Evaluating Financial and Impact Return for Portfolio Companies

WAVE Equity Partners Example Project

Social Impact Private Equity Firm in Boston

Company Description

WAVE Equity Partners is a Boston based private equity firm that invests early growth equity into rapidly growing companies in the clean energy, food, waste and water Industries. Our goal is to identify and accelerate innovative solutions that will foster prosperity while safeguarding the planet’s ecosystem. WAVE was founded on the principle that positive ESG impact can be achieved without sacrificing financial returns. In fact, when companies sell a product with positive ESG attributes at competitive prices, they differentiate themselves and can take market share from their competitors.

We identify innovative companies with strong IP that are selling superior products at lower cost and good margins. Fund I, which closed in March 2016, is fully invested and reserved with six high performing companies in water recycling /desalination, insulation materials, waste-to-energy and waste-to-fuel, industrial and residential water heating, and safer more powerful lithium-ion battery components. Now, WAVE is investing capital from Fund II to utilize the investment strategies, deal flow, and execution skills successfully demonstrated in Fund I.  The Fund typically allocates $15-20 million per company across two or more rounds. 

Project description

 WAVE is committed to generating superior investment returns for our Fund investors while incorporating ESG issues in our investment analyses, decision-making, portfolio management, and disclosure. Consequently, WAVE reports financial results as well as ESG impact metrics that capture the unique environmental benefits of each portfolio company.  The project research objective is to develop a total return metric for the funds, which will be an aggregation of financial return and ESG/Impact return. Gauging possible tradeoffs between the two sources of return will be one learning from the project. 
  

  1. FINANCIAL RETURN: the team will build a financial valuation model, utilizing Black Scholes option pricing, to compute interim valuations of our portfolio companies in accordance with GAAP standards. The WAVE team will provide mentoring and guidance on interpreting these results through a practical lens.
  2. ESG/IMPACT RETURN: The team will develop environmental impact models for several portfolio companies. These models will need to be customized because the impact pathways are different. For example, the manner in which a high performance insulated biomed shipping company produces environmental dividends (less transportation, elimination of food and drug losses) is different than how a an indoor aeroponic farming facility helps the environment. Understanding the scope and size of this impact is crucial for understanding the economic significance and competitive differentiation of these companies. In some markets that have implemented carbon pricing mechanisms, such as parts of Europe, US or Canada, these GHG reductions can also be certified and monetized.