Building an Impact Investing Market
When the UK’s Department for International Development launched the Impact Programme, just over a year ago, we knew we were moving into new territory.
Today, the Impact Programme launches two new reports: The Annual Report 2013 and The Impact Programme Market Baseline Study.
The 13 Year Programme is at the vanguard of the UK Government’s shift to an ambitious aid programme focused on economic development and a drive towards sustainable, inclusive growth in the developing world.
We knew what we wanted to achieve: the development of the impact investing market in Sub-Saharan Africa and South Asia. And we had a solid strategy for meeting those objectives, an investment Fund and a range of market-building activities which together aim to direct capital towards pro-poor businesses and entrepreneurs in Sub-Saharan Africa and South Asia. This would create more and better jobs, raise incomes and provide greater access to affordable goods and services, such as healthcare, agriculture services, energy, housing, education and safe water.
We also knew that this first year would mark a steep learning curve, which it has.
The launch of “Beyond the pioneer”, new research funded by the Impact Programme and the Impact Programme’s first ‘birthday’ provide an excellent opportunity to reflect on the progress that has been made in this year and the lessons that have been learned.
During the last year, the DFID Impact Fund—a Fund of Funds that is managed by CDC Group, the UK’s development finance institution—has been established along with a Technical Assistance Facility that will support underlying investee companies. The first Fund to receive investment– Novastar Ventures—has been selected. Novastar will invest in transformative businesses in East Africa.
The programme’s market-building activities, led by the Global Impact Investing Network (GIIN) have also made good progress. In 2013, the GIIN launched a dedicated research program, which has undertaken landscaping reports that will detail the impact investment markets South Asia and Sub-Saharan Africa. The AIMS programme (Advancing Investment Management Skills) was also established to increase the local capacity, skills and expertise of Fund Managers to identify, develop, measure and manage impact investments. Additionally, key enhancements have been made to strengthen two important resources for impact investors: ImpactBase and IRIS. ImpactBase is a directory of impact investment funds, and IRIS is a robust catalogue of social, environmental, and financial performance metrics for impact investors. Indeed, IRIS metrics have been leveraged to support a strong framework for tracking and measuring the results of the DFID Impact Fund investments and the programme overall.
Through CDC’s interaction with the market, the GIIN’s research and interface with key players, and the Programme’s baseline study a number of key findings have emerged:
The impact investment market is extremely diverse and the DFID Impact Fund is distinctive: Research and stakeholder engagement has highlighted the diverse nature of the impact investment market, which reflects opportunities, now and in the future, for many types of investors to have a positive social impact. In these early days, the market must also respond to different stakeholder needs and concerns including investors with considerably different requirements for social and financial returns, and varying appetite for risk. The DFID Impact Fund has a reasonable appetite for risk, to push frontiers forward, but wants ultimately to demonstrate what can work in this sector. In particular, the DFID Impact Fund has a specific mandate to reach millions of people at the base of the pyramid through its investees which makes it unique amongst most investors in the space.
Investment in impact funds may need to be done on terms that are differentiated from commercial private equity (PE) investments: Even though impact Funds follow a differentiated investment strategy that incorporates a strong focus on achieving impact and can sometimes result in low underlying portfolio profitability, there is a tendency towards generalist PE Fund terms to be used as a benchmark when assessing impact investments. As part of its investment process, CDC have worked closely with other Fund investors to apply “fit for purpose” investment terms that appropriately reflect the investment strategy of Funds and ensure sustainability of impact Fund Managers.
Priorities of investors differ by their mandate: Most investors seem to have been attracted to invest in impact Funds not only due to their focus on development impact, but also because of their innovative strategies and a focus on addressing a capital gap in the market. This has important implications to improve the fundraising prospects for first-time managers in this space.
Impact investment activity in South Asia (outside of India) appears to be at a nascent stage when compared to other developing countries.
There is a lack of publically available data on the impact investment market in Sub-Saharan Africa and South Asia: While there is a significant evidence base for global trends in impact investment, there is relatively little data available on trends in base of the pyramid-focused investing in the programme target regions at present. The Impact Programme is well placed to help bridge this information gap, which has been identified as a constraint to market growth in these regions.
For many Skoll World Forum delegates these findings may not be revelatory, but we are keen to understand if they relate to the experience, challenges and opportunities that others are facing. As the Programme moves forward, we look forward to sharing additional learnings with the market.
This blog was first published on the Skoll World Forum blog and is reproduced with permission.
Dear Liz, thanks for the background on DFID’s reason for and approach to investing in the impact market.
I was wondering as to what lessons dfid has learnt about itself and its own systems as an “angel investor” through its bilateral and research programmes funding policy experiments for southern governments, before this venture into ‘impact investing’ through lending mechanisms such as ‘silent capital’. In other words, its practice in relation to another common framework for reporting the performance and impact of the ‘investments’ – the MDGs – an equivalent standard set of performance measures for describing the impact that appears similar in purpose to the IRIS initiative.
On a slightly different note, how does dfid’s participation in ‘impact investing” sit with its status as a public sector organisation? Does not this role slightly confuse the objectives and function of the CDC – a quango that dfid effectively ‘owns’ – if slightly confuse their positioning in this space? Or am I not understanding how and on what basis taxpayers money is allocated across the two organisations?