Transforming Capital Access: How Private Credit is Driving Social Change

Hi and welcome to the Impact on FinTech TV.

I'm your host, Jeff Gitterman.

We're down on the floor of the New York Stock Exchange.

I'm joined this morning by Drake Hicks, Vice President and Head of Impact at Variant Investments.

Drake, welcome to the show.

Thanks a lot, Joe.

Thanks for having me.

So, we always start our show by asking people what drove them to Impact in the first place?

How did you pick this direction in your career, whether it was early or late?

Just what was the trigger that kind of started you off on this foot?

Yeah, no, thanks a lot.

That's a great question, Jeff, and I'm sure interesting background to a lot of your, your hosts and guests.

But I, you know, I grew up in, I grew up in Hong Kong.

I was born and raised in Hong Kong, and a lot of just the curiosity of understanding how different forms of, of life exist and how we are all part of a broader system, I think was generally the foundation of where I thought about how do I find a role, a profession.

That is broad based, that is global, that thinks about people from all different corners.

And after being at Williams, I, I had the chance to speak to a lot of the forefathers, foremothers of impact investing, the Willie Foots, the Brian Charles sides, the Jacqueline Novogratz, who were the really foundational members.

And out of their behest and recommendation, they really said, go out and get some traditional finance skills and come back when you're ready.

It was probably the last time I really did what I was told, honestly speaking.

And so I joined Black Rock right out of the Gates of, um, and was there for 4 years just in traditional finance.

And that gave me the nice grounding and understanding what is a balance sheet and whatnot.

But at the right time, I knew I wanted to see what that meant in terms of the intersection of impact and and finance.

And that was impact investing.

And, and, you know, we all know that the, the terms have all twisted and turned over time.

But I really wanted to find that, um, and really come from this background of curiosity and try to understand how different Forms of people live and realize that there's a way to meld that those two.

That was impact investing.

So at variant private credit, but in the impact space, how do you find that balance of melding traditional finance with serving a different population?

Yeah.

And so maybe, maybe I'll I'll step back and just talk a little about even where Variant came from.

So the premise behind Vriant, since inception, three wonderful founders around 2017.

They had seen this market for capital access for financing niche private credit assets globally, and that's the premise by which they started the fund and the team originally.

And so it was a natural extension of that in 2021 was the impact fund.

And so we were starting to see pockets of, of just opportunities in Rwanda, in Kenya, in domestic America that were not being financed by traditional systems.

And so in 2021 is, it's where very impact and, you know, to all credit of Babel Asser, one of the founders and principals, he said, let's do this the right way.

And so we took time to interrogate what type of impact we really wanted to drive through the lens of original financial inclusion and this DNA of finding pockets that were underfunded and also expanding it out to responsible consumption and also equitable growth, which are three pillars by which we operate.

So talk to me about private credit's role in the impact space and where it fits.

You know, I think we, and luckily I've been around long enough to have seen multiple twists and turns of the impact investing space, and I think coming out of, let's just say, 2017, 2018, 2019, we saw a lot, saw a lot of equity investments.

So investing in ownership, investing in funds and private equity and venture, and there's an incredible place for that.

Innovation gets spurred, you know, crazy ideas get funded.

But the benefit of private credit, and I think it's sometimes the lesser known opportunity and impact is the fact that there's, it's a beautiful expression for impact done well.

And what what I mean by that, it's not extractive, so you're not taking ownership from a founder, you're not taking really that decision making capabilities.

You're growing in line with the founder and the business, so it's more scalable, it's slower potentially, and a lot of, you know, underfunded areas of growth and potential are not always the object for equity.

So private credit has this beautiful place in the impact spectrum that's sometimes unnoticed and really trying to bring that to light.

And I think both from Calls from LPs and investors and whatnot to say, hey, there's an alternative.

And then also on the private credit side we're seeing this play out in real time of how to fund impactful opportunities.

So it's been a bit of a convergence.

At the same time, you know, equity is typically a drawdown.

It takes, it's longer, it's 10 year investment horizons.

And so when you see more liquidity preferences come to fruition with a private credit opportunity product, it's a beautiful time right now for this.

So where does capital actually have leverage to change outcomes there?

Yeah, and I think it's the same maybe misconception with the fact, you know, you aren't taking ownership of a business.

So do you have less, less skin in the game?

Private credit, you can actually influence the structuring from the onset.

So we would talk a lot about right now the additionality behind structuring private credit and, and Maybe I'll just surface an example that's recently happened.

So we invested in a lease to own financing business tech platform in Rwanda.

So it's the idea that you come to me, I extend credit for you to own a motorcycle, and through that motorcycle, you can create entrepreneurial activity in a broader market that increases your income potential.

So there's so many pathways that are unlocked through this financing.

And with our partnership through the gates with this team is we introduced a very non-burdensome covenant to say, hey, with your fleet, let's decarbonize a certain percentage every year, so that we not only are, you know, broadening the aperture for which we can deliver for impact, but we also can be part of the just transition.

Now, one of the things that happened there is it introduced new capital players after the fact.

So right now, Rwanda typically doesn't have as much commercial banking activity or DFI capabilities as you would say in a South Africa or Kenya.

And through this introduction and a decarbonization, they've been able to expand their fleet in an EV way.

But also have attracted different forms of capital.

So right now this team is sitting with a handful of different term sheets on their desk, saying, hey, we're going to take variant out, which we always like, you know, to be part of a deal.

But I think it's also a wonderful story end to end saying we came in, we were positive partners in this, this business growth, but we also saw the outcome and bringing in and crowding in additional cheaper forms of capital as they scaled and grew into it.

That would not have been available if that covenant hadn't been introduced.

And so I just think that's a really great example of how private credit can influence the deal outcome.

And when you're doing that, do you provide impact reporting through V that lets people know all these different factors?

Do you tie it back to the SDGs, or do you have a framework?

100%.

And, and this is all due credit to the team that was built and predate dated myself is I really came into a Strong foundation and DNA for impact and all due credit to the team here, but we invested in a 7-step process.

We co-developed with Tideline, a big player in the market, and we said, OK, I want you to be able to trace the dollar impact when you put it in our fund and how it goes through the pipeline, how we assess it for additionality, intentionality, and measurability at a really high level.

But each step of the way, I want you to be able to really follow that path.

And so we start with exclusions.

It's, it's large. faith driven.

It's a no go zone.

And this is at a firm level saying there may be an opportunity to compete to kind of garner strong returns, but that's not an area we are really interested in going.

The second level is exclusion.

So where are the operation of the business at risk?

Now, it's not necessarily going to preclude us from investing, but it's introducing and surfacing questions that we need to address by the time we go to impact committee, Committee with a capital C.

So you know, we're really Focus on that.

The 3rd level is capital access and need.

We want our capital to matter, so we're comfortable going in early.

We're comfortable being seed debt in circumstances where models are unproven, where equity is not really available, right?

So we can really grow into that.

But then we start saying, and, and just going back to your point here, Jeff, is SCG alignment.

We want to know what table are we sitting at.

If we're sitting at that 17, you know, sustainable development goal tables, where are we really situated?

Um, 4th is where we really express that and interrogate that impact.

So we go to committee, it's a 5 person committee group, and we vote.

We bring the deal teams in.

Any questions that were not addressed, we really kind of create a pinata situation to say, can we really build comfort around that?

So we're assessing around 4 different pillars, and we're also assessing around what is currently in our portfolio, what deals have we passed on, and is there any relevant policies.

So we Hold policies for gender inclusivity that really aligns with TX Global.

We hold policies for affordable housing.

We want to be deeply affordable.

So we're looking at locations with, you know, 40%, 60% AMI or deep affordability and stability there.

If we pass that threshold, it's a dual mandate.

There is impact eligibility, meaning when we go to investment committee, there will be an opportunity to invest out of the impact fund. report out to Iris Plus.

We want to know if you've got tons of deals on your table, what are you benchmarking as it gets?

We want to, we want to make sure we're aligned there.

Now, one thing that I want to be very clear about throughout that whole process, I'm fully in the loop.

I'm talking to the counterparty themselves.

I'm aligning on KPIs of what are we doing day one?

What are we looking at 6 months down the line, and what are we looking at 12 months down, down the line.

We want to know once we're investing in the in.

Structure and we've built that impact pipeline to you.

Can we incrementally work together to even address forward and develop on those impact goals?

If we're already investing in it, you, you really want to make sure that's a mutual conversation.

We also want to continually invest in teams, right?

So even though our tenure of our loans are around 34 years at, at max, we want to say, OK, in a couple of years' time, are we going to come back and work together again?

Those are all what I'm judging in the 7-step process.

So in the last 3 to 4 years, we've seen a tremendous rise in private capital and interest in private capital from the markets, and we've seen over the last 6 months, a lot of challenges to private credit.

Where are you attracting and drawing capital from?

Yeah, definitely.

So I'll break it into two, right?

So even within the private credit segment, we at Variant since 2017 have been doing senior secured asset backed lending, and we know it's been a very popular space, but having that history behind us has allowed us to build a name and reputation and also go after niche assets rather than kind of the bulge rocket assets that we know are a little bit in the news right now.

Um, it doesn't mean that there isn't space for these all, but we're, we're saying that we've kind of hyper focused on one area and we're not susceptible to mission creep there, you know, we're really focused on that niche private credit asset back lending space, and that really does pervade into the strategy that we do with the impact.

So it's an extension of that.

We traditionally underwrite in the same way you would for a traditional fund.

Now, on the flip side, on the impact side, we're not direct lenders, we're multi-thema.

And we're also global.

So what that allows us to do is to calibrate into areas of strength and also calibrate outside of areas of weakness.

The fact that we're not siloed in one theme has really benefited our performance over the long term, and the fact that we can say, hey, you know, we understand Kenya really well, but we also understand domestic America.

And just to be clear, we are definitely domestic tilting.

We do 60 to 70% locally, and we look abroad for select emerging markets that we Really understand well, but Mexico, for example, 2 out of 4 deals we did this quarter was in Mexico.

So it's a really example of a strong market that we knew really well.

We went on site, we built comfort, and we'll continue to invest in that space.

So when we think about private credit, you know, in in the news right now, we've been able to avoid some of the potshots that have happened based on the fact that we stay true to our strategy.

We've continued to invest in areas that we understand and markets we know.

So talk to us about the investors.

Who's your ideal investor at Varriant?

Fantastic.

So Varit was built out of wealth.

So RIA channels the retail investors that have these inklings for mission.

So whether they're large family offices, high net worth that say, hey, you know, I've made some money, maybe in a traditional space, and I want to align my portfolio to really reflect.

Those values over the long term.

We hear a lot of words legacy, especially in those reaction to what's happening globally and the uncertainty.

How can it be part of a better story?

So that's kind of one can.

Now as we've grown and had a couple of years under our belt, we've definitely attracted more institutional investors.

So when you think about the future and therein and impact being able to do good and do well, and you can make money by doing good.

What would you tell our guests about why to be thinking more about investing in variant that there may be traditional types markets, especially that they're scared of right now?

Yeah, you know, first of all, the proof is always in the pudding, right?

So look at the data and understand what you're investing in.

I think when we look at the impact spectrum at large, you've got everything from grants to catalytic capital that's targeting anywhere from 2 to 4%, let's just say, all the way up to the traditional houses that have now spun out different impact funds and and are really trying to showcase incredible performance in certain ways.

And so from that type of when we think about varying itself, what we're asking the investor to think about is just ask more for your money.

You can see it.

I'm a dedicated resource to the impact.

So what that means is when I'm working with a counterparty, I'm asking the right questions.

I'm building educational proponents to their impact story.

I'm trying to say, hey, how can we learn from this market?

You're, you're addressing something that's unmet, whether it's the underserved population or you're meeting a capital access need because the financial regulatory environment is necessarily not as.

Built for that.

That happens.

That happens in our corners of New York City, right?

So how do we really finance those gaps?

Because that's unlocking innovation in different pathways to job creation, job stability and education.

Now, so when I say ask more for your money, which is essentially like part of our theory of change, and it's very almost cliche at the top, but we really dig into the the components that really bear witness to that.

What I'm saying is, any investor can generate a certain form of investment in impact capital and good businesses, and just look for that, you know, it's fundamentally that.

Drake, thank you.

Anything else you want to tell our audience before we sign off?

No, it's such a pleasure.

I, I feel incredibly grateful to be in this space.

Jeff, you've been around for decades.

Um, thank you for doing the work you do.

I'm only 15.

Two years at max, you know, but no, really appreciate the time and, um, please feel free to come to me, come to any of these amazing players in the space and just ask for for your more for your money.

Well, thanks for the work that you do, Drake.

I appreciate it.

That's it for the impact on FinTech TV.

I'm your host Jeff Guterman.

Until next time.