Impact IPOs: Current Status and Challenges

Cadira Capital Management met with two companies that went public last year as "impact IPOs". Below is our summary of the current situation and challenges of impact IPOs in Japan based on the content of our dialogue.

According to the “Basic Survey for the Realization and Spread of Impact IPOs,” by Social Innovation and Investment Foundation, impact IPOs are defined as follows:

Impact IPO means that a company seeking to create positive impact (1) conducts an IPO while demonstrating that it is adequately implementing Impact Measurement & Management (IMM), and (2) increases corporate value by explaining the status of impact and IMM to stakeholders so that the company can continue to pursue impact and IMM from the time of the IPO, and by seeking funding from impact-oriented investors.

Some companies have listed as SDG-IPOs in the past. While raising funds with the direct aim of contributing to solving social problems is similar, the difference seems to be that impact IPOs are measured and managed with the intention of creating impact.

According to Dealroom, there are now 256 impact unicorn companies globally, up more than sevenfold from 32 at the end of 2017. Twenty-one have gone public since the survey began, and the number of unicorns with a market capitalisation of more than $1 billion is growing globally, suggesting that impact IPOs are becoming more active.

Meanwhile, in Japan, signs of the expansion of impact IPOs can be seen in the realisation of the two aforementioned impact IPOs, the increase in the number of member companies of the Impact Startup Association, and the increase in the amount of funds raised by venture capital firms making impact investments (hereafter referred to as "impact VCs").

In addition, in May this year, the Domestic Advisory Committee of the GSG, which aims to expand impact investment market and ecosystem in Japan, published the "Guidance for Information Disclosure and Dialogue in Capital Markets for Impact Companies", which provides a basis for fostering a common understanding between impact companies and capital market participants and promoting constructive dialogue.

Cadira believes that the key to a real expansion of impact IPOs is for listed investors in particular to become more impact-oriented. The two impact IPOs mentioned above are mission-driven and consistent in their rhetoric and actions. In addition, they have made very unique efforts, such as clearly setting impact KPIs, which gives us high expectations for the direction the companies will take. However, one issue these two companies seem to have in common is that, unlike shareholders who have been with the company since before it was listed, impact is not often on the agenda when talking to investors in listed companies. Investors' opinions undoubtedly influence management. This means that there is a concern that a change in the investor base as a result of a listing could slow down a company's efforts to create impact.

It may not be surprising, then, that the International Finance Corporation's Operating Principles for Impact Investing (OPIM) call for "responsible exits". This means that when exiting from a portfolio company, impact investors need to find a buyer who understands not only the sale price, but also the mission and vision of the company, and who can work with the company to create sustainable impact and realise economic value. In this respect, a healthy impact IPO is unlikely to be possible without a listed investor who understands the impact of the business.

Although the market capitalization of the two companies we met with is still small, the pre-IPO market indicates that unicorn-level impact companies are emerging in Japan, and once these companies realize their IPOs, it is expected that attention to impact investing will increase. At that point, for the market to develop in a healthy way, it is necessary for listed equity investors, venture capitalists, impact companies and other stakeholders to align their perceptions. We at Cadira Capital Management will engage in dialogue with these market participants to foster a common understanding. We will also consider supporting impact companies by being a recipient of responsible exits as one of our investment strategies.