Impact Investing in Emerging Markets – Bridging the Gap Between Aid and Investment

by Kieran Archer

As the lead for Challenges Capital, part of the Challenges Group, I was delighted to attend  a conference a conference,  organised by Palladium Group at the Said Business School in Oxford last week (June 10th). The aim was to explore whether Impact Investing in emerging markets was able to successfully address social and environmental issues while achieving expected financial returns.

Published Premise

As official development assistance supports early stage SME growth in emerging markets and philanthropy largely supports the ‘social enterprise’ sector, impact investing has come to exist at the intersection of aid and investment. The appeal of impact investing in emerging markets continues to grow, however challenges to address the ‘gap’ between early-stage grant funding and later-stage commercial investment, still persist. The prevailing sentiment of many institutional investors, who cautiously avoid significant ‘impact investment’ allocations, contrasts that of aid agencies, philanthropists and foundations, many of whom are enthusiastic at the prospect of this investment approach.

NB: It should also be noted that this conference was held under Chatham House rules, which meant that although information can be shared, speaker details can’t.

Last week’s event  was very well-attended by delegates from many countries and was useful both in providing interesting perspectives as well as being an excellent forum for networking. Prominent speakers were from larger institutional investors including international banks, as well as Development Finance Institutions (DFIs) and larger advisory firms. The ‘missing middle’ in investment terms for many of those was from about $1 million to $25 million, not the $25k to $0.5 million, or so, that NGOs and smaller local funds tend to speak about.

There was also a focus on higher-end funds of funds and on the need for First Loss capital infusions from Governments and DFIs. A number of speakers identified the need for locally-based funds in developing markets and highlighted the absence of appropriately-trained and experienced local fund managers. It was encouraging that there was an almost universal acceptance amongst even the most commercially-driven institutions, that the concept of impact investment or ‘triple bottom line’ investments has proved itself as viable and competitive against more traditional single bottom line returns.

One speaker made some interesting points about the need for responsible exit strategies for impact investments. For most developing countries there is no prospect of a secondary market, so many impact investors will have to look at ‘passing the baton’ to other responsible investors particularly through trade sales or supply-chain integration. Another speaker warned about the danger of too much hype in pension funds about investing in Sub-Saharan Africa and an excessive focus on investing in micro-finance institutions because they are seen as the only ‘mature’ segment in many emerging economies. There was frequent reference to the difficulties faced by investors from the Global North in identifying good-quality investable enterprises in emerging markets. This presents substantial opportunities for platforms such as Challenges Marketplace – and initiatives such as Access to Capital for Rural Enterprise (Challenges Capital are syndicate managers of ACRE) to generate a worthwhile pipeline of investment opportunities for the rapidly-growing impact investment asset-class.

For more information on ACRE, Challenges Capital or Challenges Marketplace, please contact us.