Impact Investing a Sensible Portfolio Choice in a Covid-19 Economy
By Sifiso Skenjana: Chief Economist, IQbusiness
The COVID-19 pandemic has propelled unity from all market participants in an effort to stave off the devastating health and economic impacts the pandemic has brought. These efforts have been geared towards the insourcing of medical supply chains, food security, access to water and sanitation and education and health technology.
According to Global Impact Investment Network (GIIN) the global impact investing market is estimated at $502 billion in assets under management (AUM) as of end 2018, accounted for by approximately 1340 impact investors worldwide. GIIN also reports that roughly 800 asset managers account for 51% of the AUM, why 31 development finance institutions (DFIs) account for 27% of the AUM.
Impact investors tend to differ in both their risk appetite as well as 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. The chart below from the Dalberg Report Closing the Gaps: Finance Pathways for Serving the Missing Middles 2020 details a spectrum of funding instruments and the impact and financial return they can expect. Dalberg details four groups of small and growing businesses namely:
Livelihood and Sustaining Enterprises: These are the businesses that are often family run and exploit immediate, and often small opportunities with incremental growth rates. These are also businesses whose business model can be replicated in order to reach a wider base of households.
Dynamic Enterprises: These are the businesses that often operate in “bread and butter” industries like 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 / services and often prioritise service or product levels first before prioritizing scale.
High Growth Ventures: These businesses often have highly disruptive and scalable business models (eg fintech, healthtech etc) that are able to address large addressable markets. They often have the potential for exponential growth, given the right support and market access.
The spectrum of the funding instruments enables the various 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.
Where to Invest?
Technology Frontier: As mentioned, the COVID-19 pandemic has accelerated the need for insourcing of supply chains for medical goods and services, while industries have had to accelerate their digital transformation in order to respond the remote working requirement, given the imposition of social distancing regulation. Agritech is also lowering the cost of cost management, transport and improves the prospects for higher food security in food scarce economies. Looking at Healthcare specifically, the Healthcare Investments & Exits annual report shows that US healthcare venture capital raisings in 2019 grew 10% to $10.7 billion while investments in biopharma, medical device, diagnostics and healthtech combined reached in $32 billion with healthtech shining as the fastest growing investment item in the healthcare sector. Between 2017 and 2019, venture backed investment in healthtech grew 95%, from $3.32 billion to $7.51 billion. Investors are certainly seeing value in the tech space and impact should follow.
Sustainability Frontier: Water availability is a challenge not only in a COVID-19 impacted economy, but has been a key area of focus for a lot of DFIs, NGOs, Family Offices etc. Impact investing making more available scarce resources like water and energy in sustainable ways will continue to be a burning platform for the world. As sustainability becomes increasingly centre-stage for capital, so should the funding for the enterprises that will ensure that this ambition is realized.