Fertile ground for impact investments
The Covid-19 pandemic has prompted unity across the market in an effort to stave off the devastating health and economic effects of the pandemic. These efforts have been geared towards insourcing medical supply chains, food security, access to water and sanitation, and education and health technology.
According to the Global Impact Investment Network, the global impact investing market was estimated at $502bn in assets under management as of end-2018, accounted for by about 1,340 impact investors worldwide. The network also reports that about 800 asset managers account for 51% of assets under management, and 31 development finance institutions account for 27%.
Impact investors tend to differ in their risk appetite and in the way they define and measure return on investment. This has resulted in many small and medium enterprises falling into the category of “the missing middle”, where the risk-return matrix seems particularly complex for different tiers of impact investors and funding difficult to disburse. There is a spectrum of funding instruments, and the impact and financial return they can expect.
The Dalberg report “Closing the Gaps: Finance Pathways for Serving the Missing Middles 2020” details four groups of small and growing businesses:
Livelihood and sustaining enterprises: often family run and they exploit immediate, and often small opportunities with incremental growth rates. Their business model can be replicated to reach a wider base
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of households;
Dynamic enterprises: these often operate in “bread and butter” industries such as retail, trading and manufacturing. They often find a market for an existing product and exhibit moderate growth and moderate scaling potential;
Niche ventures: these businesses often target a market niche with innovative products or services and often prioritise service or product levels before scale;
High-growth ventures: these businesses often have highly disruptive and scalable business models (fintech, health tech) that are able to tackle large addressable markets. They often have the potential for exponential growth given the right support and market access.
The spectrum of funding instruments enables the various
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tiers of impact investors to locate themselves given their risk/return/impact expectations, and find the combination of “missing middle” enterprises they could invest in.
There is also an opportunity to pool impact funding (mostly through asset management and venture capital funding vehicles) to target the full spectrum of organisations to ensure the missing middle of entrepreneurs are serviced from a funding point of view.
As mentioned, the Covid-19 pandemic has accelerated the need for the insourcing of supply chains for medical goods and services, while industries have had to accelerate their digital transformation to respond to the remote working requirement given the imposition of social distancing regulations. Agritech is also lowering the cost of cost management, transport and improving the prospects for higher food security in foodscarce economies.
Looking at health care specifically, the “Healthcare Investments & Exits” annual report shows that US healthcare venture capital raisings in 2019 grew 10% to $10.7bn, while investments in biopharma, medical devices, diagnostics and healthtech combined reached $32bn, with healthtech shining as the fastest-growing investment item in the health-care sector. Between 2017 and 2019 venture-backed investment in healthtech grew 95%, from $3.32bn to $7.51bn. Investors are certainly seeing value in the tech space.
Water availability is a challenge not only in a Covid-19 affected economy; it has been a main area of focus for a lot of development finance institutions, NGOs and family offices. Impact investing making scarce resources such as water and energy more available in sustainable ways will continue to be a burning platform for the world. As sustainability goes centre stage for capital, so should the funding for the enterprises that will ensure this ambition is realised.