Burgess COMMENTARY

Peter Burgess

Does Impact Investing Work? Vital Capital Case Study Shows It Does

Wesley Clark taking command of USSOUTHCOM (Photo credit: Wikipedia)

When General Wesley K. Clark first heard about the idea of impact investing, he was skeptical. One trip to Angola convinced him that it had the potential to lift people out of poverty in ways that philanthropy and humanitarian aid could not. “This is the only way it will work,” he told me.

In April, while attending the Milken Institute Global Conference, I had the opportunity to visit with General Clark about his role as an advisor to Vital Capital. There he explained the process by which he concluded that there is a social impact role for profit seeking in the developing world.

As I approached the issue of impact investing, anticipating my own trip to Angola at the behest of my host Vital Capital, I had lots of questions: • Does the need for a return on the capital invested impair the social impact? • How do you manage a project to have both social impact and economic returns? • How do nonprofits, governments and investors work together to greatest effect? • Can a successful investment on one place be replicated in another? Bottom line: I wanted to know if impact investing actually works to create the social benefits it aspires to make. So, with these questions in mind, I boarded a plane for a 30-hour trip from Salt Lake City to Angola. Angola: An Overview

Eytan Stibbe at Lossambo, Huambo, Angola Eytan Stibbe, the founder of Vital Capital, has been described by local media in Tel Aviv as a “King in Africa” because of his growing influence and impact in that region. It seems an unlikely role for an unassuming fighter pilot from Israel. Stibbe gained an international perspective while attending the European University in Belgium, where he earned an MBA after completing an undergraduate degree in math and computer science at Bar Ilan University. Military Career: Stibbe, with whom I spent two days earlier this year attending the Milken Institute Global Conference and who then hosted me as his guest on a tour of a sample of his projects in Angola, after considering the question I’d put to him, concluded that his military career—seven years as an Israeli Air Force pilot, followed by 27 years in the reserves—had no impact on his career. Kobi Trivizki, who works for Stibbe in Angola, however, concludes that the effect of his military service on his career can be summarized in a single word: “courage.” Africa: Stibbe began his African career in earnest in 1991 when Pope John Paul II agreed to visit Angola during a truce in the civil war. At the time, the country lacked the airport infrastructure to allow the Pope to visit safely, so the Angolan airport authority reached out to Stibbe and his partners at the Mitrelli Group. Within a few months they had five portable air traffic control towers installed, thus launching a decades-long relationship with Angola. Vital Capital: Angolan President Jose Eduardo dos Santos (L) ...

Angolan President Jose Eduardo dos Santos (L) flanked by his wife Ana Paula attend the final election campaign rally on August 29, 2012 in Kilamba Kaixi on the outskirts of Luanda. The ruling popular Movement for the Liberation of Angola (MPLA), which has been in power since independence 37 years ago, will compete on August 31, 2012 in the legislative poll against 8 other political parties, including the main opposition Union for the Total Independence of Angola (UNITA). Dos Santos told the crowd that with a new term he would push ahead with his multi-billion-dollar drive to rebuild the country after the civil war that ended a decade ago. (Image credit: AFP/Getty Images via @daylife) Following the end of the civil war in 2002, the President of Angola, with whom Stibbe had now developed a relationship, asked the Mitrelli Group for help in rebuilding Waku Kongo, one of the regions of Angola that had served as a front in the war and was therefore most economically and physically devastated. President Dos Santos, Stibbe says, made a genuine and magnanimous effort to create a lasting peace by immediately inviting senior UNITA leaders to join his cabinet and to immediately fold the UNITA soldiers into the country’s army at their UNITA rank. To address the problem in Waku Kongo, Stibbe’s partner Haim Taib suggested the creation of villages modeled on the concept of an Israeli “moshav,” a village similar to a kibbutz, but with some assets held in common and some held personally. Commenced in 2003, by 2006, 15 “Aldeia Nova” (the name means “new village”) villages were built and populated in Waku Kongo with 80 to 100 homes per village. Each village was either built to produce milk or eggs. A government owned, Mitrelli-managed logistics center operated a dairy and a distribution operation for the eggs. After several years of Mitrelli leadership, the operation was handed off to locals in 2009. Within two years of the Mitrelli group pulling out, the operations were in disarray. In 2011, Stibbe raised a private equity fund to make impact investments in Sub-Saharan Africa, calling it Vital Capital. One of its first investments was a 40 percent stake in the agribusiness operations of Aldeia Nova in Waku Kongo. General Wesley K. Clark: Military photo portrait of Wesley Clark, forme...

Luanda Medical Center Vital Capital has invested in what some here have described to me as Angola’s greatest need: health care. In the center of Luanda, Vital is building a modern medical center to serve the entire country, including people at all socio-economic levels. The center will operate not as a hospital but as a diagnostic center with out-patient surgeries. The Facility: The operation is 100 percent owned by Vital and is housed in a purpose-built, 16-story structure built to international standards. Vital leases five floors of the building and manages the entire building for the developers. The five floors operated by Vital will include heavy diagnostic equipment like MRI machines as well as two surgical suites. Dr. Ener da Silva

Dr. Ener da Silva Six additional floors will be rented out as clinic space; one of these floors has already been rented to a dentist, Ener da Silva, an Angolan who trained and practiced in Portugal. Other doctors will also lease space in the building, with the option of taken as much or as little space as they want, including the option to use space only on certain days of the week. Vital’s operation will provide all back-office and administrative services, from billing to staffing, for the doctors who wish to rent clinic space. The doctors will have the option to run all of their own administrative services or to focus solely on treating patients. The building has been constructed to international standards and features three backup generators on the roof to provide multiple redundancies for the power supply to the building. Strategy: The Vital strategy for operating the facility is to include customers from all socioeconomic levels. The wealthy patients will often simply pay for services from personal resources. Some patients who are employed will have insurance. Some companies essentially self-insure, providing health benefits directly by contract with the facility. Finally, the government’s social security program provides health coverage for all citizens, who in certain circumstances will have access to the Luanda Medical Center. Much of the focus will be on providing specialists from gynecologists to cardiologists and ophthalmologists. Most patients will be referred to the Medical Center by a doctor elsewhere in the country when specialized care or diagnostic help is required. Vital’s project manager, Shai Ratzaby, explained their strategy by saying, “You can do much more with a great doctor and good equipment than with only a good doctor and great equipment.” That notion focuses their efforts not on bringing bleeding edge technology to Luanda, but on bringing leading edge doctors and nurses and providing them with basic, modern tools of medicine to allow them to treat patients at an international standard. Shai Ratzaby from the roof of the Luanda Medical Center

Shai Ratzaby from the roof of the Luanda Medical Center Ratzaby says that he expects to staff the operations with 25 percent expatriates and 75 percent locals. Part of the mission of the Medical Center, he says, is to train not only the local doctors in the Medical Center but also to provide training to doctors in other hospitals and around the country. The long-term plan, according to Ratzaby, is to open satellite clinics in locations around the country where people who have been trained well can interact with patients locally. When necessary, the Luanda Medical Center staff will consult or even treat the patients from the satellite facilities. Impact: Ratzaby explains that they believe that they have a social impact in three ways. First, they provide a higher level of specialized care across the socioeconomic spectrum. Second, they plan to provide training to other hospitals, raising the overall level of care available in the country. Finally, they hope to expand access to health care with clinics around the country. Kora Housing Kora housing project at Lossambo

Kora housing project at Lossambo Vital Capital’s largest project in Angola is Kora Housing, which is currently building 40,000 affordable housing units in Angola. Nimrod Gerber is the General Manager of the project. Market Housing: While the vast majority of Angolans remain desperately poor by the standards of the industrialized world, the economic growth of the country, fueled quite literally by oil, makes the cost of living there extraordinarily high. A 1,000 square foot home constructed 50 years ago during the colonial rule of the Portuguese might sell for $150,000 today—well out of reach of all but the most affluent members of the Angolan middle-class. As a result, many people, even among those who could afford more, live in adobe dwellings they build themselves, most often without any electricity and never with running water or sewer facilities. These tin roofed structures are seen throughout the country, both in urban neighborhoods and in rural communities. The mud bricks are the primary building material for low income housing--just add tin roof and don't bother with lighting or plumbing.

The mud bricks are the primary building material for low income housing--just add tin roof and don't bother with lighting or plumbing. Kora Communities: Kora is building whole towns from the ground up. Step one: clear the ground of land mines left over from the wars fought here. Step two: create the infrastructure for a small city, including water, sewer, roads and connection to the power grid or, in some case, provide power from generators. These Kora towns have been designed by famed urban planner, Jaime Lerner, of Brazil. Each Kora community will include pre-schools, primary and secondary schools, technical and vocational schools, medical clinics and health centers, and plenty of green space. Housing Units: Each Kora housing unit is approximately 1,000 square feet. Each has three bedrooms—a master bedroom and two smaller bedrooms, two bathrooms, a kitchen and a living room. Some units are designed as two-story townhouses, but most are on one level. A few are built in single level structures, but most units are built in four story buildings. Some of the four-story buildings are designed with retail space on the bottom floor with housing units on the top three. Community Outreach: Eytan Stibbe at Sisters of the Most Holy Savior Love the Little Ones Orphanage

Eytan Stibbe at Sisters of the Most Holy Savior Love the Little Ones Orphanage Vital Capital and the Mitrelli Group are active in the broader community as well. The local Foundation for Arts and Culture was established by the Mitrelli Group and receives the bulk of its funding from Vital Capital and the Mitrelli Group. The Foundation has two primary activities in Huambo, near the Kora housing projects. The first is the Women’s Empowerment Center, which helps survivors of the war to reestablish themselves on multiple levels, but especially economically. The second effort is a local Catholic orphanage. The Foundation arranges a small staff of Israeli volunteers on a year-round basis. Aldeia Nova Daniel Griff, Eytan Stibbe, Kobi Trivizki, Yalee Azani, Nimrod Gerber, Eliezer Osherovitz

Daniel Griff, Eytan Stibbe, Kobi Trivizki, Yalee Azani, Nimrod Gerber, Eliezer Osherovitz The front lines of the Angolan civil war were for many years in the Waku Kongo valley, leaving it utterly devastated. This tragic history set the stage for one of the highest impact investments Vital Capital has made to date. History: With the blessing of President Dos Santos, Stibbe’s vision for moshavs in Angola was implemented. By 2006, Aldeia Nova was born. Fifteen villages were constructed with financing from the Mitrelli Group, which also had a contract to manage the government-owned agribusiness assets, including greenhouses, a slaughter house, dairy operations, chick hatchery, grain elevators, etc. The housing in which the families live is identical in all fifteen villages and provides about 700 square feet with electricity and indoor plumbing, including flush toilets. The Mitrelli Group contract expired in 2009 and the company passed responsibility for managing the Aldeia Nova community assets to a local, government appointed manager. By 2011, however, the operation was falling apart, according to Stibbe. At that time, Stibbe completed his fundraising for Vital Capital and was in a position to begin making investments. Vital Capital purchased a forty-percent interest in the community operations for $10 million from the government and assumed the management of the operation. According to Kobi Trivizki, the General Manager of the project, Vital is entitled to 100 percent of the profits until they recover all of their invested capital. Thereafter, profits will be split. Aldeia Nova families are either given the opportunity to buy milk cows or laying chickens Egg Operations: Chickens and eggs. Chickens come first.

Chickens and eggs. Chickens come first for Aldeia Nova farmers. Families that are operating chicken coops to produce eggs are sold 1,000 chickens and trained to feed and care for them to optimize their laying in coops provided by the program. The purchase of the chickens is financed over time so that egg production covers the purchase price and leaves the farmers with positive cash flow. The chicken coop itself was provided initially to the families selected for the program in its early days. Aldeia Nova now produces about 160,000 eggs per day across all the villages. The estimated demand for eggs in the whole country is, according to Trivizki, about 3 million, meaning that Aldeia Nova is providing about 5 percent of the daily demand for eggs in the country. During my visit to Waku Kongo, I also visited the central warehouse with Trivizki and Stibbe, on a day when they were preparing a 500,000 egg order to be shipped to the capital, Luanda, for a large, South African grocery store chain that was shifting its supply of eggs from imported South African eggs to domestic production, including eggs from Aldeia Nova. The central operations for Aldeia Nova are quite advanced technologically by Angolan standards. They operate a state-of-the-art hatchery where they produce chicks that will be layers The logistics center run by Vital Capital under Trivizki’s leadership, applies modern technologies to tracking and managing every aspect of every family farm. For instance, Trivizki can see in a moment if a farmer’s production declines, how much feed she is using for her chicks, etc. As a result of the technology employed and the market for eggs in Angola, it appears that egg farmers will be able to reach annual net incomes approaching $20,000 per year, about four times the per capita GDP, once they have paid off their original chickens. Kids driving their cows for milking at Aldeia Nova

Kids driving their cows for milking at Aldeia Nova Dairy Operations: The dairy operations at Aldeia Nova have a slightly more high-tech look to them. While packaging eggs is a decidedly low tech operation, converting raw milk into yogurt, ice cream, butter and cheese is largely automated. Every cow on every family farm wears an ankle monitor with an electronic chip so that Trivizki and his team can track the health and production of each and every cow individually across the fifteen villages. Milking is done in each village at computerized milking centers. The work is easy for the farmers, so easy, in fact, that the work is generally done by small children who follow rather than lead the cow to the milking station twice each day, wait briefly while the cow is milked and then follow it home. While they wait, the kids play with other village kids who have also arrived with their cows, such that it seems that milking time is a highlight for the children. A tanker truck comes by each day to get the milk and haul it to the central dairy operations. Cows being milked at Aldeia Nova

Cows being milked at Aldeia Nova The dairy doesn’t sell any milk. Instead, it takes the milk and adds value by converting it to yogurt (both liquid for drinking and fruity yogurt you eat with a spoon), ice cream, butter, and cheese. By selling only value-added products, they create higher margins, allowing the cooperative to pay above-market rates for the milk the family farmers produce. According to Trivizki, they presently pay about 30 percent above market rates for the milk and provide some free feed to their dairy farmers as well. Community: Each village has a variety of shared community features. Each village has a small medical clinic staffed by a nurse. When I visited one, there were several people working at the clinic, including a local doctor and a several staff. In a country with a host of development challenges, health care may be its biggest. It was pleasing to see the small medical clinic in each of the villages. The clinics serve not only the villages where they are located but also surrounding communities that are not part of Aldeia Nova. Each village also features a school. The buildings are high-end by rural, African standards, providing the kids with a genuine opportunity for education. Vital Capital Operations: Vital is officially headquartered in Geneva, Switzerland, but its heart and soul is in Tel Aviv, where Stibbe continues to live. It also has offices in Kumasi, Ghana and in Luanda, Angola. The CEO is Mr. Sandy Oppenheim. Investments: In addition to the investments in the Luanda Medical Center, the Kora housing projects and Aldeia Nova, Vital has invested in two other projects to date, including the 8 Miles Fund, a pan-African private equity fund and Focal Energy, a renewable energy company. Analysis and Conclusions Having completed my visit to Angola, I return to the questions with which I started my journey. 1. Does the need for a return on the capital invested impair the social impact? 2. How do you manage a project to have both social impact and economic returns? 3. How do nonprofits, governments and investors work together to greatest effect? 4. Can a successful investment on one place be replicated in another? Return on Capital: Women selling coal at the local market

Aldeia Nova villages with Waku Kongo in the distance. The projects I saw were not equally replicable. Aldeia Nova, perhaps the most appealing of the projects, seems to be the least replicable while Kora Housing and the Luanda Medical Center are designed from the ground up to be replicated and extended both within Angola and in other places. In Los Angeles in April, I was privy to meetings between Stibbe and the housing ministers of two other African countries that specifically want Vital to replicate their work in Angola in their countries. I agreed not to disclose the names of those countries so as to avoid placing any undue pressure on the final negotiations and initial implementation there. Final Conclusion: Based on what I saw in Angola, the impact investing asset class which is still tiny will grow quickly. Consider the choice of a philanthropically-minded family office or foundation between giving money away to a charity or NGO on the one hand and on the other having the opportunity to invest it to have the same sort of impact—and get the money back—and you see quickly that more money is likely to be invested over time. There already exists a tension between nonprofits and impact investors as they each look skeptically at the business model of the other. The greatest opportunity for each is to collaborate with the other. The world needs the impact that will come from their synergistic collaboration. I express appreciation to Vital Capital for covering the cost of my trip to Angola. Recognizing that my Forbes readers are accustomed to pieces of 1,000 words or less, I’ve prepared a more complete article for those who might like a longer take. The longer article will be available on Amazon.com soon. Please help me continue this conversation by commenting below, on Twitter at @devindthorpe and on Facebook, Google+ and my personal website yourmarkontheworld.com.

5 Top Comments on Does Impact Investing Work? Vital Capital Case Study Shows It Does

Cheryl Conner Cheryl Conner 2 years ago Great article and vital topic, Devin – kudos on taking on such a great topic! This is a post to bookmark, save, and definitely to share. Top CommentREPLYFlagPermalink

Devin ThorpeAUTHOR Devin Thorpe 2 years ago Thanks, Cheryl! I wish I had 80-100 hours to research and write every post! Top CommentREPLYFlagPermalink

peterburgess peterburgess 2 years ago

I like the article … but at the same time the article frustrates me enormously. Angola, like so many resource rich places around the world has a wealthy elite and a very poor general population. History has not been helpful, but what has been happening in the last few years is also problematic.

I have worked both as a corporate CFO and also as a ‘development consultant / expert for the World Bank, the UN and others and it is appalling what I have observed about the flow of funds and the exploitation of resources and the under-classes.

Some of the expats involved in development activities are amazing, committed people who do great work with relatively little personal gain, but that cannot be said of everyone. Where there are corporate interests involved there is widespread exploitation of the situation for corporate gain.

I read this on a Forbes website … a brand once known for the phrase ‘Capitalist Tool’ … but there are no numbers anywhere in the article. When numbers are absent I worry about what they might show. There are a whole lot of little signals that this impact investing is not all it seems to be … and I am not surprised, but still frustrated.

Peter Burgess TrueValueMetrics Top CommentREPLYFlagPermalink

Devin ThorpeAUTHOR Devin Thorpe 2 years ago Peter, you make some excellent points. I approached my research with similar skepticism. After seeing it myself, I’m a believe in what Vital Capital is doing–at least in terms of impact. I could not obtain from them numbers that would allow me to test the profitability and return on investment. In any case, it is far too early to measure those financial results. The social impact was undeniable. Thousands of local people employed, potentially 250,000 people to be housed in clean, sturdy, modern, affordable housing. Untold numbers to be treated and diagnosed in their medical facilities. Vital Capital’s work is critical to the creation of Angola’s rising middle class. Top CommentREPLYFlagPermalink

1 comments Andy Goldberg Andy Goldberg 2 years ago Hi Devin, an interesting and important article to be sure, but I found myself missing two crucial elements to gain an understanding of the effectiveness of impact investing. First some kind of financial analysis would have been great. I understand that the company did not want to release detailed financial statements, but still, was there no way to get some ballpark figures about investment and return. I was also missing a little insight into the human impact the projects had. What were the houses like? Who were the families benefiting? Where did they live before? How do the Aldeia Nova families feel about the foreign bosses? Maybe next time you could look at these angles a little more. Thanks… REPLYFlagPermalink Devin ThorpeAUTHOR Devin Thorpe 2 years ago Andy, thanks for your feedback. You make excellent points. Because none of the businesses have reached an exit, real financial results would only be speculative at this point. I think the article does cover what the new and old housing is like; space requirements limit the details. A longer format of the article is forthcoming on Amazon as an ebooklet. Top Comment