you doing with the data. Are you just using one data provider and screening out the bottom scores and overweighting the top scores? In the stock market, that’s not having any real material impact on the companies because if you don’t own my stock, someone else will own my stock. It’s a passive approach, and the more it’s done the less there’s any additional impact. At least with an active manager who is looking through the scores at the data from multiple data providers, he’s hopefully avoiding landmines that the traditional metrics might not tell you.

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Strategic Investors: Profiles of investors with strategies to consider.

Magda Wierzycka, CEO of South African asset manager Sygnia Group, commands a rapt audience in her home market, across sub-Saharan Africa and in markets worldwide. After a childhood spent in an Austrian camp for refugees from Poland’s communist government, Wierzycka built one of South Africa’s best known names in the continent’s financial sector by leveraging her actuarial skills with the latest technology.

A frequent critic of corruption and mismanagement in South Africa’s ruling African National Congress (ANC), she came under fire herself in August 2018 when, after 13 years, she shut down Sygnia’s hedge funds, denouncing the model as one that became a management-fee racket. She spoke with Karma Network Contributing Editor Michael Moran about that decision, the importance of technology as an investment tool, and prospects for her adopted country.

Michael Moran: Do robo-advisors pose a threat to the jobs of human financial advisors?

Magda Wierzycka: We are the first company in South Africa to launch an official robo-advisor and our experience has been that it’s a supplement to the provision of financial advice, rather than a replacement.

So, in this space of ‘soft industrial revolution’ and technology taking over from humans, I think that there are certain professions where the human touch will always be required. And as much as robo-advisors were initially devised as a replacement for financial advisors, the reality, and what we have discovered from a behavioral perspective, is that investors, for as much as they will play with financial models, when it actually comes to making their financial decisions, want a human being to look them in the eye and say, “This is the right choice. This is the right investment decision.”

So I think that robo-advisors will never replace the real financial advisors. Just as in medicine, where the moment you feel sick, you Google your medical center. But if you really are in pain, you want your doctor to tell you everything will be okay, that you are in safe hands. Just the very fact that they are stroking your hand and saying, “It’s okay. I’ll be here to take care of you,” is incredibly valuable and I don’t think it will be replaced by a machine.

Similarly with robo-advisors, when it comes to financial affairs and significant wealth management, I think people will always want someone to sit there alongside them, and guide them in making the final decision, or at least tell them it’s okay.

So what we’ve done with our robo-advisor is we’ve actually made it available to financial advisors in South Africa to embed it into their own website, so their clients can use it as a tool. And then, when it comes to making the financial decision, they can phone a real-life human being and have a conversation based on having played around with the robo-advisor as a model.

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Perspectives: Opinions from our network of advisors, investors, operators and analysts on the risks and opportunities they see.

The extent to which robo-advisory is either a boon or threat to the traditional wealth management industry has been a major question on the minds of financial advisors since the emerge of the tool set right after the 2008-09 financial crisis. Early movers like Betterment and Wealthfront have attracted clients and capital, and legacy players from Charles Schwab to Morgan Stanley have launched their own offerings — often through acquisitions or partnerships with pure players. But many traditional wealth managers argue that the idea of replacing human advisors entirely is a pipe-dream, and a dangerous one, at that.

Scott Moss is a Partner at the New York-based law firm Lowenstein Sandler, where advises P/E, hedge fund and family office clients on regulatory compliance matters. He says the robo-advisory space poses unique risks to the century-old model of credible human advisors helping people make potentially life changing decisions about their assets. But these risks, he says, are manageable if handled carefully. He spoke with Karma Contributor Editor Michael Moran.

Michael Moran: What are the SEC requirements for reporting conflicts of interest for robo-advisors?

Scott Moss: Now a lot of robo-advisors have a Research Affiliates Fundamental Indexation (RAFI) program, where the commission for execution is wrapped together with the advisory fee. This streamlined some conflicts of interest, but the SEC highlighted things that maybe the robo-advisors didn’t think of.

For example, if the third-party algorithm maker drove investments to, say, affiliated ETFs. That was a conflict of interest that they wanted the robo-advisor to disclose to its clients.

If the services that the robo-advisor gave was not a comprehensive financial plan, the SEC wanted that to be explained to the client. If there was a tax law harvesting component, whatever the components of the algorithm or the actual services, the SEC wanted a lot of specificity, particularly in ADV.

They also wanted that to be understandable and in plain English, which can be very hard to do, especially if you’re in a robo-advisor fintech platform with no human interaction.

The SEC suggested things like Frequently Asked Questions, interactive tools or pop-up boxes to help a retail client understand in plain English what those services were about. And they also wanted it to be simultaneous with decisions or before decisions were made. So before a client signed up for the robo, they had to have all the material information about the services.

For the suitability of the investment advice, the SEC focused a lot on any questionnaires that were used by the robo-advisors that led to the advice.

So they look at how thorough the questionnaire was. They considered if it solicited enough information to make a recommendation that was suitable for the client. They wanted the questionnaire to be clear and understandable. They wanted it to use examples to help the user.

They wanted it to flag inconsistencies. So if in one part of the questionnaire the client responded with a low net worth or low income, but yet responded with a very high risk tolerance, it wanted the questionnaire to flag those inconsistencies and provide commentary if there was a self-directed component, where the client would direct the robo-advisor to do something through its interactive website or app that was not maybe suitable for the client.

Lastly, the SEC focused on the compliance program. Now every investment advisor that’s registered with the SEC has to develop a compliance program tailored to their operations and the same advisors, that rules apply to all investment advisors but the application can defer to the role of advisors.

So similar to the other three things they focused on, prior two things they focused on, the compliance program; and focused on how the algorithm was developed and tested; how the questionnaire was developed and used; what disclosures were made; how cyber security was protected; and in particular the SEC focused on the marketing and advertising procedures.

Now that guidance dovetailed very nicely into two recently published settlements against robo-advisors in December of 2018. And really, all of the claims against those two robo-advisors can fit into categories that were in that February 2017 guidance.

One of those recent enforcement actions that got settled was against Wealthfront Corp., that had about $11 billion in regulatory assets under management. The second was against Hedgeable Inc., which has about $81 million in regulatory assets under management. So not particularly small firms. Firms with developed compliance programs with significant assets.

Against Wealthfront, the SEC focused on false statements about a tax-loss harvesting strategy. They focused on retweets of prohibited client testimonial. They focused on Wealthfront paying bloggers, but not properly treating them as cash solicitors under the cash solicitation rule. They focused on the record maintenance, and they felt that because things weren’t caught that Wealthfront didn’t have adequate policies and procedures.

For Hedgeable they focused on misleading statements in a performance advertisement, again record retention, and again because they felt that performance advertising misstatements or misleading statements should have been caught. They felt they had an inadequate compliance program.

Now all this leads to where we stand in 2019, which is the Office of Compliance Inspections and Examinations (OCIE) of the SEC named robo-advisors or digital advisors, cybersecurity, and advisors to retail clients as top priorities in a 2019 national exam program.

Also, states may jump in the fray, especially focused on solicitors like bloggers, which may need to be licensed as investment advisor representatives or registered with the states.

So combined with the current market volatility, the high priorities of OCIE and possible state enforcement actions should lead to a very fun-filled 2019 or at least an interesting one for digital advisors.

The post Scott Moss: The Legal Perspective — An Eventful Year Ahead for Robo-Advisors appeared first on Karma Impact.

On Our Radar: Deals we are paying attention to for their impact on industry.

An internal memo obtained by several major media outlets today revealed that BlackRock Inc. is undergoing its largest organizational restructuring in a decade.

The overhaul includes new leaders in BlackRock’s alternatives investment division — which is seen as an area of growth for the New York-based firm as it seeks to diversify its business — changing roles for about two dozen directors, a reorganization of sales teams, and new positions for two people considered to be possible successors to Chairman and CEO Larry Fink when he retires.

Mark McCombe, currently Senior Managing Director and Head of the Americas region, will take on a new role as chief client officer, while Mark Wiedman, another Senior Managing Director who earlier this year also became the Head of International and Corporate strategy, will also lead the company’s Latin America division, according to BloombergQuint.

“Today we are making a number of changes designed to ensure we stay ahead of our clients’ and society’s needs,” the memo, written by Fink and BlackRock President Rob Kapito, states, according to the news outlet.

The organizational changes outlined in the memo are in line with BlackRock’s culture of frequently shifting staff roles, a source told the Wall Street Journal. That shuffling includes top roles held by the half-dozen contenders to replace Fink when the 66-year-old executive retires.

At the same time, the world’s largest money manager has been coping with market volatility affecting its bottom line. On January 10, BlackRock announced plans to lay off 500 employees (or roughly 3% of its 14,000 workforce). Seven days later, it reported that its assets fell $468 billion in the final quarter of 2018, marking the largest such decline since September 2011. Two-thirds of the company’s approximately $6 trillion of assets in management are indexed products, BloombergQuint notes.

The company is looking to bolster its alternatives business — including investments in energy pipelines, non-traditional assets, and loans — as it seeks to expand beyond asset management. In February, BlackRock purchased eFront, an end-to-end alternatives investment management software provider, for $1.3 billion in cash.

In the memo, Fink and Kapito note that changes in the markets “represent the biggest opportunity in a decade to differentiate BlackRock — but only if we are willing to be bold and decisive,” the Journal reports.

On April 1, BlackRock announced that it raised $2.75 billion for its Long-Term Private Capital fund fund, although it is still short of the $10 billion to $12 billion total it seeks. In February, it also partnered with private equity company KKR to make a $4 billion investment in the Abu Dhabi National Oil Company for midstream pipeline infrastructure.

Ambreen Ali is a freelance writer and editor based in the New York City area who specializes in business and technology. She has 15 years of reporting experience, including covering Capitol Hill and reporting from South Asia.

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Strategic Investors: Profiles of investors with strategies to consider.

The popularity of ESG (Environmental, Social, and Governance) strategies has been one of the hallmarks of impact investment in the last 10 years. Once seen as little more than warmed-over philanthropy, ESG is now viewed as a proactive way for investors to manage risks and returns.

According to a 2018 survey of institutional investors by Morgan Stanley, found that nearly 75% of the $22.8 trillion invested sustainably in 2016 was owned by institutional investors. Other asset owners are rising to the occasion as well: The Ford Foundation announced in April 2017 a commitment of $1 billion of its endowment to mission-related investments.

Jake Barnett is an Institutional Consultant and Financial Advisor at Graystone Consulting’s Stephans Van Liew & Oiler Group, a part of Morgan Stanley, and draws from his past experience in public affairs and nonprofits to focus on impact investing strategies. In an interview with Karma Network Contributing Editor Michael Moran, he describes his approach to matching ESG strategies to investors who are determined to make an impact on mitigating climate change.

Michael Moran: Clean energy, which we define as the renewables and related infrastructure industries here at Karma, seems like a natural fit for impact investors. The targets include everything from solar and wind turbine farms, manufacturers of their components, grid operators, as well as labs and startups pursuing efficiencies and solutions to related problems. As an impact-investment consultant, how do you help your clients find the right place for their money?

Jake Barnett: We have a theory as impact consultants that you have to be a lot more comprehensive and a lot more collaborative, curious, and courageous than someone simply seeking to maximize margin. When you’re sitting with a client who is really strongly interested in the climate space, for instance, you have to speak at first at a very high level. Climate is obviously a much more complex and multifaceted issue to address than just the energy space. So you construct a portfolio that’s thinking about this in multiple different channels; not just energy, but also consumption, innovation, mitigation, and all the different ways of attacking the problem with a diversified approach.

A great diversity of different personalities and different institutions [are] interested in ESG investing these days, from socially conscious millennials to really unique clients, like an order of nuns whose money I invest. Our [Morgan Stanley] research suggests that right now, one in four dollars invested and professionally managed in the United States has some environmental, social and governance characteristics incorporated. So you’re talking about pension funds [and] large hospital systems. You’re talking about foundations and college endowments. The concept of investing in ways that take into account social issues and ecological challenges has really entered the mainstream.

One of the best examples is the letter from [Blackrock Chairman and CEO Larry Fink] predicting that if companies don’t integrate positive social impact into their model intentionally, they’re increasingly risking [their] social license to operate.

Michael Moran: Let’s start at the very top level. I’m an investor, and for whatever reason — mandates, the rules of a trust, or my own personal preference — I want to advance the cause of mitigating climate change but still make money doing it. What happens next?

Barnett: We start with a very open conversation with our clients [to find out what their] priorities and values are. A client who’s very interested in ecological justice and focused on environmental issues is going to have a portfolio [that leans differently from] a client who is interested in affordable housing and social justice. There’s going to be inherent overlap between those two, but they are very distinct. Then you’re also going to be driven in part by what their portfolio should look like from a traditional financial standpoint.

Putting the building blocks in place, balancing equity, fixed income, and what different strategies make sense from an allocation standpoint, as well as what strategies make sense for them based on their theory of change as an investor — this is all custom work. The question is whether they view divestment as screening out companies that are to them morally objectionable, ordo they want to lean in and engage those companies to change them from within, or do they want to pursue a blended approach that uses both tools. We’re not going to be prescriptive as a consultant when it comes to those types of questions. We’ll be thoughtful and inform people about what we see others doing — the pros and cons of each approach from an impact and an ESG standpoint.

Finally, I think something that’s always important to bring to the table in these conversations is the financially material impact that climate [change] is having [on investor behavior]. I emphasize that point because oftentimes the scientists and people who talk about climate [change] do it a disservice by discussing the impacts that are going to be happening 10, 20, 30 years from now. But you’re seeing flooding today; you are seeing disruption to supply chain [today]. And I think that if you’re sitting in a fiduciary role, regardless of your values, you are risking stepping outside of the mainstream and violating your fiduciary duty if you aren’t asking very thoughtful questions about these issues.

Michael Moran: So it’s very customized depending on the client, whether they want to divest from, let’s say, extractives in carbon heavy industry, or whether they are looking to find specific alternative investments that are playing in unit spaces like clean energy, storage or water conservation. How do you make those choices?

Barnett: It’s about integrating your traditional financial discussions about constructing a portfolio with the impact thesis of the client. You aren’t just talking about financial capital. You’re also talking about the human and social capital that [exist] at an institution.

Morgan Stanley just released a very good report on this, ‘Mission Align 360,’ that highlights some of what our clients are doing at all different levels to focus on the question of impact. Let’s take private equity impact investing as an example. Some clients are involved in sourcing and due diligence deals that they’re really excited about and that we can collaborate with them on. Ultimately they’re doing that because they have the experience, the appetite, and the time to.

But many other clients don’t want to be as heavily [weighted] in the private equity and ESG space because they have [neither] the experience [nor] the risk appetite. So in that case we’ll talk to them about the public solutions piece. Let’s look at divestment as an example. Divestment has been successful in the past as a means of affecting change [because] investors [have used] their voice to explicitly express their issues with the fossil fuel industry. That amounts to finding ways to ask pointed questions about a company’s social licence to operate. So for these investors, the way they invest effectively is in the act of vocalizing and advocating for broader climate change and having divestment as an expression of that advocacy. Some clients are comfortable with being outspoken in this way; others aren’t.

Michael Moran: What about an investor who wants to have maximum impact in a much narrower space? Water quality? Methane capture? Grid intermittency?

Barnett: It doesn’t need to be an either-or choice on that. Ultimately the direct investor deals with the niche area that they’ve predetermined, [in which case] we aren’t going to be as involved. When a client [follows] a passion to look at a really specific niche and early stage venture that they want to support, they will articulate that desire.

Michael Moran: Among the clients you engage with, what categories do ESG investors break into? Can you give me a sense of what that ecosystem looks like?

Barnett: Let’s talk about this in terms of the spectrum of capital that lies between two types of ROI: Return on Investment on the left, and the Return on Impact on the right. On the far left is traditional investing, which seeks to maximize return with no consideration of impact. The far right is philanthropy, where you’re looking to maximize return on impact with little thought to traditional ROI. In between is room for an almost infinite mix of strategies. If you want to see this expressed in a very clear way, look at the work of the Heron Foundation on conscious portfolio construction.

What a lot of people begin with in that spectrum is divestment or negative screening, which is an effort to keep out of a sector or company you find morally objectionable. My personal opinion is that this needs to be complemented by broader advocacy and engagement in the divestment movement in [order to] really make a difference. However, if they just came to me and said, “I don’t like XYZ type of companies and I don’t want to invest in them,” I [would respond], “Great, let’s explore the best [strategy] to implement.”

[This is] pretty easy to do in a passive investment sense. There are optimized indexes that you can basically say, “Drop out the top 200 carbon emitters and create an index in XYZ sector.” So that’s one option. The next rung would be [to weight] toward companies in that “E” bucket that have a stronger environmental record. That’s really going beyond the energy sector, where divestment tends to focus. So one example might be [to look at which] companies are really committing to carbon neutrality within different sectors. This could be a utility that’s vowed to move to a certain share of renewable energy within the sector, or,if you were a hospital or a chemical company, being progressive about how you deal with the waste you create. If we were looking at financial services and I were talking to a bank, I would be interested in what role carbon emissions and climate risk played in their lending portfolio.

There are obviously options on the debt side as well, and to some extent, it can get more exciting with green bonds that support direct energy efficiency retrofits and affordable housing. You also can get into “thematic solutions” within public equities and public debt, where you’re focusing more [on sectors]. These all fit the ESG strategy. I’m investing in water funds, I’m investing in clean energy companies, I’m investing in companies that derive a large chunk of their revenue from delivering solutions to natural resource scarcity problems.

When you move to the right a little bit more, you start to get into purer impact investment plays within areas like private equity. I can give an example in private real estate, [where] about 60% to 80% of the total holdings are on the coast. So a question I’ll routinely ask is, “How are you dealing with stormwater rise and more extreme weather events?” One time, a manager effectively told me, “Well, we only hold our buildings for about five to seven years, so it’s not a risk that we’re actively considering right now.” That was not an answer that I found acceptable.

Another manager gave a very comprehensive answer, talking about how within their portfolio they’ll routinely do stress tests on the resiliency and the ability of the property to manage extreme weather events. [For example, that manager] ended up investing in a New Orleans hotel that was on one of the highest elevations in [the city] in part because of their worry about flooding. That hotel was one of the few to stay in operation throughout [Hurricane Katrina]. It was actually at full occupancy throughout the crisis because it was the command center for FEMA (Federal Emergency Management Agency).

That’s one of the most concrete examples I’ve heard of [that demonstrates] the ESG element within the general private equity bucket. And once you’re into private equity, then obviously you open up a world of impact-targeted efforts, including companies that are delivering solar lanterns to replace diesel generators in Africa, and really cool renewable energy projects [targeting] resource efficiency and mobility in China.

The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.

Jake Barnett is an Institutional Consultant with the Wealth Management Division of Morgan Stanley in 227 West Monroe Street branch. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.

The post Jake Barnett on ESG Strategies: “It’s about…constructing a portfolio with the impact thesis of the client.” appeared first on Karma Impact.

Strategic Investors: Profiles of investors with strategies to consider.

Sanjit Singh Dang and Ekta Dang, the founders of Santa Clara-based U First Capital, bring innovative technology companies, high-performing mentors and venture capitalists together in their Silicon Valley firm.

Ekta Dang, who serves as the CEO, is a mentor at Google Launchpad and the Center for Entrepreneurial Studies at Stanford Graduate School of Business. She is also an entrepreneur-in-residence at the University of California San Diego. Prior to U First Capital, she served in various leadership roles at Intel, including Intel Capital.

Her husband and co-founder, Sanjit, was a key player at Intel Capital, leading investments in DocuSign, Basic Science and other startups. He serves on Advisory Council of U.N.’s World Artificial Intelligence Organization.

In this interview with Karma Network’s Contributing Editor Michael Moran, they discuss their unique investment approach and the potential of their “venture-capital-as-a-service” model as a more cost-effective way for companies to get into startup investing with their tailored, laser-focused approach.

Michael Moran: What is venture-capital-as-a-service (VCAAS)?

Sanjit Singh Dang: U First Capital provides venture-capital-as-a-service for other companies. We want to be able to provide dedicated access to the companies in their areas of interest.

So if a corporation comes to us and says, “Hey, I am interested in new technologies that bring banking to the unbanked” as an example, then we have access to startup technologies that are addressing these paradigms in that specific area of interest.

And the way we structured it is through a venture capital fund, a single LP venture capital fund. The nominal target is $20 million, and it is created with market standard terms, but it is dedicated to the corporation in their areas of interest. We have years of experience in the corporate venture capital space, so we feel we have a unique proposition to help these corporates.

We also have tentacles in the startup and venture capital community, and hence we have deep access to new technologies that are coming up that are very valuable to these corporations.

We understand that for most corporations it is not easy to just create a new venture capital fund. It (usually) has to get approvals from CFOs, CEO, the board — and that takes six to nine months.

So we created a model for corporate partnership where the corporation would pay us X dollars per year like an innovation consultant, and we will do exactly what we would be doing if there was a fund in place. We bring them access to startups.

In addition to bringing access to startups, we also have deep tentacles with several universities including the University of California,Los Angeles, University of California,Berkeley, and University of California Santa Cruz. Ekta is an entrepreneur-in-residence at University of California San Diego, so we bring all of that access to (talent and startups) to our corporate partners as well.

Michael Moran: Why would a family office or corporation choose a venture-capital-as-a-service model for setting up a fund?

Ekta Dang: Based on their feedback, we are able to bring them a very tailored set of startups and technologies that are of interest to them in terms of going a level deeper. Then we add our diligence process to help them decide where to invest and how to strategically plan the investment while helping them monitor the health of those investments as well.

So instead of just limiting the sourcing options to our core team, we now have a very broad team of academia and industry advisors that help us very quickly come back with what is in their arsenal with regard to those technologies.

Michael Moran: What does U First Capital’s revenue model look like? How are you charging for your services?

Sanjit Singh Dang: Our goal is to eventually create a venture capital fund with each corporation and under that fund, we will try the traditional 2% management fee and 20% carried interest, which is very standard in the venture capital world.

We understand that it takes a few months for a corporation or a family office to create that. That’s why we created this service model where we say, “Hey we will come in as innovation consultants and we will start doing everything like we are a VC arm.” We will charge a consultant fee for providing that service.

Typically we are putting that number at $200,000 per year. That gets the discussion started. And if you look at $200,000 per year and compare it to somebody creating their own team where they will have at least two or five people in Silicon Valley, that’s going to cost a lot more than $200,000 plus the time to hire and ramp up the team.

So if you compare it to that option, $200,000 per year sounds pretty lucrative to most corporations. It’s more a question of whether the corporation or the family office is ready to do this.

The post Ekta and Sanjit Singh Dang: “For most corporations it is not easy to just create a new venture capital fund.” appeared first on Karma Impact.