iMPACTiSSiMO! Podcast Episode 53: Chris Kuchanny with Impactable Investment Group
There’s a 4 trillion funding gap to reach the Sustainable Development Goals.
It’s simply unattainable through philanthropy or overseas development aid. Institutional investors, who sit on the largest pile of capital in the economy, are mostly sitting on the sidelines.
Chris Kuchanny with Impactable Group has come up with a solution, making it possible for institutional investors to deploy capital at scale in emerging markets with impact.
They are co-investing and piggybacking existing due diligence (adding their own) and aggregating smaller opportunities into institutional-sized investments in private debt.
Emerging market private debt – most people expect a loss of 20% or 60%. It’s actually 1% – and that’s based on 20 years and 70,000 data points from all of the MDBs and DFI’s across the GEMS Database – that’s lower loss given defaults than senior secured debt investment. The highest grade corporate debt investment in the US and Europe equivalent and slightly lower.
Built from the beginning for institutional investment:
Market rate returns
- Low risk
- Scalable
- Impact
Allies he needs right now:
- Philanthropic capital where they have a sliver that can at least 10x impact in scaling emerging market impact investment
- Partners to help with their YEM private debt story
- Professional investors in emerging market, private debt, to join their network
- LP’s who are willing to take the time to understand their innovative approach
Podcast Transcript
Jacob: [00:00:00] The sustainable development goals have a $4 trillion per year investment gap in developing countries. Institutional investors could potentially fill that gap, but they cannot find suitable opportunities at the right scale. Chris Kuchanny with Impactable Group just might have a viable solution. So tell me about your journey that led you to this point.
Chris: Well, I started my early career in the city. I started on a derivatives prop trading desk, which means I was trading the bank’s own capital, and it was all very much finance, finance, make money, make money.
And I think there were a couple of things in the background that made me really kind of question what I wanted to do with my life. And I put them as, you know, the two things of farm and faith. Family, actually, just as I was leaving university, went; actually I was starting university, went to Africa [00:01:00] and they bought a working farm and a visitor center. They set up charities, they built a school specifically for orphans. And they were really inspired by trying to help people in a very poor community in the northern part of Zambia.
So, having gone out to visit them many times, having been part of that journey, that was really, if you like, the start of a journey for me on understanding what’s going on in emerging markets and really having my heart pulled by the struggle that is poverty.
And I guess also on that early phase of my career, after having made and managed quite a lot of money for quite a young age. I actually realized that there’s only so much satisfaction that can come from that. And I actually had a moment of faith where, you know, as I stepped into Christian faith, I realized that I wanted more from life. It wasn’t just about making money in lining pockets.
So that led me to launch a new hedge fund actually. And the hedge fund had an interesting structure. So we started it with, from the word go, a charitable structure so that whilst we had a, a [00:02:00] sort of global fund on one side that ended up growing, it was over half a billion dollars, and the main fund had a multi-billion dollar portfolio, a couple of funds. And then the fee income from now, or at least up to a quarter of the fee income, went into a philanthropic pot, if you like, a foundation. And that foundation started on a journey of working out how we can help people in emerging markets through development, initially actually helping to fund, for example, infrastructure like schools. But then going on a journey of, well, actually, you know, we need to support business and helping people on with microfinance and then with SME finance and then with full value chain investing. Really trying to develop economies, recognizing that as they grow, can really help with that issue of poverty.
And I think on that journey, one of the things we realized is, going back to your initial statement in that question, is that four plus trillion dollar a year funding gap to meet the STGs is simply unattainable through philanthropy. It’s actually [00:03:00] unattainable through overseas development aid as well. Not because the money isn’t out there, but the probability of that scale of money coming into philanthropy just simply is improbable.
So we really need institutional investor money, which is where most of the world’s capital resides in pension funds and asset managers, and insurance firms. We need that to come off the sidelines and have investible opportunity into emerging markets and in that way, scale and start to narrow the SDG funding gap.
So that’s entirely what Impactable is all about.
Jacob: What tends to be the biggest misconceptions that you find about emerging markets, and sort of the, maybe the perceived risk versus the actual risk, or some of those hurdles that particularly institutional investors might face that you try to help dispel?
Chris: Yeah, I mean, I think the first thing I’ll say is, look, I mean, of course, there is risk in emerging markets, and when we look at emerging markets, within our universe, we’ve got 77 approved countries for trading. And there’s [00:04:00] another 30 or more that, or maybe more than that actually, that are not approved for trading. We’re talking over a hundred nations, and the diversity within that nation block is vast.
So, you know, of course, there can be lots going on in all of those nations at different times. But I think because of that complexity, because of often ignorance, actually just a lack of understanding without lack of experience, then the natural perception is it’s just too risky, I’m not gonna, not gonna get near it. And there’s a number of problems with that way of thinking. If I go back to the risk, and I’ll come back to the way of thinking in a moment, and how it impacts people in developed markets and particularly developed market portfolios, is that risk can be mitigated.
Now, one of the key ways of mitigating risk is through diversification, of course. So you can diversify away a lot of the risk by having a broad remit, which is what we are coming in, doing a broad remit by country, a broad remit by sector, by having maximum position sizes that are [00:05:00] relatively low. But also, you can look at the different types of investments, and we’ve looked across the board: public private equity, private equity, private debt. We are launching with a private debt strategy. Why are we launching with private debt? Because emerging market private debt, the largest database out there of emerging market private debt performance, it’s called the GEMS Database. It’s all the MDBs and DFI pulled 70,000 data points over 20 plus years together, and the loss given defaults, the actual loss on that portfolio was an average of 1% a year.
Now, to put that into flavor, most people would expect, I’ve asked people, and I’ve had answers ranging from 20% to 60% of expected loss on that type of portfolio. So, to come in a number that’s actually one is generally shocking for people, and how is that possible? And I’ll explain in a second how it’s possible, but to give you a comparative, that’s lower loss given defaults than senior secured debt investment. The highest grade corporate debt investment in the US and Europe equivalent and [00:06:00] slightly lower. So, you know, you can achieve that level of low loss rates if you are very vigorous. If you structure deals well, if you have security, you know you have the right covenants behind your transactions. There’s a lot that you can do in practice that can de-risk alongside, of course, diversification, a whole range of other, of other factors.
So we’ve spent the last couple of years really working through this, fighting to work out what’s the best way of executing. And then we’re also executing in conjunction with some of the leading emerging market private debt investors. So what we are doing is co-investing alongside those investors, which means that, effectively, we’re piggybacking off their expertise and research, often their local market presence and knowledge. And then we’re adding our own due diligence, our own impact processes, which are very vigorous on top. And in that way, investors in what we are doing are getting sort of top-level due diligence and the market leaders’ level due diligence with even higher due diligence on top.
So I think if you’re [00:07:00] very vigorous, if you’re intense about it, you really care, and actually, you do need to have a collaborative, supportive relationship with the companies in which you’re providing, in this case, debt or in other cases, it might be equity, then you can actually produce a very high-quality and low-risk return.
Jacob: I mean, I’m curious, though, how do you have a solution that others haven’t been able to crack this code?
Chris: Well, I think that it’s taken a while; it didn’t just sort of instantly come about. And the way that we’ve done it is we’ve designed something from the start. That is available to an investible by institutional investors.
So from the beginning, it’s been very hard-nosed, and we need at least four factors to be able to be attractive for those investors. The first one is it’s, it’s gotta be financially viable. And institutional investors would generally expect a higher return for an emerging market investment, that they’re getting commensurate investments in developed markets.
So we are coming out with a product that’s aiming at double-digit net returns. How can we do that? I’ll talk to you [00:08:00] about in a second. I’ll talk about these four first. So one is, is returns, two is risk. We’ve already talked about that low-risk element. We’ve simulated return profiles, and one, you’ve got that kind of 1% loss given default rates across large data sets. When you combine that into a smaller portfolio, we think we can still get to sort of within two, two and a half, 3% maximum drawdowns by being very careful about what we invest in and being careful around our portfolio construction. We’ve built everything we’re doing for scale. So, something like 60% of the emerging market impact funds, or more, at least 60%, are under a hundred million dollars, and a small fraction, well under 10% or over a billion dollars.
What that means is most of the market is institutionally uninvestible, a lot of these big inspos have minimum tickets of fifty, a hundred million, right? So if you are, and they don’t wanna be more than 20% of your fund. So most of the industry structure themselves in a way that they end up being in this kind of circular discussion, whereby they can’t scale because they can’t scale. And we’ve designed something that from the beginning is built to scale. [00:09:00] So everything that we launch will have multi-billion-dollar capacity.
And then everything we’re doing is also built around impact. We’ve got very thorough impact processes, which have been vetted by Impact Institute and given a big thumbs up. Everything we’re doing is really designed around trying to help with this transition that’s ongoing. And the transition we’re seeing is the largest industrialization in human history. It’s so big that it’s at least 13 times as big as the previous largest industrialization in human history. And what’s interesting about that is all of that industrialization substantially is happening in emerging markets.
These are markets where the vast majority of planet Earth lives, well over 80%. Markets where most of the growth in population and real GDP growth is happening. We’re seeing the next 2 billion growth in global population, more than 2 billion will be born in emerging markets, because we’re shrinking in developed markets. And on an economic growth basis, real [00:10:00] GDP growth on average year after year, so far, this millennia has been 3.3% higher in emerging markets than it has in developed markets. So there is a very strong argument for most developed market portfolios being wildly underweight emerging markets. And we see the problem with that. We see the problem with that with recent events, with COVID, with 2008, with 2000, with all these major market events. Because what happens, well, the left tail risk, these unusual downside events, when they happen, everything correlates to one in developed markets. Which means that everything moves in the same way.
And actually, if you look at particularly the space that we’re launching here within private debt. That is not the case. You might see a small uptick in loss given default in loss rates, for example, but it isn’t sustained, and it’s not of the same scale as you’ll see across developed markets.
So we’ve built a strategy from the ground up. That has been unwavering, and we [00:11:00] must deliver those four factors of very competitive returns, low managed risk at scale with significant impact, but it’s gotta be hard nosed financial first quality or financial return first, and that’s the thing that can enable the impact happening later and how we do that, we could go on to talk about it.
Jacob: Yeah, I mean, it sounds like a winning combination. I guess what has been the biggest hurdle, though, in terms of getting this going and maybe leading up to that, like, where are you at in that journey? You know, is this just an idea in your head, or is this, you know, you’re on fund five and this is a vetted thing, where on that journey are you?
Chris: Well, somewhere between the two. Sadly, we’re not at fund five yet, but, yeah, God willing. But we are we’re certainly well beyond it being an idea in our head. We’ve developed a portfolio of opportunities here that demonstrates that we can do this at scale. We’ve got knocking on 300 different opportunities that have come in both through our own origination and through our co-investment network. We’re scaling through co-investment as I mentioned or touched on before, which means, you know, with those leading emerging market [00:12:00] private debt players, we’ve been going around the market and asking. Who’s got spare capacity? A lot due because their diversification means they can only invest a certain amount in each trade in each deal. So we’ll come alongside, we’ll take up spare capacity where it meets our criteria.
So we’ve demonstrated that we’ve got a scalable portfolio of opportunities that thoroughly due diligence in both impact and investment perspective. We’re speaking with a range of LPs or investors across different jurisdictions, and we’ve structured what I believe to be certainly a very innovative structuring that offers multiple ways in for investors. We’ve got a more liquid version open-ended. We’ve got a closed-end, highest return, five-year lock version. And then we’ve got a principle-protected version that completely de-risks the investment with no capital at risk, or limited capital at risk, depending on optionality there for investors who aren’t quite sure about emerging markets, but want to dip their toes.
So I think, you know, that latter thing is gonna be very important [00:13:00] because there are a number of investors who are saying, Look, we agree with you. We know we’re underweight in emerging markets. We can see the opportunity, we can see the diversification advantages, we can see the average return, quality of return advantages, but we just don’t know where to start.
So we’re trying to provide a product that allows them to do that, as well as provide products for other parties who are maybe more familiar with taking that risk and keen to do so either on shorter-term or longer-term basis. So we’re coming to market this year. We’re hoping for that to be late Q3. It may slip a little bit depending on LPs. We’ve got a number of larger LPs who are circling and very interested, and you know, we’ll see where we go on that journey.
Jacob: We crossed paths. I think originally it might’ve been the GIIN in Copenhagen or maybe the Impact Summit Europe. I mean, we tend to orbit in some similar circles.
And at those events, though, there’s also, you know, the large impact asset managers that often tod a lot about, they have the boots on the ground and they [00:14:00] have the offices in emerging markets, which you aren’t coming in saying you have that infrastructure. Do they see you as a potential threat, or are you a partner for them, or how does that work in that ecosystem?
Chris: Yeah, so we’re building an ecosystem where we very much are building up a partnership with those asset managers. And as I touched on before, one of the issues is that a lot of these asset managers are going out and they’re doing, you know, one or two years or more of due diligence to get ready to make an investment, to get ready to provide in this case, debt capital for some of these investees, these companies that are growing. And when they get to that point, they realize, well, we’ve only got what they know on the journey, 10 or $15 million may be maximum for some of the largest guys out there to invest. And often these companies need a lot more capital.
To give you an idea of the scale, I mean, Africa alone, the SME section, the mid-market in Africa has a two and a half trillion dollar funding gap. It’s a massive market. And so when we, what we are doing is we’re building a [00:15:00] network where in the early phases here, we are principally coming in as an additional investor, the investor alongside, and depending on how that, you know, that can be structured in different ways.
It could be sort of, you know, we’re just taking up some excess capacity, or it can be maybe a full service that they provide where whereby we pay for that service and we are getting access to their monitoring, reporting, due diligence. In either way. We are coming alongside, we’re adding due diligence, we’re adding alpha in the form of helping support them in this investment. We’re also adding capital. And then as we grow, we’re doing our own due diligence on opportunities that we are sourcing, we’re originating, and that group of opportunities is growing, where we’re in the same position and they’re too large for us. Then we’ll look to offer that back to our network as well.
So I think it’s in these markets, it’s really important for people to realize, and maybe I think the private debt market has been much better at this than private equity in my experience. Where they’re a little bit more kind of closed off, private debt, I’ve found refreshingly open, where [00:16:00] people realize that look. We are running tail risk here in private debt. You’re paid, in emerging markets, you’re being paid more than you would maybe in developed markets, but you know, you’re still being paid modest amounts, not multiples of your invested capital. And so the real important thing is you get the tail risk, right? Like you don’t get the core credit risk wrong. And to some degree, more players in the room is an advantage.
So I think across emerging markets, my belief also in equity land it’s gonna be far better for everybody when these networks expand and people are better at sharing their toys because as we work together, shoulder to shoulder in these markets, we can make things happen bigger, better, and everyone can benefit.
Jacob: Yeah, I would second that, just general philosophy. I mean, as we work with different impact organizations and helping them scale through better storytelling and reaching who they’re trying to speak to. One of the soap boxes I keep finding myself on is that we need [00:17:00] more cross-pollination. We need more of that connective tissue in the industry. And if we’re all trying to hold our cards so tightly to the vest and do save the world on our own private island, we’re not going to get there. We need each other, really, and we’re going to get further faster by working together.
And so I applaud any efforts that are trying to stitch together more of that, you know, cooperation. And in that vein, what are the allies that you need most right now?
Chris: There’s a couple of things in terms of the hurdles we’re facing and some of the allies that we would all benefit from.
I think one of the things is as you’re launching a new product, and I think our product is very new, it’s very differentiated. There is sort of the educational aspect of it. You know, you’re trying to educate investors, particularly institution investors in developed markets. Who haven’t had much exposure to these areas on why this is so important for them?
So we’re actually in the process of finalizing a YEM private debt paper. And that is really aimed at kind of trying to provide some [00:18:00] actual market data independently sourced. So people can actually begin that journey in many cases, or advance that journey of why invest in these markets, and how to do so.
As part of that, we have a number of partnerships that we’re we’re building there. And as that piece comes out, I suspect that we’re gonna be doing that in partnership with a number of major entities. So anyone who wants to join on that particular piece and getting the YEM, particularly YEM private debt story out there, we’d be very willing and very eager to partner with.
The other two things is one I mentioned our co-investor network a number of times. We currently have well over a hundred names on our long list and several dozen who are already providing us investment opportunities. And many of those we will be doing the same ourselves, our quid quo profile providing opportunities back, but always interested in others. So if you’re a professional investor in emerging market, private debt, if you’ve got boots on the ground, you know, you’ve got the skills, you’ve gotta track history then let’s speak and let’s find ways that we can work together to really scale up this part of the industry. And then from there, other parts.
And then the other thing is, of course, [00:19:00] LPs. We need investors, and we need investors who are willing to engage. Because what we’re doing is, is not simple, you know? I mean, in one sense, okay, it’s just emerging market private debt. It’s just private debt investment. But because it’s a new product with a couple of new nuances, in one sense, I don’t think almost anyone’s done this before, if anyone at all, in terms of the way that we’re structuring this. So we need LPs who are willing just to kind of take the time to get to understand this. I think when they do take that time to understand it, they’ll realize that what we’ve developed here is something that meets those four quadrants of the expectations that they have for this type of product in a way that should meet their needs. And I think a lot of them, and actually we’ve found this so far, those we have been speaking to generally. Very few have said that this doesn’t make any sense. And you know, they, for understandable reasons, they don’t have any space in their portfolio or they can’t invest in space right now, they’re kind of limited, has been typically the response as opposed to we completely don’t get it.
So if there are LPs, we do [00:20:00] have one small slither, which is a concessionary slither, So if you are you know, got philanthropic capital, we’ve got a product that can at least 10 times multiply your impact in scaling emerging market impact investment. And actually we’ve got a line of sight for that being, it could be a hundred times.
So back in the day when I was managing our philanthropic part, which I still am, it’s just a bit smaller than it was ’cause we’ve spent and invested a lot of it. But when I was then something, like that would’ve been really exciting for me because, you know, the scaling of the capital in that market would be interesting.
Aside from that, what we’re mostly looking for is investors who just want to be in on any one of those three products I mentioned: open, open-ended, closed-end, or a principal-protected product.
Jacob: And what does an ideal LP for you look like?
Chris: Well, I think as it says, one is willing to actually do the work on the way in to understand what we’re doing. They’re willing to be on that journey. I’m not saying, you know, I mean a lot of the LPs we’re speaking to do understand these markets. I’m not saying everyone doesn’t, but it’s the party who’s willing to engage with emerging markets, willing to [00:21:00] understand the actual risks, willing to understand how that fits within their portfolio. And I think again, what we’ve structured is there’s an opportunity for most here.
We’re principally looking at the institutional end of the market. So the ideal is right at this immediate moment, someone who could come in as an anchor with a 50-million-plus ticket. For some people on this call, that sounds like an enormous ask for others; that’s their day-to-day. But you know, that’s where we’re at, and we do have a number of parties who fit that bill, who are looking. And for those obviously who would come in as, and when we get to the point of launching a product in the earlier phases, then there would be, of course, advantages to them to do so.
So in the first phase here, we’re just like the analogy I use is it’s like filling a jar with marbles, you wanna get the big marbles in first and then the smaller ones filling around it. And so we’re looking for a couple of those larger guys, but we’re also looking for other investors who are interested of whatever guise in whatever form.
And you know, and then the other tranche was that kind of, sort of quasi [00:22:00] concessional pool. So we’ve got about a 30 million maximum we’ve already got soft circle five to 10. So we need another 20 odd in that pool that would catalyze, I think, potentially a market first product in terms of a de-risked, hopefully credit rated principal protected product that would, I think, be scalable and be a bit of a game changer actually for investors.
So if any of that is interesting to any of the parties listening, particularly any of the LPs, then please do, do get in touch.
Jacob: And they can be anywhere in the world, or it’s EU, UK only, North America doesn’t matter?
Chris: Yeah, we need to be very careful in terms of how we market and where we’re at the moment.
So there are certain markets we’re in pre-marketing phase in various markets in Europe, and you know, we’re in pre-marketing phase for other jurisdictions around the world as well. So in theory, we’re aiming to launch a global product that is investible. We’re planning for a product to be out of Luxembourg. We haven’t launched a product yet, and so we’re in that sort of [00:23:00] careful liminal space. And to making sure that we’re we’re polling investor interest without definitively confirming exactly how the terms and everything will work.
But we are getting closer to pressing buttons. On launching the entity, and as I say, I think we should be in a position to do so late third quarter or onwards this year.
Jacob: If someone is interested in learning more, where would you point them?
Chris: Well, our global head of distribution Raj Gohil would love to hear from you. His number is O-7. No, I’m just joking. Do hit him up on LinkedIn or wherever.
We have a pretty up-to-date website, actually, so our website impactablegroup.com is a lot of information there. We’ll just reach out direct to Raj or myself or any of the team, and we’d happily engage further and see how we can help.
Jacob: Any last words before we let you go?
Chris: One of the things I would say is that living in developed markets as we do, I’ve focused this conversation entirely on a product that [00:24:00] is focused on financial first impact investing. And from the gaze of this part of the world across the rest of the world, it’s hard to understand the scale of the issues and how those issues can affect all of us.
As I mentioned, we’re seeing the largest industrialization in human history. We currently have 5 billion people living on less than $10 a day. Now, those numbers may not mean very much to a lot of the people listening to this until you’ve sat down with someone who is in that position, who is living hand to mouth, who genuinely is concerned about being, putting food on the table, let alone being able to provide for the medical needs, the educational needs long-term job prospects, and the other aspects of what most of us would call minimum viable living. It’s heart-wrenching when you go and visit and you see people in this [00:25:00] position. And also inspiring when you see people acting with such grace in these horrifically challenging circumstances.
We’re currently talking about what, at least 60 to 70% of planet Earth, living in that level of condition and worse. And my table-thumping belief is that that doesn’t need to happen. And that’s because of this, a couple of things.
One is we have the capital, we have the technological resource, we have the ability. And this is not just an impact consideration, it’s also, you know, something that’s sort of arm-length and uneffective for us in developed markets.
When I mentioned another 2 billion people are gonna be born or more than that, into emerging markets over coming decades, we’re gonna see, for example, a billion people born in Africa. Now, what happens when that billion people is born in that continent and the continent’s warming? It’s less and less livable, and there are no viable jobs. [00:26:00] If we don’t have a green and financially inclusive transition, it will impact all of us. What happens when a hundred million people decide they wanna cross borders into Europe? There’s nothing any of us can do.
And the other factor here is that answering that problem is not only deliverable, but actually it can be delivered in a way that benefits everybody. That sounds almost too good to be true, but it isn’t, and it simply isn’t because. Impact investing doesn’t even have to be, you don’t have to consider the impact to consider the financial viability of increasing developed market portfolio exposures to emerging markets.
As we do that, as we provide this capital, we fill these funding gaps, we will make stronger returns. We will improve the quality of return in our portfolio, and we will help solve these global problems, which ultimately will, in [00:27:00] most of our lifetimes, impact all of us if they aren’t answered.
So the encouragement I think, for everybody is just to take the blinkers off, have a little look at what is actually out there in emerging markets, and try and find a way in that fits your risk category in some aspect of your portfolio. ’cause whatever that is, whether you’re super high risk, super low risk, or anything in between, super punchy returns, low returns, you just want to get your toe in the door. There is an opportunity out there for you to do so if you choose to invest a bit of time in finding out.
Jacob: I applaud what you’re doing and excited to see how this all develops, and excited to see your launch and to shift more capital to where it needs to go in these developing markets and to make a more just an equitable, and sustainable world for all of us.
So thank you, Chris.
Chris: Yeah, thank you, Jacob. Appreciate you taking the [00:28:00] time.
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