Project Sage 4.0: Alternative Finance Trends in Gender Lens Funds and Why They Matter
In December, Wharton Social Impact Initiative and Catalyst at Large published Project Sage 4.0, our fourth study of private equity, venture capital, and private debt funds with a gender lens.
The growth in funds continues to be significant, with a 3.5 fold increase in the number of funds since we began the study in 2017. There are now more than 200 gender lens funds in the report — itself only a partial reflection of the total field, since Project Sage covers only those funds that respond to our survey. 22% of the funds in the latest report are raising $100M or more, with the majority in the $20–50M range, and the funds span every sector, vehicle type, and geography. (Note that Project Sage is not recommending these funds, but only reporting what is happening in the field.)
For me, one of the most interesting emerging trends in this year’s research is the growing diversity of vehicle structures and types of capital deployed. Most of what I’m writing about here are not things that we had time to ask about in the Project Sage research, but are my personal perspective. Project Sage asked two very straightforward questions: what is the structure of your vehicle, and what are the instruments you’re using to deploy the capital. In this article, I use my own personal knowledge of the field to look at how and why this is playing out.
Here’s a breakdown of two trends we’re seeing in the field.
Diversification of Vehicle Structures
Some gender-smart fund managers are moving away from classic venture capital and private equity structures to create alternative fund structures that allow them to better meet the needs of the entrepreneurs they are investing in, as well as their own needs. Here are a few:
Holding companies/ evergreen funds give managers the flexibility to let investments run longer instead of being pressured to exit on a particular time frame, as well as giving LPs more flexibility on when they invest, and when they take their return (also known as liquidity windows). Project Sage firms that use this structure include Africa Trust Group, AHL Venture Partners, AlphaMundi, Alta Semper, Alterna — Catalyzer, Beacon Fund, Beyond Capital Ventures, Graca Machel Trust, iungo capital, Kachuwa Impact Fund, Mercy Corps Ventures, Opes-LCEF, Ortus Africa Capital, ShEquity, and WIC Capital. This structure is gaining traction amongst traditional VCs, too: Sequoia announced last year that they were discarding the 10-year venture fund model in favour of a permanent capital vehicle structure.
Collaborative angel funds pool money to invest in the best deals that come through the group’s pipeline, drawing upon the collective expertise and intelligence of the participating angels. These funds don’t have a traditional partner structure and don’t always have paid, full-time staff (although they are run by experienced investors) but they are very engaged with the interests of the investors in the group and have more flexibility with structure than a traditional VC fund. For investors, collaborative angel funds offer diversification and the opportunity to benefit from the expertise of the group as a whole. For entrepreneurs, they offer the simplicity of communicating with one entity rather than the equivalent number of individual angels. Examples in Project Sage 4.0 include Next Wave Impact, Rising Tide Europe, and WIC Capital.
Blended capital which brings together investment across a range of types of investors and capital. Typically, one layer of the fund is pure philanthropy or first loss capital, while the other layers are equity or debt with varying returns profiles. This structure gives the fund managers more latitude to invest in frontier markets and new ideas, or to fund technical assistance to investees, without compromising their ability to attract commercial investors. Examples in Project Sage 4.0 include Care Enterprises/SheTrades, Calvert Impact Capital, LEAP, NESsT, Deetken Impact/Pro Mujer, Root Capital, and Women’s World Banking.
Diversification of Types of Capital
Traditionally, investment capital into private market vehicles has been structured as either straight equity or debt. But over the last few years especially, we’ve seen more fund managers adopting flexible terms and experimenting with different types of capital to provide what Shuyin Tang from Beacon Fund calls “fit-for-purpose financing.”
These include revenue participation loans (aka revenue based financing), where the fund gets their return by taking a percentage of the revenue until a predetermined amount has been paid, rather than being paid back on a fixed loan schedule or taking an equity stake in the companies they invest in. This means that if a company grows at a faster pace, the fund gets paid back sooner. But if something happens to disrupt the company’s growth — like COVID, a natural disaster, or diversion for a new strategy — there is an understanding that it will take longer to pay back the loan. For entrepreneurs, this flavour of capital is often better aligned with how cashflow works in a growing business, but can cause challenges when a business has revenue but no profitability. For investors, revenue participation loans can offer stronger returns than traditional debt models, with a more immediate return than equity. Some of the Project Sage firms offering revenue participation loans include the Africa Trust Group, AgDevCo, AlphaMundi, Alterna — Catalyzer, Altree Capital, Avaana Capital, Beacon Fund, Capital 4 Development, Kachuwa Impact Fund, NESsT, Ortus Africa Capital, Pomona Impact, SEAF, The 22 Fund, Vilcap Investments, and WIC Capital.
Invoice discounting helps entrepreneurs doing business with big corporations or government entities — both of which are notorious for their unfavourable payment terms to suppliers — to bridge cash flow gaps. Instead of waiting up to 3–12 months for invoices to be paid, entrepreneurs can transfer their invoices to another entity in exchange for a cut of the amount due, allowing them to meet customer demand and grow their business. Examples of Project Sage firms offering invoice discounting loans include Advance Global Capital, Africa Trust Group, Avaana Capital, and Ortus Africa Capital.
This is not an exhaustive list of existing alternative finance structures, and there will undoubtedly be more innovative structures to emerge. But this trend is particularly relevant to gender-smart investors because so much of the gender lens capital to date has been in traditional VC or private equity structures that are not always responsive to what women or gender-smart entrepreneurs are building. The fact that these funds have added to their complement of vehicles and capital demonstrates a willingness to think more creatively about what is needed for the entrepreneur.
One challenge fund managers working with alternative fund and financing structures face is that investors are still primed to look for what they already know and understand — so when something different comes across their desk, they don’t always know what to do with it. If you’re an investor, I encourage you to make an effort to learn about these different flavours of capital so that you can make informed choices about what to invest in.
If you’re interested in learning more about innovative and alternative financing structures, a good place to start is Aunnie Patton Power’s recent book, Adventure Finance, which provides a detailed introduction to different forms of financing. I also encourage you to get involved with the GenderSmart community, which is full of innovative thinkers and actors working to improve the investment system from top to bottom (and where we spotlighted some of these alternative financing innovations at our 2021 Summit).
Finally, I encourage you to look at Project Sage 4.0 and take some time to learn more about the funds featured within the report. There are so many possibilities for how capital can be deployed. As investors, it is our job to learn about them and use them to their full advantage.