Volery Capital Partners
Signatory type: Investment manager
HQ country: United States
Covered in this case study
Asset class: Private equity
Geography: North America/Western Europe
Sector: Financial services
Volery Capital Partners is a private equity firm focused on the financial services industry – we invest in asset managers, specialty and consumer finance and insurance companies aligned with our impact objectives. We provide strategic growth capital and hands-on support to help management teams achieve new levels of growth, financial performance, and positive impact.
Why we focus on SDG outcomes
We focus on financing solutions to climate change and economic inclusion. We look for business models where revenue and impact are mutually reinforcing to ensure that companies’ growth initiatives and market strategies will remain aligned with their (and our) impact objectives. We believe that having insight into and effectively managing positive and negative impacts is fundamental to reducing risk and creating long-term value for stakeholders, including our investors, local communities, society, and the environment.
How we focus on SDG outcomes
When developing our investment strategy, we used the SDGs to identify specific priorities within climate change and economic inclusion. To help guide our strategy and measure and manage our impact aligned with the SDGs, we developed an impact framework called alpha, which assesses three main areas of a target company: impact process, impact performance, and company values.
Our alpha framework was developed specifically for Volery’s strategy but incorporates many industry standards, as shown in Figure 1. We use it to assess the merits and risks of an investment, areas where we can engage and support an investee, and as a management tool to drive improvement.
Figure 1. Our impact framework - Alpha
We believe there is a relationship between strong impact process management and strong impact performance. Through our alpha assessment, we look at a variety of processes and practices that each have a direct link to impact performance, including stakeholder engagement, risk identification, reporting and industry leadership.
We assess practices related to how the company identifies, measures and manages impacts through its business model (process) and activities related to company mission, employee engagement and diversity, equity and inclusion (DEI) (company values). While not directly tied to the SDGs, these processes and practices are essential for contributing to sustainable development objectives.
Both the process and company values are comprised of multiple best practices that we assess and assign a specific score to against a fixed rubric (ranging from No consideration to Pioneering) – see Figure 2.
Figure 2: Example best practice assessment
The performance piece of the framework is about measurable outcomes and focuses on quantitatively assessing SDG alignment. For every investment, we formulate a specific impact thesis, aligned with our overall investment thesis, that articulates the positive social and/or environmental SDG-linked outcome(s) we seek to advance.
Each impact thesis is anchored in a theory of change, clearly tied to the SDGs, and aligned to industry standards such as IRIS+ and the Impact Management Project’s five dimensions of impact. This impact thesis and theory of change form the basis of the KPIs that we use to set a baseline and track throughout the lifetime of our investment. The frequency with which we track KPIs is tailored to the individual investment, but the longest timeframe is annual. We have developed processes to engage with investees if they underperform, such as helping the company identify external consultants to address a specific issue.
Where we cannot identify a clear theory of change with measurable outcomes and evidence to support them, we will not make the investment.
Although our impact thesis is focused on positive impacts, how an organisation identifies, mitigates and manages negative impacts is an important part of our analysis. In many instances, reducing these negative impacts is also aligned to the SDGs.
Example: Alpha in practice
Across different sectors, business models, impact theses, and focus areas, alpha provides a consistent approach to assessing different investments. In addition to assessing specific deals, we use the framework to screen investments – below we highlight what makes a good investment within our economic inclusion mandate.
What Volery looks for when investing in financial inclusion
Our economic inclusion strategy focuses on several themes, including education and workforce development and financial inclusion. Roughly 45 million US consumers lack an accurate credit score and consequently, cannot access safe and affordable credit options. To address this, we target companies with unique credit underwriting models that help improve access to credit for previously excluded individuals and small businesses.
Financial services companies that provide credit to underserved individuals have the potential to do more harm than good – aligned with the many objectives outlined above, we use our impact framework in part to assess and measure these potential negative impacts.
From a process perspective, we look for companies with business models built on including individuals (or businesses) that have previously been excluded from affordable finance options and that have deep expertise and leadership within the financial inclusion field.
We are particularly interested in how companies engage and collaborate with policy makers, non-profits and academics on research and activities related to financial inclusion. We also focus on how a company identifies, mitigates and manages negative impacts around data security, customer privacy, default rates, debt-to-income ratios and credit score decreases, among others.
Considering performance, our analysis goes beyond access to credit to look at how a company helps improve consumer financial health (indirectly aligned with SDG Targets 10.2-10.5). Figure 3 represents an example theory of change which links the company’s business model to the ultimate impact outcomes we hope to achieve. This theory of change serves as the basis for our impact thesis. Where specific SDG targets are not applicable to a business model, we identify third parties that provide clear guidelines around the relevant impact objective.
To assess consumer financial health, we use the framework developed by the Financial Health Network. The SDGs and these supplemental frameworks help us identify measurements that the company can regularly report on (e.g. credit score changes, debt-to-income ratios, customer demographics). Other metrics, such as savings rates, might be beyond the company’s control to report on but might be available through partnerships with NGOs and academics.
Figure 3: An example theory of change for a company focused on improved consumer health
When assessing company values, we look at DEI and employee engagement practices, and more specifically, look for companies that have a clear mission, vision and strategy aligned with improving consumer financial health.
Other applications of Alpha
In addition to helping screen individual investments, we have used the underpinnings of the alpha framework to create guardrails around investment types that we will not invest in, such as buy-now-pay-later business models. To date we have screened more than 100 deals focused on economic inclusion and have made two investments.
As the example above illustrates, our alpha framework provides a method to capture the quantiative and qualitative aspects of impact across common dimensions. We have also used it to flag opportunities where we can provide value-added services to support portfolio companies, such as helping them to measure and report on the impact of their services.
While still early in its application, we welcome the opportunity to discuss the tool and our approach to impact measurement and management and look forward to sharing additional insights as our portfolio matures.