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Does Impact Investing Work? Vital Capital Case Study Shows It Does

This article is more than 10 years old.

Wesley Clark taking command of USSOUTHCOM (Photo credit: Wikipedia)

When General Wesley K. Clark first heard about the idea of impact investing, he was skeptical. One trip to Angola convinced him that it had the potential to lift people out of poverty in ways that philanthropy and humanitarian aid could not. “This is the only way it will work,” he told me.

In April, while attending the Milken Institute Global Conference, I had the opportunity to visit with General Clark about his role as an advisor to Vital Capital. There he explained the process by which he concluded that there is a social impact role for profit seeking in the developing world.

As I approached the issue of impact investing, anticipating my own trip to Angola at the behest of my host Vital Capital, I had lots of questions:

•             Does the need for a return on the capital invested impair the social impact?

•             How do you manage a project to have both social impact and economic returns?

•             How do nonprofits, governments and investors work together to greatest effect?

•             Can a successful investment on one place be replicated in another?

Bottom line: I wanted to know if impact investing actually works to create the social benefits it aspires to make. So, with these questions in mind, I boarded a plane for a 30-hour trip from Salt Lake City to Angola.

Angola: An Overview

Briefly said, Angola is a big, poor country with a relatively small population, 20 million people, located in sub-Saharan Africa. Colonized by Portugal in the 15th century, Portuguese remains the dominant language. Ravaged by a war for independence in 1975 followed by 27 years of civil war ending in 2002, the country still lacks basic infrastructure like roads, hospitals and schools in much of its territory. Its economy is almost entirely dependent upon oil and diamond exports. Per capita GDP is about 1/10th that of Singapore and more than 10 times that of neighboring Democratic Republic of the Congo.

It is in this context, a land for those who see every problem as an opportunity, that I find myself looking to investigate the effectiveness of impact investing.

Eytan Stibbe

Eytan Stibbe, the founder of Vital Capital, has been described by local media in Tel Aviv as a “King in Africa” because of his growing influence and impact in that region. It seems an unlikely role for an unassuming fighter pilot from Israel. Stibbe gained an international perspective while attending  the European University in Belgium, where he earned an MBA after completing an undergraduate degree in math and computer science at Bar Ilan University.

Military Career:

Stibbe, with whom I spent two days earlier this year attending the Milken Institute Global Conference and who then hosted me as his guest on a tour of a sample of his projects in Angola, after considering the question I’d put to him, concluded that his military career—seven years as an Israeli Air Force pilot, followed by 27 years in the reserves—had no impact on his career.

Kobi Trivizki, who works for Stibbe in Angola, however, concludes that the effect of his military service on his career can be summarized in a single word: “courage.”

Africa:

Stibbe began his African career in earnest in 1991 when Pope John Paul II agreed to visit Angola during a truce in the civil war. At the time, the country lacked the airport infrastructure to allow the Pope to visit safely, so the Angolan airport authority reached out to Stibbe and his partners at the Mitrelli Group. Within a few months they had five portable air traffic control towers installed, thus launching a decades-long relationship with Angola.

Vital Capital:

Following the end of the civil war in 2002, the President of Angola, with whom Stibbe had now developed a relationship, asked the Mitrelli Group for help in rebuilding Waku Kongo, one of the regions of Angola that had served as a front in the war and was therefore most economically and physically devastated.  President Dos Santos, Stibbe says, made a genuine and magnanimous effort to create a lasting peace by immediately inviting senior UNITA leaders to join his cabinet and to immediately fold the UNITA soldiers into the country’s army at their UNITA rank.

To address the problem in Waku Kongo, Stibbe's partner Haim Taib suggested the creation of villages modeled on the concept of an Israeli “moshav,” a village similar to a kibbutz, but with some assets held in common and some held personally.

Commenced in 2003, by 2006, 15 “Aldeia Nova” (the name means “new village”) villages were built and populated in Waku Kongo with 80 to 100 homes per village. Each village was either built to produce milk or eggs. A government owned, Mitrelli-managed logistics center operated a dairy and a distribution operation for the eggs. After several years of Mitrelli leadership, the operation was handed off to locals in 2009. Within two years of the Mitrelli group pulling out, the operations were in disarray.

In 2011, Stibbe raised a private equity fund to make impact investments in Sub-Saharan Africa, calling it Vital Capital. One of its first investments was a 40 percent stake in the agribusiness operations of Aldeia Nova in Waku Kongo.

General Wesley K. Clark:

One of the remarkable characters in Stibbe’s circle—some of Stibbe’s associates who refer to Stibbe’s remarkable sphere of influence as “Planet Eytan” might suggest we call it his orbit—is General Wesley K. Clark, who commanded all NATO forces during the Kosovo War and who made a credible run for President in 2004 and 2008.

At the Global Conference in April I had the opportunity to sit down with the General for an hour to discuss his relationship with Stibbe. The two were introduced by an investment banker. They first met in Milan, Italy when schedules happened to align.

Clark was intrigued by Stibbe’s argument that capital, properly invested, could do more good in Africa than philanthropy. Clark, who has advanced degrees in politics and economics from Oxford, was initially skeptical, but agreed to travel with Stibbe to Africa to see the work first hand.

After his visit, Clark became a rabid fan of Stibbe, Vital Capital and their work. He enthusiastically joined the Vital Capital board of advisors. Among all the people I interviewed for this story, no one was more excited about Vital Capital’s work.

Luanda Medical Center

Vital Capital has invested in what some here have described to me as Angola’s greatest need: health care.

In the center of Luanda, Vital is building a modern medical center to serve the entire country, including people at all socio-economic levels. The center will operate not as a hospital but as a diagnostic center with out-patient surgeries.

The Facility:

The operation is 100 percent owned by Vital and is housed in a purpose-built, 16-story structure built to international standards. Vital leases five floors of the building and manages the entire building for the developers. The five floors operated by Vital will include heavy diagnostic equipment like MRI machines as well as two surgical suites.

Six additional floors will be rented out as clinic space; one of these floors has already been rented to a dentist, Ener da Silva, an Angolan who trained and practiced in Portugal. Other doctors will also lease space in the building, with the option of taken as much or as little space as they want, including the option to use space only on certain days of the week.

Vital’s operation will provide all back-office and administrative services, from billing to staffing, for the doctors who wish to rent clinic space. The doctors will have the option to run all of their own administrative services or to focus solely on treating patients.

The building has been constructed to international standards and features three backup generators on the roof to provide multiple redundancies for the power supply to the building.

Strategy:

The Vital strategy for operating the facility is to include customers from all socioeconomic levels. The wealthy patients will often simply pay for services from personal resources. Some patients who are employed will have insurance. Some companies essentially self-insure, providing health benefits directly by contract with the facility. Finally, the government’s social security program provides health coverage for all citizens, who in certain circumstances will have access to the Luanda Medical Center.

Much of the focus will be on providing specialists from gynecologists to cardiologists and ophthalmologists. Most patients will be referred to the Medical Center by a doctor elsewhere in the country when specialized care or diagnostic help is required.

Vital’s project manager, Shai Ratzaby, explained their strategy by saying, “You can do much more with a great doctor and good equipment than with only a good doctor and great equipment.” That notion focuses their efforts not on bringing bleeding edge technology to Luanda, but on bringing leading edge doctors and nurses and providing them with basic, modern tools of medicine to allow them to treat patients at an international standard.

Ratzaby says that he expects to staff the operations with 25 percent expatriates and 75 percent locals. Part of the mission of the Medical Center, he says, is to train not only the local doctors in the Medical Center but also to provide training to doctors in other hospitals and around the country.

The long-term plan, according to Ratzaby, is to open satellite clinics in locations around the country where people who have been trained well can interact with patients locally. When necessary, the Luanda Medical Center staff will consult or even treat the patients from the satellite facilities.

Impact:

Ratzaby explains that they believe that they have a social impact in three ways. First, they provide a higher level of specialized care across the socioeconomic spectrum. Second, they plan to provide training to other hospitals, raising the overall level of care available in the country. Finally, they hope to expand access to health care with clinics around the country.

Kora Housing

Vital Capital’s largest project in Angola is Kora Housing, which is currently building 40,000 affordable housing units in Angola. Nimrod Gerber is the General Manager of the project.

Market Housing:

While the vast majority of Angolans remain desperately poor by the standards of the industrialized world, the economic growth of the country, fueled quite literally by oil, makes the cost of living there extraordinarily high.

A 1,000 square foot home constructed 50 years ago during the colonial rule of the Portuguese might sell for $150,000 today—well out of reach of all but the most affluent members of the Angolan middle-class.

As a result, many people, even among those who could afford more, live in adobe dwellings they build themselves, most often without any electricity and never with running water or sewer facilities. These tin roofed structures are seen throughout the country, both in urban neighborhoods and in rural communities.

Kora Communities:

Kora is building whole towns from the ground up. Step one: clear the ground of land mines left over from the wars fought here. Step two: create the infrastructure for a small city, including water, sewer, roads and connection to the power grid or, in some case, provide power from generators.

These Kora towns have been designed by famed urban planner, Jaime Lerner, of Brazil. Each Kora community will include pre-schools, primary and secondary schools, technical and vocational schools, medical clinics and health centers, and plenty of green space.

Housing Units:

Each Kora housing unit is approximately 1,000 square feet. Each has three bedrooms—a master bedroom and two smaller bedrooms, two bathrooms, a kitchen and a living room. Some units are designed as two-story townhouses, but most are on one level. A few are built in single level structures, but most units are built in four story buildings. Some of the four-story buildings are designed with retail space on the bottom floor with housing units on the top three.

Community Outreach:

Vital Capital and the Mitrelli Group are active in the broader community as well.

The local Foundation for Arts and Culture was established by the Mitrelli Group and receives the bulk of its funding from Vital Capital and the Mitrelli Group. The Foundation has two primary activities in Huambo, near the Kora housing projects.

The first is the Women’s Empowerment Center, which helps survivors of the war to reestablish themselves on multiple levels, but especially economically.

The second effort is a local Catholic orphanage. The Foundation arranges a small staff of Israeli volunteers on a year-round basis.

Aldeia Nova

The front lines of the Angolan civil war were for many years in the Waku Kongo valley, leaving it utterly devastated. This tragic history set the stage for one of the highest impact investments Vital Capital has made to date.

History:

With the blessing of President Dos Santos, Stibbe's vision for moshavs in Angola was implemented. By 2006, Aldeia Nova was born.  Fifteen villages were constructed with financing from the Mitrelli Group, which also had a contract to manage the government-owned agribusiness assets, including greenhouses, a slaughter house, dairy operations, chick hatchery, grain elevators, etc. The housing in which the families live is identical in all fifteen villages and provides about 700 square feet with electricity and indoor plumbing, including flush toilets.

The Mitrelli Group contract expired in 2009 and the company passed responsibility for managing the Aldeia Nova community assets to a local, government appointed manager. By 2011, however, the operation was falling apart, according to Stibbe.

At that time, Stibbe completed his fundraising for Vital Capital and was in a position to begin making investments. Vital Capital purchased a forty-percent interest in the community operations for $10 million from the government and assumed the management of the operation. According to Kobi Trivizki, the General Manager of the project, Vital is entitled to 100 percent of the profits until they recover all of their invested capital. Thereafter, profits will be split.

Aldeia Nova families are either given the opportunity to buy milk cows or laying chickens

Egg Operations:

Chickens and eggs. Chickens come first for Aldeia Nova farmers.

Families that are operating chicken coops to produce eggs are sold 1,000 chickens and trained to feed and care for them to optimize their laying in coops provided by the program. The purchase of the chickens is financed over time so that egg production covers the purchase price and leaves the farmers with positive cash flow. The chicken coop itself was provided initially to the families selected for the program in its early days.

Aldeia Nova now produces about 160,000 eggs per day across all the villages. The estimated demand for eggs in the whole country is, according to Trivizki, about 3 million, meaning that Aldeia Nova is providing about 5 percent of the daily demand for eggs in the country.

During my visit to Waku Kongo, I also visited the central warehouse with Trivizki and Stibbe, on a day when they were preparing a 500,000 egg order to be shipped to the capital, Luanda, for a large, South African grocery store chain that was shifting its supply of eggs from imported South African eggs to domestic production, including eggs from Aldeia Nova.

The central operations for Aldeia Nova are quite advanced technologically by Angolan standards. They operate a state-of-the-art hatchery where they produce chicks that will be layers

The logistics center run by Vital Capital under Trivizki’s leadership, applies modern technologies to tracking and managing every aspect of every family farm. For instance, Trivizki can see in a moment if a farmer’s production declines, how much feed she is using for her chicks, etc.

As a result of the technology employed and the market for eggs in Angola, it appears that egg farmers will be able to reach annual net incomes approaching $20,000 per year, about four times the per capita GDP, once they have paid off their original chickens.

Dairy Operations:

The dairy operations at Aldeia Nova have a slightly more high-tech look to them. While packaging eggs is a decidedly low tech operation, converting raw milk into yogurt, ice cream, butter and cheese is largely automated.

Every cow on every family farm wears an ankle monitor with an electronic chip so that Trivizki and his team can track the health and production of each and every cow individually across the fifteen villages.

Milking is done in each village at computerized milking centers. The work is easy for the farmers, so easy, in fact, that the work is generally done by small children who follow rather than lead the cow to the milking station twice each day, wait briefly while the cow is milked and then follow it home. While they wait, the kids play with other village kids who have also arrived with their cows, such that it seems that milking time is a highlight for the children.

A tanker truck comes by each day to get the milk and haul it to the central dairy operations.

The dairy doesn’t sell any milk. Instead, it takes the milk and adds value by converting it to yogurt (both liquid for drinking and fruity yogurt you eat with a spoon), ice cream, butter, and cheese. By selling only value-added products, they create higher margins, allowing the cooperative to pay above-market rates for the milk the family farmers produce. According to Trivizki, they presently pay about 30 percent above market rates for the milk and provide some free feed to their dairy farmers as well.

Community:

Each village has a variety of shared community features. Each village has a small medical clinic staffed by a nurse. When I visited one, there were several people working at the clinic, including a local doctor and a several staff.  In a country with a host of development challenges, health care may be its biggest. It was pleasing to see the small medical clinic in each of the villages. The clinics serve not only the villages where they are located but also surrounding communities that are not part of Aldeia Nova.

Each village also features a school. The buildings are high-end by rural, African standards, providing the kids with a genuine opportunity for education.

Vital Capital

Operations:

Vital is officially headquartered in Geneva, Switzerland, but its heart and soul is in Tel Aviv, where Stibbe continues to live. It also has offices in Kumasi, Ghana and in Luanda, Angola. The CEO is Mr. Sandy Oppenheim.

Investments:

In addition to the investments in the Luanda Medical Center, the Kora housing projects and Aldeia Nova, Vital has invested in two other projects to date, including the 8 Miles Fund, a pan-African private equity fund and Focal Energy, a renewable energy company.

Analysis and Conclusions

Having completed my visit to Angola, I return to the questions with which I started my journey.

1.            Does the need for a return on the capital invested impair the social impact?

2.            How do you manage a project to have both social impact and economic returns?

3.            How do nonprofits, governments and investors work together to greatest effect?

4.            Can a successful investment on one place be replicated in another?

Return on Capital:

With respect to the first question, I was rather surprised to find myself flipping the question around. It was so apparent that the demands of capital were driving social impact rather than impairing it, I began to wonder if the absence of capitalistic demands in philanthropy might be robbing it of some of its potential impact. That is a question that for another day, but with respect to today’s question, I could only conclude that actively managed capital that demanded return on investment was creating and not impairing the social impact.

Managing to a Double Bottom Line:

Let’s be clear, however, about one thing. Achieving both social impact and economic returns does not happen as an automatic result of deploying capital. Vital Capital manages to two separate objectives and treats them equally. Without wishing to suggest which objective might be given priority at Vital Capital, the firm works actively to measure both financial returns and social impacts.

Collaboration Among Governments, Nonprofits and Impact Investors:

From the outset of my discussions with Vital’s founder, Eytan Stibbe, it was clear that part of the magic in his approach was working collaboratively with governments and nonprofits.

Nothing was so clear to me about the visit but that the success of the programs in Angola requires the cooperation of various disparate parties. Vital Capital could not be successful alone—nor could any nonprofit or governmental agency accomplish alone what they do together.

Replicating Successful Models

The projects I saw were not equally replicable. Aldeia Nova, perhaps the most appealing of the projects, seems to be the least replicable while Kora Housing and the Luanda Medical Center are designed from the ground up to be replicated and extended both within Angola and in other places.

In Los Angeles in April, I was privy to meetings between Stibbe and the housing ministers of two other African countries that specifically want Vital to replicate their work in Angola in their countries. I agreed not to disclose the names of those countries so as to avoid placing any undue pressure on the final negotiations and initial implementation there.

Final Conclusion:

Based on what I saw in Angola, the impact investing asset class which is still tiny will grow quickly. Consider the choice of a philanthropically-minded family office or foundation between giving money away to a charity or NGO on the one hand and on the other having the opportunity to invest it to have the same sort of impact—and get the money back—and you see quickly that more money is likely to be invested over time.

There already exists a tension between nonprofits and impact investors as they each look skeptically at the business model of the other. The greatest opportunity for each is to collaborate with the other. The world needs the impact that will come from their synergistic collaboration.

I express appreciation to Vital Capital for covering the cost of my trip to Angola.

Recognizing that my Forbes readers are accustomed to pieces of 1,000 words or less, I’ve prepared a more complete article for those who might like a longer take. The longer article will be available on Amazon.com soon.

Please help me continue this conversation by commenting below, on Twitter at @devindthorpe and on FacebookGoogle+ and my personal website yourmarkontheworld.com.