Pushing the Boundaries of Impact Investing

The fundraising climate for nonprofits is often challenging due to struggles like donor fatigue, growing competition for the same resources, and limited funding as government and philanthropic contributions stagnate or decline. At the same time, impact investing is experiencing rapid growth, with investors looking far and wide to find investable opportunities.

The convergence of these two trends has led many nonprofits to consider impact investing as a sustainable financing alternative—although in many cases, nonprofits do not make for natural or ready investment candidates. Put simply, most are not structurally or culturally set up to receive return-seeking investment, nor do they have the resources or networks to pursue it.

This is the case in one of the most challenging areas of international development: global health research and development (R&D), a market in which the Bill & Melinda Gates Foundation plays an active role and which Tideline has been researching with the foundation’s support.

However, on closer inspection it’s clear that, even in global health R&D, there may be more potential for investing in nonprofit organizations than meets the eye.

Investing in global health R&D

In a newly published working paper, we examine the opportunities for investment in what are known as global health product development partnerships (PDPs), a group of nonprofit organizations engaged in the development of drugs, vaccines, and other health tools as public goods.

Although most PDPs have been around for less than 20 years, they are significant contributors to the global health product pipeline. PDPs and other public-private partnerships support more than half of the 485 candidates for drugs, vaccines, and diagnostics under development. Yet they receive only about $450 million annually in funding for neglected diseases—less than one-fifth of the total. As with many nonprofit organizations, the question of attracting a more diverse and sustainable mix of funding sources, including from return-seeking investment, looms large for PDPs.

For investors, global health R&D presents many of the same challenges as any underdeveloped market: There is little clarity on investable opportunities, compounded by a set of unique technical and scientific risks. Transaction precedents are also limited; the Gates Foundation has driven most deals to date, whether directly through its own program-related investments (PRI) team, or indirectly through its sponsorship and guarantee of the Global Health Investment Fund (GHIF).

As a result, testing the “investability” of PDPs, for us, meant rolling up our sleeves and diving deep on some specific ideas for investment. Three PDPs were generous partners in the effort, helping identify revenue-generating activities that could potentially form the basis for an impact investment structure in the future:

• FIND focuses on high-quality, affordable diagnostics for neglected diseases. We assessed a number of products that could be marketed and sold in both the developed world and in emerging markets (so-called “dual-market” products). We also explored a funding mechanism to decrease the unit price of a diagnostic as a means to accelerate access, with return-seeking investment supporting the manufacturing scale-up.
• International AIDS Vaccine Initiative (IAVI) advances science and technology in pursuit of an HIV/AIDS vaccine. Through its product development work, IAVI has developed technologies and services with broader—and potentially profitable—applications. We assessed a spin-off of a particularly promising antibody technology and IAVI’s clinical trial testing services, both of which have attracted outside interest.
• PATH accelerates the development and introduction of high-impact, global technologies. PATH's portfolio of diagnostics, devices, and tools contains a number of private-sector collaborations that could present opportunities for generating revenue. We also examined a recent investment in a drug eligible for a kind of prize from the FDA—in this case, receipt of a transferable voucher for an accelerated regulatory review (known as a priority review voucher, or PRV), which provides a financial incentive to investors to support a treatment for a neglected disease that might otherwise struggle to attract funding.

Lessons in investability

Together with a group of expert investors, we analyzed the opportunities our PDP partners identified and determined four steps we think other nonprofits—not just global health PDPs—could take to explore the potential of impact investing as a viable source of funding:

1. Clarify the opportunity. Organizations need to sharpen the rationale for return-seeking capital, making a strong, clear case for investment to outside investors. Not surprisingly, this includes demonstrating the means by which investors will be repaid. In addition, it is important to pull together the data, research, and precedents that reveal the potential of the proposed deal. For example, IAVI’s immunology lab has proven very effective at delivering its services at cost to nonprofit clients. As a result, it has received outside interest for profitable contracts with for-profit entities.
2. Engage management, operations, and funders. It is essential to determine the necessary (and typically considerable) resources to support both the revenue-generating activities and the systems and processes for managing return-seeking capital, while ensuring that the organization’s other work can continue without disruption. PATH was fortunate to have financial resources it could set aside to support the PRV transaction; most organizations will need additional support to develop the investment opportunity, including the hiring of legal and tax counsel, external consultants, and other subject-matter experts.
3. Ensure alignment on investment terms. Organizations should also develop a view on the acceptable boundaries for important financial terms—as well as a definition of their role, rights, and ownership—before entering conversations or negotiations with investors. If FIND pursues impact investment in its diagnostics pipeline, it will need to determine the level of capital it need, the form it should take (such as debt or equity), the potential return, the role the organization will play in the R&D process vis-à-vis other partners, and any legal rights or intellectual property it is willing to share with investors.
4. Leverage partnerships to maximize potential. Consulting with internal and external stakeholders about concerns they may have, as well as potential risks or conflicts of interest, will streamline negotiations with investors. Where possible, organizations should identify a partner with transactional experience who is willing to provide early feedback (such as a member of senior management or the board, or an outside investor or transaction lawyer with whom they have a friendly relationship).

The one completed transaction among the six “hypothetical” deals we examined has been especially instructive: PATH’s raising of a $25 million investment from the GHIF and Clarus, a biotech venture capital firm, to support development of a PRV-eligible drug.

The potential sale value of the voucher was enough to get GHIF and Clarus across the line as investors (PRVs have sold for between $67 million and $350 million); however, for PATH it required a willingness to manage some unusual processes and uncertainties. This included diverting staff members from core activities to fully develop and advance the transaction, an intense and iterative process to engage PATH’s senior management and the board, and significant legal expense to arrive at a structure and terms that worked for all parties.

The undertaking, though, was well worth it in PATH’s estimation, given the PRV could yield a significant windfall of unrestricted funding in the future. And, once registered, the drug in question—a significantly improved treatment for hookworm infections called tribendimidine—will likely have a huge global health impact on the 1.6 billion people infected worldwide.

At first glance, PDPs are highly unlikely candidates for investment, as are many nonprofit organizations with a heavy reliance on donor funding. And while not every organization or intervention will lend itself to pursuing return-seeking capital, our research shows that, under the right circumstances, a reliable source of revenue, thoughtful design, sufficient resources, and an organizational commitment to explore new funding strategies can make the unlikely possible. Impact investing has already helped catalyze innovations and solutions in historically donor-funded sectors like microfinance and the social enterprise market in the United Kingdom. In PDPs, we see the potential for the same revolution in global health R&D.

Read more stories by Amy Bell & Mỹ Lệ Thi Goel.