TPG Cracks the Code for Impact Investing

A couple of years ago, Bill McGlashan, who heads the TPG Growth unit of alternative-asset giant TPG, attended a conference hosted by internet entrepreneur Jeff Skoll, famously eBay’sfirst employee. It was an exclusive gathering on Richard Branson’s island in the Caribbean: Laurene Powell Jobs was among the guests. The agenda? Nothing less than big ideas to save the world.

McGlashan, now 54, was transfixed. Having lived and worked in China, Chile, India, and other developing nations, he had seen that capitalism could create a thriving middle class and robust economy. He wondered whether TPG, with its access to capital and investment discipline, could invest profitably while also having a social and environmental impact guided by the United Nations’ Sustainable Development Goals, or SDGs, a blueprint of sorts for achieving a cleaner, healthier, and more equitable world. The result: the Rise fund, which raised $2.1 billion last year, and has plans for a second $3 billion version. Here is McGlashan’s story.

Barron’s: What happened after that meeting?

McGlashan: Two ideas came out. One, was there a way for these powerful people to engage in a more systematic, ongoing way, rather than in one three-day weekend? Two, what if we could really use the engine of capitalism, as opposed to the NGO [non-governmental organization] world, which doesn’t really have scalability or sustainability, to solve the big issues we are facing? I met with Bono and Jeff Skoll afterward, and the three of us decided to go for it. We brought in Bridgespan [a management consultant] to start working on the impact evaluation and measurement process. We didn’t want to be just another impact fund. Impact investing was fairly fringe, more on the philanthropy side of the spectrum than hard-core fiduciary investing. What we could bring as one of the largest private-equity firms in the world was doing it at scale, and with a level of integrity and discipline around measurement and reporting that can pass muster in an institutional-capital world.

You have to be able to measure the outcomes, declare what you’re going to deliver, bake that declaration into your key performance indicators and operating metrics, and then report on it with the kind of reporting that third parties can verify.

So how do you measure impact return and standardize it across your portfolio?

A lot of people have been working on this across the industry. The world of philanthropy was the pioneer in measuring outcomes. One big advantage was that major foundations such as Rockefeller, Ford, J-PAL at MIT, and Hewlett, and universities like Chicago and Stanford had created a portfolio of research connecting the dots between the output of a business and a social or environmental outcome.

Every business has a social and environmental impact. How do you net it all out? We’re growth investors. When we look at an investment in its first stage, we have to be able to understand its growth rate and potential, based on assumptions derived from the past. If it’s a health-care business, the unit of output is how many patients they’re going to serve. Then we ask, what is the [social and environmental] impact of those outputs from the business that we’re underwriting? Is there credible, peer-reviewed, third-party data that can allow us to predict the level of impact from those outputs? We do a probability weighting for every investment. We discount accordingly. And we end up with a single number that expresses the impact multiple of money on the investment, or IMM.

We never put an investment into Rise unless it can deliver at least a 2.5 times impact multiple of money. If a deal comes into the TPG Growth engine, and it has at least a 2.5 times IMM, it goes into the Rise fund. We monitor it and have KPMG audit it to see whether we actually delivered it.

Example, please.

ViewPoint Therapeutics has developed eye drops that can treat cataracts; the treatment is a fraction of the cost of surgery. About 100 million people have impaired sight as a result of cataracts, including many in the developing world. In the U.K., you might have to wait a long time to get cataract surgery. There are lots of data on cost-of-treatment burdens and their effect on gross national product and the economic value of an engaged human being. What are the economic implications of providing a solution like that in places like India, Pakistan, Bangladesh, or Africa?

We have underwritten 7.7 million cataract-blindness interventions in developing countries, and 687,000 in developed countries. We’ve also assumed 23.5 million interventions for moderate to severe vision impairment in developing countries. And that’s assuming a 30% probability of success, because the company still has to go through a Phase 3 clinical trial. The impact underwriting of ViewPoint is 121.4 times your money. Give me a million bucks, and I’ll create $121 million of social value based on your investment.

What is another example?

Dodla Dairy has filed to go public. It is one of the largest dairy companies in India, working with about 240,000 small farmers. Dodla collects 1.2 million liters a day of milk from these farmers, uses digital thermometers to test it, and pays them with remote-payment solutions. The contracts are long-term, so farmers can reliably increase their cow count. We find this delivers a 70% increase in income levels, which we can track, measure, report. It’s a 4.2 times IMM.

What are typical financial returns?

We’re not allowed to disclose returns, but TPG Growth has generally hit upper-quartile performance, which in the growth-equity world, in recent years, is sort of a mid-20% internal rate of return, or IRR. This is the same process. ViewPoint and Dodla suffer the same issues around competition, access to capital markets, and talent as other companies. Why wouldn’t you require the same kind of return? It just so happens that we can also report on the impact.

There has been no lack of deal flow. Entrepreneurs want to hang out with the sparkly people on the founders’ board [who] want a company aligned with their agendas.

—Bill McGlashan

If you reduced your IRR expectations for ViewPoint to 1%, wouldn’t it create even greater impact by allowing more people to have cataract treatments?

The magic of capitalism is it [gives] you the Teslas and Elon Musks of the world, who are creating extraordinary impacts and extraordinary wealth. Say you said to Tesla[ticker: TSLA] shareholders, we’re going to target a single-digit return, because if we do so, we can sell the car for half the price and get more people off of carbon-belching vehicles. That would be true theoretically, but you would never have a Tesla show up in the first place.

Why focus on the U.N.’s goals?

The SDGs are true north—the goals the whole world has rallied around to get us to a just world. Analysts estimate that you need $30 trillion to get the SDGs done. If you plowed the whole Gates Foundation in, it’s less than 1.5% of that gap. We’re not even close to getting there with government and philanthropy. What’s so magical about the scalability and innovation engine of capitalism is that if you direct this engine around creating impact, my suspicion is we can get there with a lot less than $30 trillion.

Which SDGs does the fund address most?

Education is about a third of the investments; health care, about 21%; energy, 14%; and financial services, 13%.

How much of the $2 billion have you deployed?

Close to three-quarters of the fund is invested, about 60% in the U.S. We have investments that are $120 million. We have deals that could have been $300 million, but we shared them with TPG Growth. There has been no lack of deal flow. Entrepreneurs want to hang out with the sparkly people on the founders’ board [who] want a company aligned with their agendas. We’re just very clear that if you want Rise fund as your partner, we need to deliver world-class returns, as well as the impact. We’re not willing to be the high bidder on deals. On the investor side, there’s enormous demand for Rise.

You’re an early mover in this space. How will it evolve?

About 70% of the capital that we raised for Rise came from entities that had never done impact investing before. Sitting around the table is about $10 trillion. Maybe there will come a day when there’s no such thing as impact investing, because clients will always expect to see some sort of impact measure alongside the normal reporting of internal rate of return. Over the next few months, we’ll unveil our research collaborations and start to make the methodology public, so it can service others who want access to that capability.

Will a version of this fund be available for retail investors?

That’s a broader question. The Securities and Exchange Commission is exploring making alternatives [investments] available to individuals. That day is coming. It’s just a matter of time.

Will all TPG funds start measuring their impact?

We were the first private-equity firm to sign the U.N. Principles for Responsible Investment. We have a large internal ESG [environmental, social, and corporate governance] team, so we report on ESG across all our funds now.

Grant’s Interest Rate Observer recently cited the unprecedented amount of money raised by private-equity firms, and suggested that funds will struggle to earn their fees.

I’m better able to talk about growth equity than private equity. We don’t use much leverage in our investing. It’s about underwriting growth. Across our portfolio [companies], we grew the top line 33% three years ago, 50% two years ago, and 57% last year. There has never been a more interesting time in the pace of innovation and dislocation. It creates incredible challenges for legacy players, but remarkable opportunity for growth players.

Thank you, Bill. 

Write to Leslie P. Norton at [email protected]

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