What buyout houses could learn from venture philanthropy

Key principles adopted from the asset class - including a rigorous screening and due diligence process, deep alignment and hands on operational support - remain at the forefront of how venture philanthropy investing works. Here we take a look under the bonnet of Impetus Private Equity Foundation (Impetus-PEF) to discover how the model has been implemented, and to explore how certain aspects have evolved, which could provide some valuable lessons for traditional buyout houses.

Origination
Impetus-PEF's focus is on helping young people into work readiness. The strategy sets clear borders as to which organisations the foundation can work with. "Within that scope, we feel our approach has best value with organisations with track records and of a certain size, and with some thought towards impact, so that narrows the field hugely," explains Elisabeth Paulson, investment director at Impetus-PEF.

For Impetus-PEF, the importance of partnership and alignment between the foundation and the target organisation is just as important as it is for buyout houses and management teams, arguably even more so as investments tend to last much longer. "We're looking for willingness to work in partnership. And we look closely at leadership, which is crucial during the first year of assessment," Paulson says.

Due diligence
Once an organisation has been identified, Impetus-PEF enters a rigorous due diligence process. "As we are looking for a long-term partnership, we really dig deep." However, without the well-stocked teams of analysts and specialists typically found sitting in buyout houses, Impetus-PEF leverages pro bono work to support due diligence processes.

The foundation benefits from an impressive number of experienced private equity practitioners who support Impetus-PEF's work by investing their time and skills. Its advisory council comprises names from HgCapital, Bridgepoint, Bain Capital and Warburg Pincus. And individual supporters - those that work on a pro bono basis - include team members from ECI Capital Partners, Phoenix Equity Partners, TPG Capital and Palamon. Furthermore, on a corporate level, some buyout houses in their entirety support Impetus-PEF's work, including Blackstone, CVC, Hutton Collins, ICG, KKR and Terra Firma.

In a similar manner to many private equity firms, once the due diligence process is complete and positive, the process then moves on to the investment committee. "The investment director and the organisation's chief executive jointly make the case for investment to the board," Paulson says. Interestingly, to strengthen the sense of partnership, both investment director and chief executive are held accountable for championing the deal.

Management and development
Catherine Roche, chief executive of Impetus-PEF-backed charity Place2BE, outlines how sophisticated the support from the foundation is: "We have worked closely with Bain on strategy planning and priorities. By working together, we identified the development of our work into secondary schools as we had previously only been working with primary schools. The team helped us put together a business case, which was then put to the Impetus-PEF board."

Roche echoes the real sense of partnership Impetus-PEF is so keen to achieve. "We have a monthly steering group with the foundation; it very much feels as though we are working together. They are very hands on; providing good support and input. And they really understand the business."

As with any private equity investment, a real understanding of the business and its needs is vital for success. Says Roche: "The motivations for us are different than for private sector organisations. The help we receive from Impetus-PEF understands that, and they support us in areas such as recruitment, which is very different from recruitment to the private sector."

Impetus-PEF has devised a series of workshops to enable organisations to step back from their day-to-day work and really consider what its mission is, who it is for, its impact and programme design. "In the first year of investment, a key feature is to support a ‘theory of change'. We host a set of facilitated workshops over four days, bringing together a cross-section of staff - from board members, management and front-line workers. We have adopted this workshop model from US groups and revised it for our own approach," explains Paulson.

While this series of workshops might initially appear intensive, it cleverly acts as a tool for bringing the organisation together and ensuring everyone is working towards the same goal. As with any third-party investment, teams might feel sceptical or worried about the expectations placed on them. This process addresses these concerns head on and enables teams to really understand how the relationship will work. "The groups come out feeling ignited and excited. By the end, they have ownership of their agenda. Impetus-PEF becomes a buzz word for questioning and thinking about what the organisation does and how to do it better," says Paulson.

By stepping back and asking teams to think about their work and how to do it, organisations are empowered to develop, knowing they have the support of the foundation - rather than simply being set targets and goals.

It is here that private equity houses should take note. The relationship between sponsor and management is often the "dark art" of investing. Impetus-PEF has devised a process that, from the very early stages of investment, ensures entire organisations are unified in their development and plans.

Reporting and measurement
An area where the foundation has taken great leaps is reporting and measurement. Rather than demanding monthly accounts from management, Impetus-PEF supports organisations in tracking real-time data, not only to keep abreast of growth and development, but as a tool to better manage work. "We're not just reporting for reporting's sake," says Paulson. "It is designed to better manage work, to deliver reliable and consistent outcomes. If reporting was only delivered annually, that's not good enough to ensure young people are progressing; it needs to be daily, weekly or monthly to build in accountability for outcomes."

And investees agree, says Roche: "Place2Be has always been focused on impact, and measurement has always been at the heart of that. We include specific goals in our plan, such as depth of impact. We learn from that and continue to develop our practice." Roche explains how the charity continuously collects both quantitative and qualitative data to measure its performance: "We use a questionnaire to give a quantitative result and combine that feedback with qualitative reports. We need both the figures and the personal feedback."

Of course, the ultimate goal for private equity is achieving a positive financial return on investment, where venture philanthropists are seeking a positive social impact. However, the methods used by Impetus-PEF in areas such as ensuring alignment and a partnership approach, empowering entire organisations to carry out strategic development and the use of reporting to improve results, have the potential to boost financial returns for traditional buyouts. While the asset class has undoubtedly devised a wide and impressive range of tools to exaggerate returns, difficulties continue to persist when it comes to managing the sometimes tense relationship between sponsor and manager. Furthermore, as investors become increasingly concerned and focused on socially responsible investment, a neat way to address this could be to adopt some of the techniques developed by Impetus-PEF to track impact and think more carefully about the wider implications of how portfolio company profits are generated. 

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