Impact investors in emerging markets need to continue innovating to ensure capital continues to flow to regions where it is most urgently needed, even as the global impact investment industry matures.
According to the Global Impact Investing Network’s (GIIN) annual industry survey, the growth of impact investment into developed markets is expected to significantly outpace new impact investments into emerging markets this year. The survey found that impact investors who focus on developing markets expect to increase the volume of capital they invest by 18% in 2019, while impact investors who focus on emerging markets only plan to invest 6% more. This is even though the $502 billion in global assets under management in the impact industry at the end of 2018 was equally divided between developed and emerging markets.
GroFin, one of the 266 impact investment firms to take part in the survey, said in its recently published Integrated Report for 2018 that it aims to invest $47 million in small and growing businesses (SGBs) in Africa and the Middle East during 2019. Guido Boysen, CEO of GroFin, says impact investing has helped to drive a significant positive trend of private investment towards social and environmental issues.
“The growth in the impact investment sector is encouraging and shows global recognition of issues that were traditionally addressed only through official development assistance are in fact the responsibility of all.”
Boysen says impact investing has helped to unlock new capital flows to emerging markets and has the potential to make an even greater contribution to investment into these regions. The GIIN survey showed that impact investments into the regions where GroFin operates – sub-Saharan Africa (SSA) and North Africa and the Middle East (MENA) – continues to show strong growth.
The MENA region has shown the fastest compound annual growth rate of 43% over the past four years. However, despite the $2,97 billion in assets allocated to this region, it still only accounts for 2% of global impact assets under management. The $13,5 billion in assets allocated to SSA means that this region accounts for 14% of global impact assets under management, after posting a compound annual growth of the same number between 2014 and 2018. GroFin’s gross assets under management grew from $112.3 million to $174.4 million over the same period.
Boysen says the immense financing gap that prevents developing nations from addressing the issues summarised in the United Nations Sustainable Development Goals (SDGs) simply cannot be met by development finance alone and must be filled by the private sector. He believes the focus of innovation in the impact investment industry should include refining the ‘blended finance’ approach championed by organisations like the World Bank and already employed by GroFin.
“Development finance institutions, like other impact investors, need to continue to innovate to develop and improve funding models that can mobilise more capital toward emerging markets. Blended finance can be central to aligning public and private interests to scale impact.”
According to Boysen, the need for innovation is especially important in driving investment into small and growing businesses, which are prone to failure and therefore carries higher risk than many other assets classes. GroFin has invested nearly $340 million in 708 SGBs, employing a pioneering model that combines financing with technical assistance to help entrepreneurs succeed while reducing credit risk for investors.
According to the GIIN, 34% of global impact assets under management represent investments into businesses in the growth stage – which would include the SGBs that GroFin provides with medium-term risk capital.
“GroFin’s investments has sustained 28,000 jobs in countries where there is an urgent need for employment creation. Impact investment into SGBs in these countries can make a direct and powerful contribution to economic and social development. The impact investment industry needs to keep working to find the most efficient ways to make this a reality.” – Guido Boysen