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TIFF is a nonprofit, perpetual foundation, led by a board of trustees and the CEO. Board is chaired by the same chairman of the implementing partner, the Center for Economic and Business Education. TIFF has an Investment Portfolio Manager that is part of the Investment Committee, whose responsibility is to assess and evaluate potential investment opportunities.
There are two phases in the process of donors joining the fund. The first phase is at inception. In this phase, both CEBE and USAID/Sweden are considered founding members of TIFF (although USAID/Sweden do not have board representation). Both institutions have created and approved the articles of association of TIFF, and are guided by the Grant Agreement between them. They mandate a 5-person board of trustees, where 1 seat is reserved to the highest ranking public institution that has donated to the fund at time of inception, 1 seat to a CEBE Board member, 1 seat to the CEO of TIFF, and 1 seat to the investment portfolio manager at TIFF. The second phase is post-inception. Post-inception, donors can choose to join the Fund through grants to TIFF to expand its endowment. These donations are regulated through dedicated grant agreements on a case by case basis.
For donors that decide to give grants to TIFF for the purpose of expanding its endowment, TIFF will allow representation into its own board of trustees. The mechanism of representation is through grant thresholds.
For example, if donor X would like to fund $500,000 into TIFF’s endowment, this donor is eligible for a seat in the board. Waivers of this right are permissible. The representation threshold is subject to board approval. It may be the case that more than one donor is interested to join the fund. In this case, the higher grant that meets and passes the threshold is given representation.
For example, if donor X decides to fund $500,000 and donor Y to fund $1,000,000, the board seat is granted to donor Y. TIFF will periodically measure the average level of donor funding, and will adjust the threshold accordingly to allow for fair representation. The maximum number of board members is set at 9. If there is a 10th member that is eligible to join due to threshold, they have to standby for the exit of a current board member. They can however join the board in an observing capacity.
At any given time, donors can choose to exit the fund when the amount of their funding is completely invested. If there are ongoing investments that have received funding from these donors, they have the right to request investment performance reports from TIFF, and TIFF has the duty and the obligation to provide such reports. Also, donors that choose to exit the Fund can remain observing board members to witness the investment performance (described in question 3 above.
There are two types of funds that need to be disbursed to TIFF: 1) operational funds and 2) funds available for equity investments. Operational funds are funds allocated to CEBE to cover TIFF operations, personnel, overhead, and other direct and indirect costs that are necessary to run TIFF. These funds are disbursed at the time donors pre-join the board of TIFF. The second type of funding – equity funds – will be disbursed at the same time. Partners have an obligation to disburse funds into the equity pool before they join the board.
TIFF is designed to be a perpetual foundation, meaning that it is able to fund part of its operations with funds it generates from its core business. There are two types of funds that TIFF will use to ensure uninterrupted operations, and thus ensure its own sustainability: inception funding, and funding from investments. For the first three years of the project, TIFF has budgeted accordingly to cover its running costs in full through the USAID/Sweden grant. This is presented in the 3-year budget. In these three years and beyond, TIFF will make equity investments in tourism businesses, from which will get a return commensurate to the equity stake it acquires on each business. Portions of these returns from all the investments will cover TIFF operational expenses throughout its lifetime. Also, new donor funding will join TIFF with the understanding that part of new grants will go towards supporting the sustainability of TIFF.
Return management policies discussed in the Shareholder Agreement in each investment made. However, a possible scenario is explained below:
For example, if TIFF invests $10,000 in a business, it will require a 10% stake on all future net cash flows of that business as a contribution back to the Fund. This return will be used partly to fund TIFF’s operations, and partly to redistribute to the businesses themselves in the form of shared services or new investments on that same business. The ratio of how much of this return should go for TIFF operations, and how much to go back to the businesses will be decided on a case by case basis considering the operational needs of TIFF determined through its own yearly budget. Annual TIFF budget is subject to board approval.
Businesses in which TIFF invests in have the right to own a part of TIFF returns from investments through proportional representation. This mechanism ensures that any business receives funds back from TIFF proportional to the size of the investment that TIFF has made into that business over total annual cash flows TIFF receives from the investment, and after TIFF covers for its operational expenses. Calculations of returns and application of this mechanism are done at the end of each year, upon closing of the fiscal cycle.
Example scenario: TIFF invests $10,000 in Business X for 8% stake in future cash flows. Business starts running. At the end of the year, net cash flows from this business are $200,000. TIFF gets 8% of this as its shareholder, or $16,000. The board of TIFF, based on budgeting requirements, decides to keep 40% of this amount to cover operating costs of TIFF, or $6,400. What is left is $16,000-$6,400=$9,600 that is available to go back to the business as new direct investment and shared services, both of which are done under TIFF guidance to ensure that funding improves current business. The share of this amount that goes towards shared services to Business X is calculated as the ratio of the original investment over net cash flows from the year. So, ratio is $10,000/$200,000=5%. This ratio is then applied to the $9,600, which equals $480 worth of shared services. The rest goes back to that same business as new investment guided by TIFF, equal to $9,320 ($9,600-$480).
All funds that are collected from returns and earmarked for shared services through the mechanism explained in the question above,will be pooled together to create a shared services fund. By definition, shared services are offered to a group of businesses that have similar needs in those services (e.g. training, promotion, sales). On the other hand, money for new investment (as calculated from the mechanism above) is delivered individually to each business guided by TIFF consultants.
TIFF invests only in businesses that operate in one of the following areas: tourism, agro-tourism, ecotourism, culture heritage tourism, sports tourism, and any other branch of the tourism industry that supports its growth directly (e.g. training for waiters). TIFF invests in businesses that are at different stages of growth. The following table describes planned distribution of investments, and this distribution will be evaluated annually by the board and investment committee for adjustment to the allocation ration on column 2.
|Stage of Development||Long-Term Target Allocation||Financing Need|
|Seed||20%||A company or entrepreneur needs “seed” financing to prove a product concept. This could be a completely new venture or a new idea for an existing company. The funding is not for marketing the concept, which occurs at a later stage.|
|Start-ups||20%||A company that has been in existence for 1 year or less. Financing needs could vary.|
|1 st Stage||20%||Funding is needed to commercialize the manufacturing and sale of a product.|
|2 nd Stage||30%||The company needs working capital for initial expansion, but is already in business and shipping product. Could still be operating at a loss.|
|3 nd Stage||10%||The company is undergoing major growth and is breaking even or turning a profit. Use of funds could include a plant expansion, marketing, or new product development including product branding, positioning and other intangible assets that add value to products.|
|Bridge||0%||The company expects to enter into a loan agreement with a lending institution within 6 months to a year and requires financing to “bridge” to the loan financing.|
TIFF is looking for projects offering the potential for attractive growth. Some of the parameters critical for investment selection are:
- Management: a strong and committed management team with a demonstrated track record and integrity;
- Market: high growth potential in the market, which the investee seeks to serve. The market will need to be quantifiably large with growth opportunities especially in emerging areas that address global demand in tourism, not stagnating subsectors;
- Competitiveness: the business should possess – or be willing to create under TIFF supervision – the ability to develop and retain a long term competitive advantage;
- Return on investment: there should be a logical and visible exit mechanism available for TIFF that provides attractive capital appreciation with above-average profitability. Above average profitability is defined as inflation + 1-yr yield from T-bills + annual GDP growth rate + a risk markup of 3%. For example, if inflation is 3%, 12-month T-bill yield is 4%, GDP growth is 2%, and risk markup of 3%, than ROI should be baselined at 12% (3%+4%+2%+3%). Risk markups are judged through the risk rating systems. See further down this FAQ list for an explanation of the risk rating system.
- Social impact: every business TIFF invests in is also evaluated on the basis of the social impact it has, defined as new jobs created, capacity built for local entrepreneurs, gender balance achieved, and advocacy strength
All these elements are evaluated before entering an investment, where TIFF runs its initial screening process, described in a separate document of the Investment File.
TIFF will initially invest anywhere between $10,000-50,000 per investment. However, the board and investment committee can decide to invest sums larger than $50,000 for opportunities that present greater return prospects. Also, as TIFF endowment grows bigger, investment range will be adjusted accordingly. It is estimated that once the endowment breaks the $2,000,000 mark, TIFF can start investments as large as $100,000 per business. These ranges are, however, subject to approval from the investment committee.
TIFF uses a full system of risk assessment, classification, and mitigation. Please see risk assessment and rating further down this FAQ list.
TIFF investment committee runs a full strategic assessment report on all businesses that pass the initial screening process. This strategic report positions the future of the business in the market, aligning how the business will compete considering the industry, competition, marketing, demand, and strategies that will be employed. This assessment is done prior to making a decision to invest in the business. Both the results of the initial screening and the strategic assessment report are presented to the board at time of decision.
Direct management is used as a concept at TIFF to ensure that businesses don’t invest in ill-fitted ideas, and that TIFF has actually a tool to protect its investments. To achieve these two objectives, TIFF has two mechanisms that guarantee direct management. When TIFF decides to invest in a business it enters into a shareholder agreement with individual businesses. As part of that agreement, TIFF requires that the business be willing to follow an actual business plan that derives from the strategic assessment report prepared at time of investment evaluation. TIFF also requires that the business allows joint management until the business reaches a minimum growth rate of inflation + quarterly GDP growth within the first 3 years from investment. Businesses are also required that – in order to get funded – they must be willing to be audited monthly by TIFF, allow promotion and marketing to be designed by TIFF experts, and allow survey and evaluation of each intervention. Also, for a business to be able to get back returns from TIFF as new investment in the business, they have to follow an investment plan proposed by TIFF experts, which aims to enhance current operations.
TIFF uses several indicators to assess the value of an investment it has made. First, if the valuation of a business at time of exit is greater than the valuation at time of entry, this will be considered a successful investment. Second, if the average return from a business meets the performance baselines described in preceding sections, the investment is deemed successful in the mid-term. If the same business is able to sustain those same baselines for 12-24 months after TIFF exit, the business is considered successful in the long run, which indicates that solid strategies were built to maintain market advantage for at least 5 years. TIFF also utilizes social indicators. If a business is able to create new jobs, provide incremental income to current employees and owners, and create a multiplier effect in industries related to the business’s core operations, that investment is considered a success. The exact targets for these indicators are subject to board approval.
The preferred exit route is through a buyback from the owner of the business at a valuation conducted at the time when a buyback request arises. In case this is not feasible, due to the reasons of size of the investment or other circumstances, the alternative method of exit consists of a sale to strategic investor and buy-outs on the basis of an independent valuation of shares as on the date of buyback. There is no predetermined period that TIFF has to stay invested in a business. They can stay for as long as the criteria are met, or when board decides to divest.
Assigning a risk rating is not an exact science. It is an attempt, using a common vocabulary, to define generally accepted criteria of risk assessment. There are many factors to consider when assigning a risk rating. At a minimum, TIFF will consider the factors listed below:
1. Environmental risks:
– Political risks
– Regulatory risks
– Macroeconomic risks (inflation, devaluation, etc.)
2. Industry risks:
– Is the industry stable?
– Is it going through a period of consolidation?
– Is it vulnerable to local/foreign competition?
– Does it have structural problems? Cyclical?
3. Competitive risks: is market share growing or shrinking?
– Is it a price leader or a price follower?
– Is it well diversified?
– Is it well integrated? Horizontally? Vertically?
4. Operating performance based on an analysis of sales and the income statement
– Are sales growing or shrinking?
– Are cost of sales growing or shrinking?
– Is gross margin growing or shrinking?
– Are general and administrative expenses growing or shrinking?
– Are personnel expenses growing faster than sales?
5. Balance sheet strength:
– Is leverage growing? Shrinking? In line with industry?
– Are accounts receivable better or worse than the industry?
– Is inventory turnover better or worse than the industry?
– Are retained earnings growing?
– Current ratio? Quick ratio?
6. Cash flow strength:
– Does cash flow cover debt service? Dividends? New investments?
– Is cash flow growing or shrinking (or static) relative to sales?
7. Management risks:
– Does management have depth and breadth?
– Is there a succession plan?
– Is there a strategic plan?
– What is the percentage of staff turnover?