The conviction articulated on its website - ‘We believe that market forces and entrepreneurship can be harnessed to do well by doing good’ - hardly distinguishes the £275m (€333m) London-based sustainable growth investor Bridges Ventures (Bridges) from other investors in the environmental, social or governance (ESG) domain. But its investment strategy certainly does.
While a lot of sustainable investors, particularly those closest to the mainstream, invest to minimise ESG risks, Bridges - which recently celebrated its first decade in business - grabs the opportunities.
“At present, too much of ESG investment is focused on risk,” says co-founder Michele Giddens. “There is increasing understanding among institutional investors that ESG analysis has inherent opportunities, not just risks, but they will still not necessarily select investments for their ESG opportunities in the first place. That is what is distinctive about Bridges Ventures. Over 10 years we have learned that where a small or medium-sized business has part of the solution to a pressing social or environmental need, such as obesity or an ageing population, it may well have an interesting growth opportunity.”
There are two key elements to Bridges’ activities. First, it invests in growth-oriented small and medium-sized enterprises (SMEs) and second, it selects them for ‘impact’, according to four key themes: education and skills; health and wellbeing; environment; and ‘underserved’ areas.
The companies in Bridges’ sustainable growth funds grew, on average, over 20% in 2012, compared with overall UK economy growth of just 0.8%. That is even more astonishing considering that 90% of the businesses in its Sustainable Growth funds are based in the most deprived quartile of UK regions - and about half are located in the bottom decile.
“For every £1 invested, over £4 more additional spend is generated in our target areas,” says Giddens. “On top of that, our investments have saved enough energy to power the city of Derby for a year.”
But while factors such as energy efficiency can be quantified, other aspects are more difficult to measure. “We do not seek to [compare], for example, 500,000 tonnes of carbon saved to 300 people taken out of unemployment or 1,000 people who are no longer obese,” says Giddens. “The mechanisms available to do that do not provide much real information for investors. There are ways to monetise impact to allow different types to be added together but the assumptions behind that are always debatable.”
The fund manager has a three-step process - the so-called Bridges Impact Process. Step one is the selection of businesses with social-environmental impact at the heart of their commercial operations.
Step two is engagement with the entrepreneurs, based on the Bridges Ventures Impact Scorecard, before any investments are made. The scorecard is used for monitoring and tracking the agreed key performance indicators (KPIs), which forms the final part of the process.
“We use the scorecard to engage with the entrepreneurs in order to maximise impact,” says Giddens. “It helps them to know how their businesses are doing in terms of the KPIs and enables us to report back to our limited partners. There is a definite ESG piece in what we are doing - but it is in addition to selecting for impact in the first place. Once we have done that, the decision about whether or not to invest is purely commercial, as there can be no compromise in financial return. It needs to be financial return plus impact.”
One of Bridges’ flagship investments is a company called The Gym, which offers affordable access to health and fitness, often in inner-city areas. Bridges started with a £1m investment in the first gym in Hounslow, West London. According to Giddens, it was in profit from its first month. At present, 19 of these contract-free, 24-hour gyms have opened across the country, with membership, which exceeds 100,000, typically costing £15.99 per month.
“This is the type of business we like to invest in because both the impact and the commercial success were clearly linked,” says Giddens. “We also like to invest where we can put a small amount of capital to work and then follow up the growth of the business. The initial investment in The Gym, for instance, has been topped up with multiple investments, totalling over £10m.”
Bridges counts several pension funds among its investors. The West Midlands and South Yorkshire local authority pension funds have backed the fund manager from the start, with others such as the Universities Superannuation Scheme (USS) and Merseyside Pension Fund coming onboard later.
“We have seen a distinct shift in the investor base between our Sustainable Growth funds I and II,” says Giddens. “By fund II, our investors were split 50/50 between institutional investors and others such as college endowments and family offices. With fund III, the emphasis is shifting even more towards institutional investors. This is mainly because of two reasons: the beginning of a sea change in investors’ attitude toward ESG factors; and our track record. Because of our approach to the SME sector - and value-for-money enterprises such as The Gym or the Hoxton Hotel - we have had robust returns through the cycle. Our theme of small businesses answering a driving educational, employment or environmental need protects us from losses as, often, governments continue to back these sectors throughout downturns.”
According to Giddens, the exits range from 12% to 216% net IRR.
But it is not only the investor base that has changed over the last 10 years. While the Sustainable Growth funds remain at the core, innovations such as property funds and the Social Entrepreneurs Fund set up by the Bridges Ventures Charitable Trust were added to the manager’s portfolio. All funds include start-up as well as growth businesses and are typically execution-based rather than high-tech.
In its first growth fund, which held a larger number of smaller investments than the subsequent funds, some enterprises in the start-up phase failed. However, by fund II Bridges Ventures had clearly learnt some good lessons: all the companies in that fund are still trading today, despite the capital being raised just before the financial crisis.
“We have not moved away from start-up,” says Giddens. “The Gym was a start-up company and has been a success. But we focus on working with a smaller number of companies in the funds now.”
Fund I holds 28 companies, but fund II is expected to close with 16 or 17. Fund III is set to hold 15-20 companies at most.
Fund I closed with £40m in 2002, fund II with £75m - oversubscribed from its initial £50m target - and fund III, launched in December 2011 and expected to final-close in December this year, has had a first close of £72m.
“We see, on average, over 600 business plans a year - so there is more to invest in than we can access through our funds,” says Giddens.
Despite a broad spread of themes, going into fund III Bridges sees a relatively heavy weighting on healthcare-related services, driven by a strong social need to deal with an ageing population and an inefficient National Health Service (NHS).
“In some ways, having so many problems focuses peoples’ minds on how capitalism can serve society better,” says Giddens. “This leads to more need, more innovation, more opportunity, more growth and more opportunities for investors.”