9 November, 2016
With over 2.5 billion people living on less than $2.50 per day in emerging economies, there continues to be a growing movement to spur inclusive development and economic growth in truly sustainable ways. Impact investing is becoming a fast-growing asset class addressing the most pressing social and environmental challenges we face today while also generating financial returns. The Global Impact Investing Network (GIIN) and J.P. Morgan’s 6th Annual Impact Investor Survey shows positive trends –
- More than USD 15.2 billion were committed to 7, 551 impact investing deals in 2015, with a plan to commit 16 per cent more capital in 2016.
- In emerging markets, the average gross return expectation for debt were 8.6 per cent and 9.5 per cent for equity. Eighty-nine percent (89%) reported financial performance in line with or better than their expectations, and 99% reported impact performance in line with or better than expectations.
- The largest sectors with commitments to increase allocations are Food and Agriculture, Energy and Healthcare.
It’s exciting to see growing momentum for the industry but there is significant work to be done, particularly as it relates to early-stage professional capital. At Capria, in 2015, we launched the first global business accelerator for impact fund managers leveraging nearly two decades worth of experience launching innovative investment vehicles in emerging markets. In just over a year since launching the Capria Accelerator, we have seen interest from more than 650 existing and/or aspiring impact fund managers from over 70 countries. The amount of interest is one data point that speaks for the need for early stage capital for impact entrepreneurs around the world as well as the opportunity it presents. As recent as 2014, ANDE’s “State of the SGB Sector Report” stated that there is an estimated $2 trillion (yes trillion with a “t”) credit gap small and medium enterprises face globally.
Our internal research on East Africa, West Africa, Latin America and South East Asia has shown interest from impact fund managers in a wide range of sectors with Energy and Agriculture being the two most common sectors. In addition to those sectors, impact fund managers have continued to emphasize the pursuit of opportunities in education, healthcare, and fintech.
A few specific examples show some of these trends coming to life. In East Africa’s Rwanda, 65% of non-Development Finance Institution (DFI) capital has been put into agriculture and the Rwandan government plans to spend $5 billion to increase electrification from the present 20% to 70% by 2017. In neighbouring Kenya, nearly 40% of impact investments were made in the agriculture and financial services sectors. In Southeast Asia, the government of Philippines for instance, has started the Agimat initiative to respond to natural disasters and the application is likely to have venture funding in the future. In West Africa’s Nigeria, agriculture is being called “the new oil” and is witnessing successful collaborations between DFIs and private investors, a recent example being Sahel Capital’s investment in AACE Foods, alongside support from USAID and DFID.
We are witnessing a greater collaboration among traditional/mainstream investors, government, DFIs and impact investors which is critical for the long-term success of impact investing as there continues to be varying expectations on financial and impact returns. Recently, The Global Impact Investing Network (GIIN) recognized the global importance of the 17 UN Sustainable Development Goals as one way to potentially create alignment, at least as it relates to the social and environmental impact firms are looking to create. There is no doubt that the return profile will continue to be a hot topic in the years to come.
Amidst these encouraging trends, GIIN and J.P. Morgan’s 6th Annual Impact Investor Survey points the greatest perceived risk factor to be ‘business model execution and management risk’. Successful entrepreneurs leverage diverse resources to start and build their enterprises. However, in many emerging markets there is a severe lack of appropriate resources to support businesses as they look to establish the viability of their model, grow and scale. At Capria, we firmly believe that one of the most critical areas in need of support to enhance the overall sector is the development of the professional capital portion of the ecosystem at the local level, with local drivers and actors. There are qualified investment professionals launching new impact funds but the perception from many impact investors is that first-time funds are inherently riskier. However, a recent report from Prequin shows that first-time funds shows that “first-time funds not only deliver returns comparable to established GPs, but many times they outperform experienced managers… 2004 is the only vintage year in which non-first-time funds have outperformed first-time funds.” The GIIN has also cited similar research regarding first-time impact funds having competitive (or enhanced) performance to non-first-time funds. Local impact fund managers offer one avenue for getting impact entrepreneurs the support they need to make their companies thrive. Without them involved it will be even more of an uphill climb for companies in emerging markets to produce the impact and financial returns they seek to create.
At Capria, we are excited to grow the global impact investing community, with a goal to increase the flow of impact capital where it is most needed. We are currently evaluating investment opportunities with both first and second-time impact fund managers across Africa, South America and South/Southeast Asia. You can read more about our previous Cohort participants here. If you are launching an impact fund or are running one in emerging markets, our applications for Cohort 3 are due November 11.
Capria is a global impact investing firm that manages three pioneering ventures: Unitus Seed Fund, Capria Accelerator, and Capria Emerging Managers Fund. Unitus Seed Fund is the most active impact investor in India, investing in sectors including healthcare, education, mobile, consumer, fintech, and agriculture. Capria Accelerator is the first global business accelerator for impact fund managers, operating in markets including Sub-Saharan Africa, Asia, and Latin America. Capria Emerging Managers Fund is a USD 100M fund taking anchor LP positions in global impact funds, including those partnered with Capria Accelerator.