LITMIR.BIZ

      ● Ease of starting a business

      ● Level of investor protection

      ● Level of contract enforcement

      ● Ability to mitigate insolvency

      1. Inv protect: This data set focuses on investor protections. Many countries differ in their attitudes toward investors and the levels of disclosure, board of director liability, and the ability of shareholders to take legal action against companies. Most investors will want transparency, low legal liability for the assigned board director, and the ability to navigate negative situations through legal action. Countries are ranked by the composite level of investor protection for investments in the listed country, with 1 being the best and 189 being the worst.

      2. Start business: The ease of starting a business can be indicative of how well a government facilitates the needs of entrepreneurs. This data set ranks countries based on four metrics: the number of procedures required to start a business, the time it takes to register a firm, the cost to register based on fees, and also equity required.

      3. Contract enforcement: For both debt and equity investors, contracts transform conceptual and verbal agreements into a common understanding. More importantly, if one party deviates from that understanding, there should be a strong and efficient legal system to mitigate the situation. This data set ranks countries based on three metrics related to contract enforcement: the time it takes for dispute resolution, the cost of working through such a dispute, and the number of procedures required to achieve resolution.

      4. Insolvency: Important for debt investors is the ability to lay claim to a company's assets if it becomes insolvent. Debt holders often invest with a priority over the company's assets and accept a lower return proposition than equity holders for such privilege. However, if the ability to recover value is diminished or difficult the reduced return may not be worth it. The insolvency data set looks at the time it takes to close a business, the cost of closing the business, whether the business is sold off in pieces or as a whole, and, very importantly, how much money a claimant recovers given insolvency.

      5. HDI: If the prior four categories were the only data sets to include in this sourcing exercise, the top countries would primarily be developed economies that have less widespread need for impact investing.5 For an impact investor the developmental need is a priority and should be reflected in the analysis. To facilitate this, the Human Development Index (HDI), a statistic created by the United Nations Development Programme (UNDP), is used to rank countries. It scores countries based on life expectancy, education levels, and standard of living.

      6. Maternal mortality: A sector-based investor may want to include his or her specialty in the analysis. In the example provided, a healthcare oriented investor can assess the development and need for maternal care in a region. Any other specialty can be similarly integrated depending on investor focus.

      NOTES FROM THE FIELD

      In 2005, while I was working for Citigroup, we were looking to fund investment in a certain Eastern European country. The investments would be mortgage related and required a high degree of certainty regarding contract enforceability and bankruptcy protection. As part of the deal team, we noticed that the laws were very loose in these regards. We engaged in local country due diligence and met with federal government officials who told us, “Don't worry, we will be changing those laws in the next few months.” After a lengthy plane ride home, we sat around a conference table the next day, and someone asked the best follow-up question, “If they can change the laws in just a few months in our favor, can't they change them just as quickly against us?” The investment was never made.