Faith Morrow
The world of investing is changing, and it's being driven by two forces: the internet and a desire for transformative change. The internet has been revolutionary for investing, making it more accessible, efficient, and transparent. It has lowered fees, increased information availability, and given power to individual investors. But there's a growing movement to use investment as a tool for social change, challenging legacy investment approaches and seeking to redirect capital towards initiatives that promote sustainability, social equality, and justice. This is known as Transformative Investment. At the same time, there's a push for a new investment logic, Transformation Capital, which aims to catalyze systems change to address climate change and build a resilient society. This involves rethinking how capital is deployed to accelerate the transformation of socio-technical systems.
What You'll Learn
The internet's impact on investing
The internet has been a disruptive force in the world of investing, bringing about a paradigm shift in the way people invest. The internet has made investing more accessible to individuals, giving them greater control and privacy over their financial decisions.
One of the most significant impacts of the internet on investing is the vast amount of information available at a low cost. Investors no longer need to rely on libraries or company-provided financial reports, as they can easily access online company reports, financial documents, and annual reports on company websites or through the Securities and Exchange Commission (SEC). This has levelled the playing field, as previously only financial intermediaries like brokers and investment managers had the resources to obtain such information. Now, investors can make more informed decisions by analysing financial data and staying updated with business and industry news.
The internet has also made investing more affordable, with a dramatic decline in commission rates for trading securities. Online brokers often offer low fees for common stock trades, in contrast to the high commission rates charged by full-service brokers before the internet became widely available. This shift has reduced the power of traditional brokers and placed more power in the hands of individual investors.
Additionally, the introduction of electronic markets and automatic order execution has increased the efficiency of markets, reduced fees, and improved transparency for investors. High-frequency traders (HFTs), despite being controversial, have contributed to reducing bid-ask spreads, lowering costs for investors.
The internet has also changed the way people interact with financial services. Investors can now buy and sell stocks, bonds, and mutual funds online, as well as compare rates for insurance, mortgages, credit cards, and other financial products. The convenience and accessibility of online investing have made it easier for people to actively manage their finances from the comfort of their homes.
However, online investing also has its drawbacks. The ease of trading online can lead to impulsive or excessive trading, requiring investors to maintain discipline and stick to their long-term financial strategies. The immediate access to financial news and "hot tips" can be detrimental if investors make hasty decisions without thorough research.
Overall, the internet has had a transformative impact on investing, empowering individuals with information, reducing costs, and providing greater control over their investment decisions.
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SPACs as an alternative to IPOs
Special Purpose Acquisition Companies (SPACs) have become an increasingly popular alternative to IPOs for companies looking to go public. SPACs are shell companies that raise money through an IPO without having identified a specific acquisition target. They are formed by a group of investors, called sponsors, who put up the initial capital in exchange for about 20% of the shares in the SPAC. The SPAC then uses the raised capital to acquire a private company, which becomes publicly traded through a reverse merger with the SPAC.
SPACs offer several advantages over traditional IPOs. One of the main benefits is speed; the process of going public through a SPAC merger can be completed in 3-6 months, compared to 12-18 months for a traditional IPO. This faster route to accessing public capital markets can be particularly beneficial for mid-market companies that need to raise capital quickly. SPACs also offer greater certainty over pricing. In a traditional IPO, the company's valuation is determined by market conditions at the time of listing, whereas in a SPAC merger, the pricing is negotiated upfront, providing more predictability and reducing the risk of market volatility.
SPACs also provide access to operational expertise. Sponsors of SPACs are often experienced financial and industrial professionals who can leverage their networks to offer management expertise or take on board roles. Additionally, SPACs can be structured to allow for a faster and more streamlined due diligence process, which can be advantageous for companies with limited resources.
However, there are also some drawbacks to consider when choosing between a SPAC and an IPO. One of the main disadvantages of SPACs is the potential for shareholding dilution. SPAC sponsors typically own a significant stake in the SPAC and may receive additional shares through earnout components, diluting the ownership of public shareholders. There is also a risk of a capital shortfall in a SPAC merger due to shareholder redemptions. Initial SPAC investors can redeem their shares, and if redemptions exceed expectations, it can lead to uncertainty in cash availability, forcing the SPAC to raise additional funding.
Another consideration is the compressed timeline for public company readiness. The target company in a SPAC merger has to prepare for SEC filings and establish public company functions under a much shorter deadline compared to an IPO. Additionally, the financial diligence process in a SPAC merger may be less rigorous than in a traditional IPO, potentially leading to restatements, incorrect valuations, or lawsuits.
In conclusion, SPACs offer a faster, more predictable, and flexible alternative to traditional IPOs. However, companies considering a SPAC merger should carefully weigh the benefits against the potential drawbacks, including share dilution, capital shortfall risks, and a compressed timeline for public company readiness.
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Transformative investment
The world is facing a critical juncture, with the cascading crises of climate change, biodiversity loss, and growing inequality. To avoid impending disasters, a radical shift in investment practices is imperative. This is where the concept of "Transformative Investment" comes into play, aiming to redirect capital towards systemic change and a more just and sustainable future.
Deep Transitions Lab and the 12 Principles:
The Deep Transitions team, comprised of sustainability experts, academics, innovators, and investors, has developed the Transformative Investment approach. This method is being practiced at the Deep Transitions Lab, where they conduct experiments, develop tools and metrics, and foster a community dedicated to innovation and real-life action.
The Deep Transitions Investment Philosophy is guided by 12 principles aimed at creating systemic impact. These principles provide a framework for organisations to make transformative investments, triggering multi-dimensional change and reshaping the rules of socio-technical systems.
Moving Beyond Traditional Investment Paradigms:
Traditional investment approaches often fall short in addressing the urgent need for systemic transformation. This is particularly true for investors focused on sustainability, such as multilateral institutions and ESG (Environmental, Social, and Governance) and impact investors. The current financial industry is constrained by axioms, mathematics, and structures that hinder its ability to drive the profound transitions required to tackle climate change and societal challenges.
Introducing Transformation Capital:
To address these limitations, a new investment logic known as "Transformation Capital" has emerged. This approach recognises the need for a different intent, mindset, methodologies, structures, and decision-making frameworks. It challenges the traditional monetary definition of value and embraces a broader definition that includes political stability, social equality, and ecological sustainability.
Transformation Capital seeks to identify and engage Sensitive Intervention Points (SIPs) in socio-technical systems, where small changes can trigger larger, irreversible transformations. It emphasises the role of governments and public policy in actively shaping and creating markets, coordinating different types of capital, and pursuing strategic blending to align with sustainability goals.
The Power of Participatory Investment:
Transformative Finance, a research, education, and implementation partner, promotes the concept of Participatory Investment. This approach involves investing with meaningful input, decision-making power, and ownership from grassroots stakeholders, particularly communities of colour and the working class. By placing communities at the centre of control and agency, Participatory Investment has the potential to drive transformative social change.
The Role of the Internet:
The advent of the Internet has also played a significant role in transforming investing, particularly for retail investors. It has revolutionised trading by introducing electronic markets and automatic order execution, resulting in lower fees, more efficient markets, and greater transparency. The widespread availability of information is a significant benefit, empowering investors with instant access to company reports, financial documents, and online investor relations pages.
Special Purpose Acquisition Companies (SPACs):
Another tool that has gained popularity is Special Purpose Acquisition Companies (SPACs). SPACs offer a back door to taking startups public, providing an alternative to traditional IPOs. They have become particularly attractive in the tech sector, allowing innovative companies to raise capital and maintain their independence from larger corporations. SPACs have raised more than $30 billion so far, providing capital to companies in sectors such as electric transportation, healthcare, and space exploration.
In conclusion, transformative investment encompasses a range of approaches, from shifting investment practices to embrace sustainability and justice, to challenging traditional investment paradigms, and harnessing the power of new investment logics and community-driven initiatives. By embracing these transformative strategies, investors have the opportunity to drive positive change and create a more sustainable and equitable future.
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Participatory investment
Participatory impact investing is an approach to financial investment that focuses on the social and environmental effects of the projects invested in, as well as the meaningful participation and agency of the communities involved. It is a potential solution to the challenges that have emerged in impact investing, such as funds making false claims about the benefits of their investments, and those involved in the projects having no say in the investment process.
Participatory impact investing involves communities from the invested projects in the investment process, shifting power away from investors and funds. It draws on methodological inspiration from the global development field, where participatory methods have been central for several years. For example, the Buen Vivir Fund used a collaborative design process to design the structure and processes of how the fund runs, with these same grass-roots organisations being central to the fund's governance and day-to-day running.
The Boston Ujima Project is a place-based investment fund, controlled by community members in the Boston area, to support businesses, real estate and infrastructure projects that would otherwise struggle to find financing. The REAL People's Fund is another example, being a $10 million fund created by five community organising groups to finance entrepreneurs of colour.
Participatory impact investing can be facilitated by active private equity investors, who can promote participatory themes among their investees. It is important to establish a common understanding between the global development community and the impact investment community by introducing impact investors to participatory values, language and principles.
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Transformation capital
The traditional financial industry operates under a set of axioms, or widely accepted propositions, that inhibit its transformative capacity. For example, the notion that everything of value must be measurable in monetary terms limits the ability of capital markets to engage with sources of value beyond this narrow definition. Transformation Capital challenges these axioms and proposes a broader definition of value that extends beyond monetary concepts. It calls for a new approach to sharing risk and reward, particularly between public and private actors, to create a "symbiotic innovation ecosystem" where returns are shared fairly.
Furthermore, Transformation Capital emphasises the role of the government as a bold entrepreneur, actively shaping and creating markets to drive systemic transformation. It recognises the need to blend different types of capital, such as public and private capital, not just for de-risking but also for strategic coordination and alignment. This new investment logic proposes using new mathematical frameworks and indicators to measure performance and make informed decisions, promoting diversity, multi-disciplinarity, and long-term sustainability.
Overall, Transformation Capital offers a radically different approach to investing, challenging the traditional axioms and paradigms of the financial industry. By embracing complexity, adaptability, and a broader definition of value, it seeks to catalyse the transformative change needed to address the urgent challenges facing our society and planet.
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Frequently asked questions
A traditional IPO (Initial Public Offering) is the traditional way of going public.
SPACs (Special Purpose Acquisition Companies) are an alternative to a traditional IPO. They are essentially a back door to taking a startup public.
SPACs offer smaller, innovative and big-idea companies a way to get enough capital to evade the tractor beams of bigger companies and reach escape velocity as independent businesses.
SPACs can feel like a shell game and there are possibilities for abuse.
The internet has revolutionized trading by introducing electronic markets and automatic order execution, resulting in lower fees, more efficient markets, and greater information and transparency for investors.
