Leverage Point
Financial Products and Services
Are there enough truly gender-smart investment products, structures and services out there? And are these fit for purpose?
By the Numbers
PRIVATE MARKETS
As of July 2021, there were 206 funds across private equity, venture capital, private debt and permanent capital vehicles in the private space. This represents growth of 49% from July 2020 and 255% growth from October 2017. Total capital raised had cleared $6 billion. As of July 2022 Catalyst at Large estimates that there are at least 100 more private market funds with a gender lens in the market, globally, totalling over 300, and a number of fund managers are on Fund 2 or 3. Many others are still raising.
PUBLIC MARKETS
According to Parallelle Finance Q2 data, publicly traded gender lens equity funds (GLEFs) totaled US$4.7 billion in AUM as of 30 June, 2022. AUM grew 13% during the quarter. Gender lens fixed income AUM was US$7.6 billion.
There are approximately 60 dedicated public market vehicles, between those publicly traded and those only at an institutional level, in addition to those offering SMAs (separately managed account strategies), and those, like Trillium, Boston Common Asset Management and Walden, who use gender as a strong factor of analysis and engagement but do not have a dedicated gender-lens fund.
As of 2021, we counted US$17 billion in global assets related to gender-labelled financial products; this is a tiny fraction of the global sustainable investment universe. In 2022, several of the public market funds reached over $1 billion in AUM, prior to the overall market declines.
GenderSmart View
One thing limiting the volume and array of product is varied underlying gender data. Not the amount of data, but the consistency with which it is used and the underlying depth of analysis.
Sana Kapadia
Head of Content
Less focus on new products, more on adapting existing ones
Instead of creating new products in a bid to shift gender equality forward, some focus has shifted towards adapting existing products and innovating within current structures, whether that’s by introducing a gender lens to ESG strategies or leading with a thematic such as healthcare, climate, or future of work, and then including gender and diversity as part of the thesis. Private market funds that are intentionally focused on women founders or co-founders, or women’s markets, are still growing, but not at the acceleration hoped for pre-pandemic.
“I think there is [now] a wider range of products across asset classes in public, private and debt, equity. That’s where the conversation has evolved. It is no longer ‘why’ or ‘how: it is ‘what should I specifically invest in?’”
“In the public markets, what we were seeing five years ago with this hockey stick growth is definitely flattening quite a bit. In the private markets, it seems like there’s a maturation of the ecosystem components. And I think because most of the major investment houses have now already done something [in public markets], there’s not that race to the top”
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“[There is an] incubator or global accelerator TA facility for entrepreneurs in climate. And we have come in as a donor, pretty much mandating that they apply a gender lens to this program that’s been running for a long time.”
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SPOTLIGHT
EQT’s new fund links carried interest to gender equity at senior management level
In October 2021, EQT launched its new fund, the EQT Future Fund, with a target fund size of EUR 4 billion. This multi-sectoral fund is focused on high impact, sustainable investment opportunities and will have a longer holding term. The fund will invest in line with three key objectives – planet, people and prosperity – and requires its investments to have a clear impact thesis and plan to achieve its asset level and portfolio level KPIs.
One of the KPIs is increased gender diversity, alongside reduction of GHG emissions and improved employee wellbeing. The fund will track the gender diversity progress to achieve a 50% split within the top 20% earners in each company. Up to 20% of the fund’s total carried interest is linked to the achievement of the portfolio-level impact KPIs, including the gender diversity KPI.
Gender bonds and sustainability-linked bonds are growing across regions
Since November 2021 global markets have seen an increase in gender bond activity, with issuances across regions in Asia, Africa and Latin America. According to Parallelle Finance, gender lens fixed income AUM grew 75% in 2021. To date, issuances of gender bonds have primarily been undertaken by DFIs and corporations but work is underway by a number of governments to develop frameworks for sovereign gender bond issuances. Some respondents are hesitant to embrace gender bonds, waiting to learn how effective they prove over time.
With the rise of green and sustainability linked bonds showing no sign of slowing, some gender-smart actors have identified stronger potential for scaling gender strategies via the integration of gender and diversity considerations into these frameworks.
“A lot of people are talking about gender bonds and the opportunities for them on the continent. But I think it’s important, as we’re talking about new mechanisms, to also show how they have worked in other places, and what it has yielded or not yielded. Why would this be something that works for Africa?”
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“Transition finance basically allows any issuer – even an oil and gas company who wants to become less energy intensive – to start tapping into sustainable finance, even if it does not invest in renewable energy. You’re suddenly multiplying the number of potential issuers. And it is quite relevant when you talk about transition. It’s a lot more obvious to add a social element to add a diversity and gender element to your transition because it’s not just transitioning your climate, it’s also transitioning your impact to society.”
“When you look at the number of gender bonds that have come out from Latin America and you compare that to other regions you will see just how they’re trying to lead in this space. The Brazilian Stock Exchange came out with one of the first sustainability-linked bonds that had diversity and inclusion KPIs embedded in their bond issuance.”
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Accelerators may strengthen women-founded businesses but don’t always help attract capital
There are a number of accelerators operating across regions which are designed to support women founders, and fund managers, and fill the gap left by funders. However, while providing value, some actors are concerned that these programmes do not translate into access to capital at scale.
“There is a mismatch of what’s available in the market versus what (some) women are actually looking for. Incubators and accelerators are coming in to fill the gap but enterprises still don’t get access to capital. Entrepreneurs and investors are not speaking the same language; they don’t understand each other, they don’t see each other.”
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“We found that women access less capital, and particularly less equity, at the conclusion of those [accelerator] programs than the businesses led by men do. But is it actually that it’s a barrier to women’s ability to access capital? Or are [women] actually just more sensible about recognising, you know, when the business is in a position to take on external capital?”
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There’s an urgent need for diverse and patient capital
With lifecycles varying enormously across markets and enterprises, there is a real need for patient capital to support businesses as they scale. This is particularly pertinent when considering that some companies – such as those developing climate solutions – may have a built-in maturation time that cannot be rushed to suit VC timelines. What’s more, some gender-smart companies offer solid growth rather than VC-style return profiles, making them unsuitable for the large ticket sizes offered by some traditional investors.
“[We’re paying a lot of attention to] the intersection between women’s entrepreneurship and climate entrepreneurship right now. Depending on the kind of solution that you have, it can be that you need more patient capital over a longer period of time. So, for example, if you are operating a reforestation business, [you are often looking at] 12 years plus before you’re actually going to see it turn cash flow positive, because of the rate of the maturity of trees, versus, say, a fintech business.”
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“I can only think of one fund that I’ve spoken to in the past year and a half that said: ‘We’re actually going to change the range of our ticket sizes so that we can try to capture more women-led founders.’ I think their smallest ticket size previously was $2 million and now they’re going down to $500,000. But that only came up in one conversation in the last 18 months.”
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“We’re still having challenges unlocking the advisor part of the market; that is the money that’s sitting in private banks or even with impact advisors, and it’s a significant pool. Partly the challenge is that there aren’t necessarily the right incentives. Those advisors [are generally] wanting to put large amounts of money to work, and it’s a significant effort to underwrite every fund. The incentive structure for them is always going to be to push those big firm products. And that’s why we ended up in this situation last year, where 90% of [the money raised in private markets] went to 10 names.”
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“In Australia, there’s a [AUD400K] Boosting Female Founders grant, but the structure of that is that you already have to have matching capital and so, they’re really picking winners anyway. There are all these other incredible female founders out there who have really reliable return businesses and are struggling to access capital because they can’t promise a billion dollar business and no one’s really interested in their solid growth.”
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Many investors are still unwilling to offer blended finance
In order to level the playing field for women entrepreneurs or companies that prioritise positive impact for women in value chains, we need to see more investors embracing creative and new financial products and services. These include flexible debt capital (debt-repayment tied to cashflow, for example), revenue-based financing, redeemable equity, loan guarantees, and even recoverable grants. However, many traditional investors, development actors, and philanthropists are reluctant to develop and participate in blended finance solutions, either due to a lack of understanding, misaligned incentives, a lack of good intermediation, or intractable investment policies.
In time, more investors will come to design and utilise inclusive funding instruments, blending development capital, catalytic capital and market-based solutions to meet specific market needs. Public-private collaboration in this way could change perceptions around the potential of development capital to make financial returns, as well as better integrating impact goals into traditional investment frameworks.
“I think it’s really important to use philanthropy more effectively, in conjunction with more traditional financial instruments. Then you have to be careful about not giving the idea that gender lens investing is not financially viable. But in general, I do think blended finance has an important role to play.”
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“I think investors and financiers in general are very pigeonholed. So, if somebody is offering debt, that’s all they push. [It’s the] same thing with equity providers. None of them look at the other form of finance as complementary in terms of helping a business grow. Yet, when you actually take a business apart and you look at growth over a five year period, you can find a place for each of these types of instruments. They all need to form part of a blended solution for growth.”
“One of the things we’re working on is that around 60% of our ventures need flexible working capital that scales up with them – 20% of their revenue, in a line of credit, that grows with them as they grow. This is really hard to get. And so we’re probably going to pilot activators, guaranteeing lines of credit individually with vendors that they love, to help make these things happen.”
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“I think there’s a lot of room to be able to be a little bit more creative without reinventing the wheel. There’s enough that you can do with the basics of debt financing and equity financing. Maybe it starts with really thinking about what needs there are on the ground. It might also be a matter of a better combination of smaller tickets and/or longer tender. So combining these aspects of financing and coming up with structures that are a little bit more flexible.”
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Lack of collateral still poses a problem, especially in emerging markets
There is a gap when it comes to supporting women founders who lack sufficient collateral to allow them to access funding via traditional means. This is a particular problem in some emerging markets, where women don’t have land ownership rights, for example, or where credit histories are in a husband’s name. While some family offices are demonstrating a greater appetite to innovate outside of standard asset classes, collateral will continue to pose a challenge for gender-smart investors until national policies change around land ownership and inheritance, and/or more flexible structures are in place.
“We’re looking at some guarantee mechanism that can support the funnel itself and also increase the risk appetites of investors. When you have a portfolio that is guaranteed with a solid mechanism then you can bring it more catalytic and private capital. But this issue around [the lack of] collateral issue is really a big one. I haven’t seen any concrete examples of places we can go and say: ‘We are supporting women entrepreneurs, they don’t have collateral, are you going to support them?’”
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“Gender lens investing is not part of the vocabulary of most entities in the Caribbean. This has been a gaping hole. And so many banks that will tell you that their best performing loans are women-owned enterprises, but they still haven’t thought about what to do in order to facilitate capital for more women. For example, most women don’t have the same kind of asset base that men have, and therefore the standard practice here, where you have to collateralize your loans, [can’t apply].”
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Emerging fund managers need more support from institutions
Increasing the number of women fund managers has the potential to create positive ripples throughout the gender finance ecosystem. Female fund managers are twice as likely to invest in startups with one female founder and more than three times as likely to invest in a female CEO.
However, women fund managers working on their first or second fund need early institutional support. Funds of funds can be a strong option as they diversify risk and add other value, but many investors still believe that they would rather select their own funds or have an allergy to double fee structures, despite the advantages. Institutional teams and processes can shut out promising fund managers who don’t fit standard guidelines. More data around diverse fund manager performance could help to push institutions into action in this regard but there is still enormous bias in the system.
“One of the best ways to get to scale is through a fund of funds because then you can have one fund with smaller funds underneath them but your risk is limited because you’re diversified across different funds. But then, the pushback we get there is ‘fund of funds have higher fees’ or ‘I want to see that they’re investing in diverse-owned firms with diversity throughout the firm’. All of a sudden, the focus is so narrow and the bar is so high that it’s difficult to have any sort of impact.”
“Some of these institutions don’t really understand the product pathway of moving from a $5 million dollar fund to a $20 million fund and their requirements are too onerous. I think they’re often considering what they need as an institutional investor rather than ‘this is the pathway that we can support these fund managers to get to the level where they could have institutional checks’. ”
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“We’ve picked a handful of funds or players that are solving problems that we think are important, that we want to support to come to market. And then our investment team spend some of their time working with those funds to help them think about their structure so that they can capture superannuation money because obviously that’s the really important pool of capital in Australia.”
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“It’s not necessarily just around gender-specific products; it’s much more around the products that aren’t even focused on gender. I spoke to our asset management team and we distributed about 50% of their hedge funds into our GWM clients. And so just for sake of argument, I said: ‘How many of these fund managers are female?’ They couldn’t tell me. And if something as basic as knowing the gender split of the fund managers is not there within the asset management world right now, what hope is there of us being able to look at the underlying positions and screen those?”
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Moving towards alternative, fit-for-purpose finance
There’s a growing awareness that venture capital isn’t always the best fit for gender-smart strategies, particularly with women founders with normal growth profiles across markets. Actors are calling for a wider embracing of alternative financing options, from flexible debt to revenue-based financing and redeemable equity.
Rather than replicating traditional models that don’t work for a significant chunk of gender funds and founders, gender-smart actors are hoping to see more innovative constructions and financing models that respond to what’s needed on the ground.
This will require a structural mindset shift away from the ‘right’ way to invest – including the focus on billion dollar valuations – towards a more adaptable, inclusive approach.
“I don’t think that getting access to more venture funding is the panacea. That’s not going to solve all of these problems. Because we know you lose control of your company, you get diluted. We need different ways to help get women funders off the ground; we certainly need to unlock more venture funding. We know that many more women are going to need commercial debt for their businesses than are going to be seeking out venture capital.”
“We’re looking at alternative financing options, like revenue-based financing. For us, that’s a way to maintain more ownership for women and BIPOC-led companies, while still generating a good rate of return for our investors.”
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“There are conversations starting here now around what revenue-based models of financing can look like. How can people build funds that support the businesses that women tend to build? And often, businesses that support women, which tend to be relatively low risk, revenue-positive, but are never going to be a billion dollar business. I’m starting to see people trying to work on funds and trying to get capital to support those kinds of businesses”
“Instead of focusing on chasing unicorns, alternative ways of financing can foster better gender and results. Which is not to say that women cannot run unicorns but questioning whether that should be the focus of capital allocators.”
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“In our experience, [progress] has meant looking at different types of financing that do not fit into venture capital and private equity boxes. Thinking about blended finance, investment tools that convert debt to equity, credit enhancements, and risk enhancements that help build more credibility locally to access both financing. More of the development stuff, and much less of the new, flashy, shiny, venture capital technology-led stuff. And that just doesn’t really occupy interest; in North America, people want to see what the next Uber is. ”
“I definitely think that we need more innovative finance models. Traditional VC models that have worked in other places don’t necessarily work here. How we model the funding and how we channel it should not be the same; it should be based on the different markets.”
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Rethinking the structures underpinning investment
Many of the financial structures and economic models which underpin investment vehicles have not evolved in line with changing investor priorities, thereby preventing meaningful progress at scale. By taking a deeper look at the decision making process, infrastructure and policies affecting specific markets, we can lower the barriers to entry and create an ecosystem that supports product innovation. Some respondents mentioned that they are working on public market strategies with an integrated gender lens but these are yet to come to market.
A new wave of women’s wealth also has the potential to catalyse positive change. By 2030, McKinsey estimates that American women will control as much as $30 trillion in financial assets, a three-fold increase from the $10 trillion they held as of 2020.
“At the field level everybody’s doing the best that they can within their existing structures and institutions. But I would argue that we have the wrong structures and the wrong institutions in the first place. DFIs are not evolving or innovating fast enough to keep up with the current situation and set of needs the gender lens investing field is surfacing. And so we need to look at more disruptive solutions and get smarter about the way we look at debt and equity and everything in between.”
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“What we haven’t seen that much yet is a reflection upon the traditional investment strategies and criteria. Say, if our aim is gender equality, what would be an appropriate investment strategy? Or what criteria would we prioritise with that aim in mind? That might also lead you to reflect on presumably neutral investment criteria. And I think that will be the next frontier of gender lens investing, especially if we talk about systemic change, not only bringing the gender lens into existing systems but also thinking about how these systems might be transformed, because many are still the same model as in the 80s.”
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“We would like to see the large institutions who play such a vital role in asset allocation to think about changing the structures of VC funds. The classic VC fund structure has been market standard for 50 years. Every day those VCs are investing in the next generation of start-ups, so why is it that those that are investing are not changing their shape? We need parallel structures that work for investors and needs like liquidity, general partner contributions, and many other things to be able to lower barriers of entry for emerging managers into the VC space.”
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“We’re seeing more women identify themselves as investors and understanding that owning what they own is both a right and a responsibility and stepping into that active ownership. I think that’s an exciting trend.”