VPOs often take a proactive approach to identifying potential investee SPOs, identifying potential organisations directly or via the VPO’s own network (e.g., existing portfolio SPOs, other funders or co-investors) or through conferences or business plan competitions. Generating good quality deal flow requires communicating the principles and benefits of VP to target SPOs, who may be unfamiliar with the concept.
A VP investment appraisal typically involves three steps: first screening, detailed screening and investment proposal.
1. First screening aims to identify SPOs with a good chance of securing investment. It involves a combination of desk research and direct engagement with the SPO’s management and board.
2. An organisation that has passed the first screen will generally build a business plan, as the ‘output’ of the detailed screening step.
3. The investment proposal that emerges from the planning phase will consist of the business plan and a commentary that considers investment-related issues, such as stepped investment plans (to limit risk and to base future funding on performance), level of engagement during the investment phase and exit options.
Various portfolio management options exist, including taking a board seat and arranging regular reports and reviews. Where possible, the form, frequency and purpose of engagement between VPO and SPO should be agreed and documented in an investment agreement. Engaging with individual SPOs during the investment phase can also extend to the provision of value-added services.
Adding value to investee SPOs can involve enhancing the organisation’s capacity or understanding of its market, its strategy and operations or its governance and organisational structures. More specialised support may be required occasionally. The VPO can deliver this support directly or through external experts working pro bono, at reduced rates or on a fully commercial basis.
Performance measurement is a key element of VP practice since it is critical to understanding and quantifying a VPO’s social impact. Performance measurement methods range from qualitative approaches to instruments that aim to quantify and relate input to results. A more qualitative method that is effective as a management tool for SPOs might need to be complemented with a more quantitative method that can be used by the VPO to aggregate social performance measurement of its investees at portfolio level.
Exit occurs when the VPO’s engagement with an SPO comes to an end, The approach to exit will vary based on the funding instrument used (grants versus other funding instruments) and the extent to which the SPO is financially self-sustaining. Careful planning of the exit including preparation of the management and Board will be key to a successful exit.