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Impact Investing in Emerging Markets - What have we learned?

Tuesday, 05 January 2016

Tags: eur2015 esg impact emerging markets

Guest Blog Post by Nada El Ahwal about a workshop (Session A2) at TBLI CONFERENCE EUROPE 2015 about Impact Investing in Emerging Markets, and the lessons learned. The moderator, Gudrun Timm, Partner at Carpe Diem Partners, was joined on the panel by Charles-Antoine Janssen: Managing Partner KOIS Invest, Dirk Elsen: Director Emerging Markets Triodos Investment Management, Karsten Fuelster: Country Manager Germany, Austria, Switzerland at IFC, and Fabio Sofia: Executive Director Symbiotics Group.
Views and opinions are that of the writer and are not the official views of TBLI CONFERENCE.

A group of passionate impact investors sat round the same panel to exchange insights in what could be the trickiest part of an already TBLI EUR 15 Workshop A2tricky space: investing for social impact in emerging economies. Noting the stark differences in business practices, demographics, and regulatory conditions between emerging and developed markets, the investors shed light on the intricacies of simultaneously employing capital and driving social change in countries like India and Bolivia.

Charles-Antoine Janssen, the managing partner at KOIS Invest, an asset fund management firm, opened a lively discussion by asserting that India, as an example, was the perfect place for an investor to genuinely add value. “The workforce potential is amazing, recruits in India are working to provide a better life prospects for their families, and exhibit huge entrepreneurship and willingness to work” he adds, this creates an unparalleled potential to combine social return with financial gains.

Soon into the session, moderator Gudrun Timm, MD and partner at Carpe Diem Partners, posed an alarming statistic that capital outflows from emerging economies reached 1 trillion USD in 2015 (according to the IIC). Fabio Sophia, the executive director of Symbiotics Group affirmed, “the scary thing about this figure is that this is capital that is not invested in emerging markets, despite the huge growth potential that we can all recognize. This is a huge concern in terms of development and opportunity.” Certainly, fleeing capital highlights the political economy challenges of emerging markets, where investors look for developed markets for reasonably risk-adjusted returns.  

Yet while there is a net outflow of traditional capital in developing economies, private impact investment funds are moving in their opposite direction – and seeing opportunities where traditional investors see risk. It becomes evident that this is TBLI EUR 15 Workshop A2 Panelwhere impact-investing shines – in capitalizing on the harmony between deploying needed capital to social enterprises in emerging markets, while driving social and environmental impact. “We need to make sure we are not just exporting money and equipment, we need to provide solutions” chimes Janssen. “It’s going beyond making money. Creating an environment that creates jobs, and allows people to provide their children with a better life and access to services and opportunities,” agrees the IFC’s Germany country manager, Karsten Fuelster.

Far from the romance, though, the panelists were equally aware of the shortfalls of impact investing as they were of its potential. As an audience member, I was glad to see an objective analysis of this space, the experts were well aware of the challenges at hand, and eager to work towards making impact investing a mainstream asset class, rather than just a novelty.

Using microfinance as a sub-sect of impact investing, and a proxy to the maturity timeline of the practice to become ‘mainstream,’ the panelists agreed that the coming of age of microfinance may illuminate certain learning we can extrapolate to impact investing. First and foremost, the heterogeneity of the providers inhibits observers to generalize remarks about the application of microfinance. “We must acknowledge huge diversity in this space, from banks with billions in their balance sheet to unregulated NGOs – there are over 10 thousand players,” remarks Dirk Elsen, the director of emerging markets at Triodos Investment Management. It becomes almost obvious nonetheless for best practices to emerge and cross-pollinate across various geographies in emerging markets. “The learning travels – Bolivia is a great case study and the model has been imported to countries in Africa. Bolivia has allowed microfinance institutions to remain as non-profits, be regulated by the central bank and work with deposits,” adds Sofia.

So, the question then remains – will impact investing follow the same ‘hype cycle’? While this remains largely unclear, it is more evident that the growth of impact investing across the full spectrum of asset classes – from ESG-compliant fixed income, to private equity and venture capital– has been impressive in recent years. Similar to microfinance providers, the methodology of ‘impact investors’ (a term which is inherently vague already!) wildly varies – and perhaps it is in this diversity, that cross-pollination and shared best practices emerge.

Socially conscious business models are also being replicated in different emerging economies. On interesting investment opportunities, the TBLI EUR 15 Workshop A2 Panel2speakers immediately take a deep-dive in healthcare in various countries. Janssen describes the investment case in investing in quality, affordable Indian healthcare providers as a huge market need, in a market alone that is growing at 40% annually. Further, the dire market gaps stem from structural challenges almost all emerging economies share; shortfall of drugs, no access to beds at hospitals, poor quality of training – to name a few. The silver lining though, is that the convergences of these problems create an opportunity for replication and scale of healthcare provision services across geographies, regardless of their diversity. Elsen concurred that SMEs in heath care represent remarkable opportunities, especially with specialized service providers who provide an easily replicable model, such as those in maternal care, cardiology etc. Echoing that sentiment, the Fuelster agrees, “the Indian models are catching on and more are being exported to other places in Africa too.”

In doing so, these impact investors cast a wide net of social impact as well as solid financial returns. Being the stern capitalists they are, all confirm that to make this model work – a strong eye must be kept on the financial proposition. After all, according the KOIS Invest philosophy, “the name of the game is to deliver in what you promise, which is no compromise on strong financial return for the social impact we aimed for.”

The replication of business models is a motivating positive externality of impact investing – as it provides the space for innovative ideas to be discovered, financed, and grown – both in and between emerging economies that may have never had such opportunities with traditional investment vehicles. The ripple effect of impact investment is hard to deny, and is fostering a new ecosystem of social entrepreneurs and responsible LPs and institutional investors – in the economies that need it the most.