Preparing Social Enterprises for Investment: An Interview with KKR’s Steve Okun
Steve Okun is Director of Asia-Pacific Public Affairs at global investment firm KKR. In this interview, Steve reflects on KKR and Impact Investment Exchange Asia’s social enterprise assistance program and discusses his lessons learned, from the biggest challenges social enterprises face when preparing to raise capital to the importance of assistance beyond capital investment.
KKR is a commercial private investor, but outside of its investment activities KKR has also collaborated with Impact Investment Exchange Asia (IIX) and IIX Shujog on a program that provides pro bono expertise to social enterprises. Through this partnership, KKR has assisted three social enterprises so far, the most recent being India-based recycling company Banyan Nation. How does KKR define a “social enterprise” and what issue does your program attempt to address?
For this program a social enterprise, first and foremost, has to be a for-profit business. Secondly, it has to be generating a measurable social impact. Furthermore, the social returns for the business and how to achieve them must be as primary as the financial returns. The business does this by considering the social impact in relation to the business impact in its decision making. For our program specifically, the social enterprises we work with have to be beyond the proof-of-concept stage, meaning they have to be generating revenue, or else our assistance wouldn’t work in terms of modelling and forecasting; it would be too premature for the business.
Our program, which is one of the key CSR programs for KKR in Asia, was developed out of a desire to leverage our business skills in a philanthropic context. What we learned from our partner IIX is that there are many great social entrepreneurs in Asia, and that there is a lot of third-party capital willing to invest in their enterprises, but that many of the social enterprises are not investment ready. By taking KKR’s business skills and working with social entrepreneurs to get them investment ready, we could generate a great social impact. This is especially true in emerging markets, where the impact an entrepreneur can have with a relatively targeted amount of capital goes a lot further in terms of social return than in a more established market. To date, our program has worked with one company each in Indonesia, the Philippines and India.
What are some of the common challenges that these social entrepreneurs need to overcome to become investment ready?
The first problem is that entrepreneurs don’t know how to present their business to investors. The enterprises we work with are already up and running and have experienced a degree of success, so they don’t need us to teach them how to create or run their business. However, these entrepreneurs do not know what investors need to know about their company. They might not have a business plan; they might not know how to put forth a revenue model with projections. They don’t understand how much money to ask for, or even whether they are better raising equity or debt, and when to ask for it. We are able to help them think through all of that, do the financial modeling for them, and enable them to get investment ready.
In particular, many social enterprises don’t know what the most suitable type of capital might be for their company. Entrepreneurs all believe they need to go raise equity, but that is not necessarily the best option. There are many ways that a company can receive financing across its capital structure. For example, one of the companies we worked with obtained bank financing while another received pure equity; each company is different. East Bali Cashews, a cashew producer in Indonesia, thought that it needed to raise a million dollars in equity. However, given the cyclical nature of their buying and selling seasons, East Bali Cashews needed working capital to buy the cashews, which could then be paid off over the course of the year, much more than they needed equity. Equity fundraising was only needed to expand the factory. We advised them to put together a stapled financing package in which investors would provide two dollars in debt for every dollar in equity. Furthermore, we advised them that raising only equity would actually be detrimental to the company, as it would dilute their share and no investor would invest in a factory in which the founder has little to no stake in their company. Once we were able to convince the founder to take this approach, the company raised US$900,000 in just two weeks after the business plan and revenue model were completed. From our experience social entrepreneurs don’t realize their fundraising options, and this is where an investment professional can really add value.
What are the future goals of this program and how do you see it expanding?
One of the goals of our partnership with the IIX is for IIX to use these projects as case studies to showcase the potential financial and social impact that social enterprises can have and also what challenges remain in this space—namely, that many social enterprises are not investment ready. We want people to recognize assistance, beyond just capital, is what many social enterprises need. Just a little bit of assistance can really impact this space. IIX is a great partner and platform to make this happen. In the future, KKR hopes to expand this model to social enterprises in North America, which are also providing meaningful societal impact; need for financial assistance for social entrepreneurs is not limited to emerging markets.