GIIN: Sarona is one of the oldest impact investing firms. Tell us why Sarona chose to focus on investing for social and environmental impact.

GP: Sarona started 57 years ago with idea that we ought to be able to use investment capital and the expertise of successful business people to benefit poor communities by investing in businesses in these communities. Environmental consciousness entered our investments more recently, within the last six years or so. We can build a better society through choices we make, including the choices we make with our investment capital. That's why Sarona was started, and that's still how the owners and the board of directors see it. Impact is deep in the veins of who we are, and I can't imagine that it ever would be different.

GIIN: Your most recent fund, Sarona Frontier Markets Fund, is a fund of funds. Why did you decide to create a fund of funds?

GP: As a financial intermediary, we are a bridge between private investors and investment opportunities. In the industry broadly, such intermediaries have spent a fair bit of time trying to figure out how to successfully invest in developing economies, and have spent less time creating products that meet the needs of interested investors. Our sense is that there are more interested investors than products to meet their needs. A lot of investors are sitting on the sidelines because they can't commit to a ten-year investment hold, or they need more liquidity, security, and diversification. So, we created a diverse fund of funds with an evergreen offering, which means that investors can enter and exit the fund annually. Through Sarona Frontier Markets, we help high-quality fund managers gain access to the private capital markets, and we create a diversified portfolio that allows private investors to get into impact investing.

GIIN: Tell us the basic parameters of the Sarona Frontier Markets Fund. Are you investing in debt or equity? How many underlying funds are you targeting? What's your average deal size? Are there any other investment guidelines or objectives?

GP: Frontier Markets invests exclusively in private equity funds. Currently, we are invested in six underlying funds, each of which enters into transactions of $2-$20 million in their underlying portfolio companies. Next year, we expect to add another half dozen funds or so, and ultimately we expect to diversify across 25-30 funds. Right now, we're investing between one and three million dollars in each fund. We hope to grow to deals ranging from five million to fifteen million dollars per fund. The funds we invest in are generally sized between $50 million and $200 million, so we are limiting our exposure in any one fund.

GIIN: The traditional fund-of-fund model is designed to balance financial risk. How do you mitigate risk in the Sarona Frontier Markets Fund? Are there unique considerations because of the social and environmental components of the Sarona Frontier Markets?

GP: This fund of funds is diversified across different developing countries and different industries. The underlying funds invest in renewable energy, clean tech, low-income housing, transportation, agricultural production, microfinance, and other financial services. From a financial perspective, the diversification is significant because many investors are apprehensive about developing country markets. Diversification allows them to put their toe in the water without a huge risk of financial loss. From a social and environmental perspective, investors can capture more positive impacts in a fund of funds than they can by investing in any one company or fund.

GIIN: Do you target specific social and environmental goals? How will you measure performance against these goals?

GP: We target environmental impacts that address air pollution, climate change, water pollution, and resource or biodiversity depletion. On the social side, we measure jobs created and we review management policies and practices, purchases of supplies from poor producers, and distribution of life-enhancing products to poor consumers and communities. These are not yet entirely measureable goals. For example, carbon emissions are the easiest and most common measurement to address climate change, but there's no commonly accepted way to measure how a company affects water cleanliness. One example of an investment that matches our goals is a fund that supports renewable energy in India. Not only is this an environmental fit, it's also social because it extends the electricity grid to rural villages that might not have reliable electricity now.

GIIN: How do you evaluate prospective funds? Walk us through your process.

GP: In the last 18 months, we reviewed about 140 funds and we've invested in six. We look for funds that hit all of our targets: financial, environmental, and social.

Initially, we review their documentation and make telephone calls to review financial risk and return, ethical management practices, and social and environmental impact. If they make it to our short list, then we make a fairly rigorous on-site due diligence visit. Because we're a fund of funds, we essentially buy into fund managers, so we also ask questions to determine whether the fund manager shares our values. We review with fund managers the potential social, environmental, and governance impact they can have on their portfolio companies. We ask questions like, what have you done in the last 100 days, or six months to change the social or environmental practices of your underlying portfolio companies? Lastly, we follow up with reference checks through legal firms, accounting firms, chambers of commerce, and we talk to other investors participating in the fund. With our rigorous due diligence process, we're striving to become the industry leader in identifying the best private equity funds around the world.

GIIN: Do you encounter challenges when evaluating funds because social and environmental performance reporting is inconsistent across the industry?

GP: Yes, absolutely. These funds have many investors, and they all ask for different performance reporting. One fund manager asked if we could get the investors to agree on common reporting metrics so that he wouldn't have to create different reports for each investor. We hope the GIIN's IRIS initiative can help address this issue.

For now, I'm OK with some inconsistent reporting because each fund manager has a slightly different strategy, particularly when they focus on different industries. A fund focused on renewable energy will report how many megawatts they create from hydropower or solar power, and how many households have been supplied with electricity. Whereas, a fund focused on housing projects will report how many houses they've built and how many families have new homes. As a fund of funds, we're involved in a lot of different things. Though it's a bit of a mess, this is all good.

GIIN: Do you expect to make trade-offs between financial return and social or environmental impact?

GP: We think we can achieve very healthy financial returns - we target 12-15% IRR returns to our investors - while also pushing for social and environmental impact. Taking a shortcut by not considering environmental or social factors, or even causing harm, might make a higher profit in the immediate short term, but we take a long terms values approach. Investing for a better world is not a zero-sum game. Impact investing creates value - social, environmental, and financial - so you really don't have to give up a lot of return.

We believe that impact solutions must have economic viability to have long-term success. So we are very aggressive on financial return expectations. We also believe that companies will be more stable in the long run if they treat their customers and suppliers well, recognize and serve the large markets at the base of the economic pyramid - both as suppliers and as customers - and anticipate environmental changes and potential environmental harm. In the long run, these types of companies will outperform companies that are after a quick buck.

GIIN: What types of investors have invested in the Sarona Frontier Markets Fund?

GP: Right now the fund's investors are mostly high-net-worth individuals, family foundations, and a few small family offices. We expect that to expand to include additional family offices and some institutional investors, like pension funds.

GIIN: Why are these investors interested in an impact investing fund of funds?

GP: Our investors are interested in the Fund predominantly because it gives them a diversified portfolio in developing country markets at the small and medium company level. They recognize that developing countries' GDP has been growing more strongly than ours, and that small and medium enterprises in these countries are growing more strongly than large companies. These companies serve a growing global middle class, which has created strong internal demand for food, housing, transportation, and energy within developing country markets. Most investors don't have access to mid-market investments in developing countries. This fund of funds captures that market, and gives investors a portfolio diversified across a broad basket of countries and industries.

GIIN: In general, how interested are your investors in the Fund's focus on social and environmental impact?

GP: Among the high-net-worth investors, most have either invested in impact funds or are involved in philanthropy, and so the Frontier Markets Fund feels right to them. On the institutional side, the interest is weighted more towards participation in developing country markets. Institutional investment managers may like the fact that this is an impact investment, but that doesn't matter much to their investment committee. In most cases, managers of capital haven't been given a mandate to consider impact. There are some smaller pension funds affiliated with religious organizations that add impact values to their investing mandate, but examples like this are still few and far between. Communicating the value of marrying financial returns with social and environmental impact to investors is what our work is all about.

GIIN: Creating a fund-of-funds addressed a gap in the impact investing market. What other gaps within the impact investing industry can be addressed by new investment products?

GP: Today, almost all impact investment products are available only to accredited investors. There are a lot of ordinary people who would love to participate, but they can't because they're not accredited investors. The Calvert Note has helped address this, but there's not a lot of retail product dedicated to the impact investment space, and there's not much diversity of product for the small retail investor. Because most impact investments are by definition not publicly traded, getting product into retail hands is a tough nut to crack, but it needs to be done.

Secondly, people should be able to more easily invest in publicly traded firms that target environmental and social impact in developing country markets. A good next step would be the addition of some deliberate impact into screened socially responsible investing (SRI) funds, and expansion of these funds into developing country markets. These types of funds exist in North America and Europe, but there's a gap in funds that invest in publicly traded securities in developing countries. This will take some creativity, but it will allow many more interested investors to marry their hearts and their wallets.