AMDP Investment Proposal

To: Clark Hansen, CEO of AMDP
From: Lorenzo Montini, Research & Development Analyst

Date: March 8th, 2018

Subject: Lumni, a can’t-miss opportunity

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As every week, I’m reaching out to you because I have just finished conducting extensive research into socially responsible businesses. I feel I have come across an investment opportunity that Anima Mundi Development Partners cannot pass up. Lumni manages investment funds that finance higher education through sponsorship contracts, with students paying back the investment as a percentage of their salaries after graduation (Lumni). Lumni fits the AMDP’s requirements of being a social enterprise and supporting local economies but, most importantly, it is currently a profitable business. Investing in such a company with environmental consciousness and social responsibility will not only generate high returns but also make a positive impact on the world.

AMDP’s standards for investment

Triple Bottom Line

The triple bottom line (TBL) is a framework that shifts the focus of a business on the effects of its operations, including the degree of social responsibility, the environmental consciousness, and the economic value (University of Wisconsin). The TBL is defined by the three P’s:

1. “People” gives emphasis to the fair treatment of employees, as well as endorsing favorable practices within the community.
2. “Planet” is achieved by the implementation of sustainable practices and the reduction of environmental impact within the firm.
3. “Profit” is the financial bottom line that every business and every investor care about, the return on investment.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) is the company’s commitment to a fair behavior that takes into account its economic, social and environmental consequences. Limiting to fulfilling legal requirements or market-standard practices is not the same as adopting socially responsible policies. CSR must be aimed at producing long-term benefits and must not reduce to façade actions adopted in the short-term for opportunistic purposes (Caramela).

Social Enterprise

The two key features of a social enterprise are making a profit and being driven by a social purpose. More precisely, a social enterprise is a business with primarily social objectives and whose profits are mainly – but not entirely – reinvested in the community for that purpose rather than delivering returns to shareholders (Wertman).

Carbon Footprint

The carbon footprint expresses the total greenhouse gas emissions directly or indirectly associated with a product, a service or an organization. The estimate of the climate-altering contribution to global warming of all the gases emitted during the production cycle is expressed in terms of CO2eq or “carbon dioxide equivalents” (Selin). A low carbon footprint is a crucial aspect of CSR since every social enterprise must be committed to minimizing the amount of damage done to the environment.

Company Snapshot

Lumni was first founded in 2002 in Chile by Felipe Vergara – currently President and CEO – and Miguel Palacios – currently Head of Research – with the objective of offering a better way to help students pay for their education. Later, the company opened subsidiaries in Mexico and in Colombia in 2008, and in the US in 2009. Eventually, Lumni expanded to Peru in 2013. The legal format of Lumni is a private limited company in each of the above-mentioned countries (Lumni).

Business model

Lumni designs and manages investment funds that finance higher education through Income Share Agreements (ISAs). Students commit to repay a fixed percentage of their salary for a set period of time, after graduating. The payback period is usually around 2 to 2.5 times the length of study financed and the percentage of salary paid back is never more than 20% (Lumni). This discretionary number is decided taking into account the average salary for the major, the market interest rates and the desired return on the fund. Once the period ends, the obligation expires, regardless of the amount repaid.

This is an innovative alternative for educational financing in the world. Key to the model is that it is not a loan with interest, but rather it is an investment and is paid back as a percentage of the salary. If students do not end up earning much money, the payment is low. But if they do, they can afford to pay more.

Financial sustainability

Lumni has a total of 40 million USD in investment funds and a total of over 100 investors across all countries. The fees charged by Lumni are:

• 1.5% of capital raised.
• 2% of capital committed or invested
• 20% of the returns over and above 8%

From a financial point of view, Lumni has an average return of 9.1%. Two funds have already closed in Chile, with a period of 10 years each. They paid respectively an 11.2% and a 15.3% return to investors. Lumni funds are on average 30 times more diversified than a typical equity market portfolio, resulting in lower volatility. The diversification of Lumni funds is larger than other portfolios, with an average of 1,200 contracts per fund with respect to an average of 9 stocks per portfolio for other traditional funds (Fundación Ecología y Desarrollo).

Social performance

Lumni allows investors to obtain risk-adjusted financial returns while making a social impact. Below are some of the ways that Lumni’s model benefits society:

• Lumni offers additional support services to help students achieve their career goals.
• Lumni selects students based on their integrity and potential and not on their gender, age, racial or ethnic background, or sexual orientation.
• Lumni collaborates with investors and partners who share their values – perseverance, respect, solidarity and service, integrity, responsibility.

So far Lumni has financed 8,085 students aged between 18 and 22 – 60% of them in Colombia, 14% in Peru, 12% in Chile, 9% in Mexico and 5% in the US. Lumni plans to reach a cumulative total of 30,000 students over the next few years. Lumni uses the following indicators to measure its social impact: the number of alumni, the income of former students, and the rate of default on payments, which is an average of 2% across all countries (Fundación Ecología y Desarrollo).

Key partners

Lumni investors include institutions and high net worth individuals from Latin America, North America, Europe, and Asia. Private investors usually embrace Lumni’s philosophy because they did not receive much help in their own beginnings as students or entrepreneurs. These investors like to achieve a balance of profitability and “social return”. First, their financial risk is reduced by investing in low-risk portfolios of hundreds of students across different careers. Second, the social benefits are guaranteed as Lumni targets students from low-income backgrounds.

Scalability and replicability

While Lumni Colombia can be considered to be in a growth stage, Chile, Mexico, and Peru are in an early stage, and Lumni US is just a start-up (Fundación Ecología y Desarrollo). These pay-forward financial vehicles represent a great solution for Latin America, in part because banks don’t provide affordable student loans. As higher education is a large and unexploited market in Latin America, Lumni’s potential for scale is enormous.

Appraisals

Personal pricing

One of the risks that Lumni may encounter is adverse selection. If the payback percentage were fixed, the best students with the best salary prospects would be incentivized to rely on federal loans. However, as Kate Bachelder argues on the Wall Street Journal, Lumni’s advantage is that it “doesn’t offer everyone the same contract. Pricing allows Lumni to be sure that it can recoup enough of its investment. The firm also employs psychologists to evaluate students’ intentions.” Eventually, Lumni will end up offering a lower payback percentage to those students expected to get a high-income job when entering the labor market.

Risk diversification

Lumni was also featured in the New York Times in an article written by David Bornstein about investing in students’ future. According to him, modern society doesn’t invest in people because of the intrinsic risk connected to it. At Lumni, “they know that some students will run into difficulties, some will achieve average success, and some will do very well – but they don’t know in advance how any individual student will fare.” Lumni acts like an insurance in the way it spreads the risk by pooling a diverse group of students. Through diversification, funds can balance out the risk and achieve stable returns.

Awards and certifications

Lumni received a series of awards and certifications both for its social responsibility and for its profitable model: Ashoka Fellow (2006), Endeavor Global (2009), Poder Business Awards (2010), Clinton Global Initiative (2010), World Economic Forum (2011), Impact Assets (2011). Its founder and CEO Felipe Vergara was also chosen in 2009 by the magazine Bloomberg Business Week as one of the 25 most promising social entrepreneurs in the US. Lumni is a certified B Corporation (Lumni).

Recommendations

Within the contemporary corporate world that seems not to care enough about the planet and its people but only about profits, Lumni is a pioneering company that spotted an opportunity to make money by enhancing students’ potential. I feel that it is the duty of Anima Mundi Development Partners to identify socially responsible companies in their early growth stage and help them succeed by investing in them. Lumni is undoubtedly one of these businesses and its model has proved to satisfy the highest standards of social and environmental performance to balance profit and purpose. Not only would it be a way of ensuring significant, low-risk returns on our investment, but most importantly it would be a way of promoting business as a force for good.

If you have any further questions, please do not hesitate to contact me.

Regards,

Lorenzo Montini

AMDP Research & Development Analyst

Works Cited

Bachelder, Kate. “Escaping the Student-Debt Trap.” The Wall Street Journal, Dow Jones & Company, 13 June 2014, www.wsj.com/articles/the-weekend-interview-escaping-the-student-debt-trap-1402699281.

Bornstein, David. “Instead of Student Loans, Investing in Futures.” The New York Times, The New York Times, 30 May 2011, opinionator.blogs.nytimes.com/2011/05/30/instead-of-student-loans-investing-in-futures/.

Caramela, Sammi. “What Is Corporate Social Responsibility?” Business News Daily, 8 June 2018, www.businessnewsdaily.com/4679-corporate-social-responsibility.html.

Fundación Ecología y Desarrollo, and Multilateral Investment Fund. Study of Social Entrepreneurship and Innovation Ecosystems in the Latin American Pacific Alliance Countries: Regional Analysis: Chile, Colombia, Costa Rica, Mexico & Peru. July 2016.

“Lumni Report” Lumni, www.lumni.net/.

Selin, Noelle Eckley. “Carbon Footprint.” Encyclopædia Britannica, 1 Nov. 2013, www.britannica.com/science/carbon-footprint.

“University of Wisconsin | A Simple Explanation of the Triple Bottom Line.” University of Wisconsin Sustainable Management Degree, sustain.wisconsin.edu/sustainability/triple-bottom-line/.

Wertman, Adlai. “Social Entrepreneurship.” BUAD 101 Freshman Leadership Seminar, 5 Oct. 2018.