Ahead of the United Nations General Assembly happening later this month, the Global Impact Investing Network (GIIN) has published a report, Unlocking the Potential of Frontier Finance, on the obstacles and opportunities for investors in emerging and frontier markets. According to the report, demand for capital significantly outweighs capital flows.
Billed as the first of its kind, the report found that despite the recent growth in frontier investing, capital flows are falling short of demand for investment and the estimated $2.5 trillion required in emerging markets alone to achieve the United Nations' Sustainable Development Goals (SDGs).
GIIN used a database of 40 frontier finance transactions, ten interviews and a workshop discussion with 39 investors and other interested parties. Its analysis found market-rate return targets in 74% of transactions, with 87% of investments meeting or even exceeding financial performance expectations. These investments mainly focused on social impact objectives such as the SDGs on productive work with a fair income and economic growth.
Investors in frontier markets explained that one of the main hurdles to reaching the SDGs is the smaller ticket size typically associated with frontier investments, not to mention the gaps in supply chains and high transaction costs. Report data shows that ticket sizes averaged $1.1 million and had a median of $385,000 - figures that could well prove difficult for larger institutional investors.
The five key recommendations to help investors overcome these challenges, as outlined in the report, are:
- Unlock grant capital to act as a derisking mechanism to individual investments and supporting the broader impact investing ecosystem. By de-risking investment opportunities, grant capital could catalyse further investment as well as support the financing of technical assistance.
- Test and refine financial instruments and structures to strengthen the appropriateness of investment products. The flexibility required to meet investee’s needs while operating in a frontier finance environment should be considered an opportunity for innovative investment structures.
- Expand partnerships among investors and with other interested parties. Building partnerships can provide the foundation for a broader ecosystem, pooling facilities and enabling investors to collectively navigate requirements and risks.
- Strengthen forums for investors and entrepreneurs to share ideas and lessons learned. A range of forums could foster collaboration between investors and entrepreneurs and serve as an entry point for asset owners.
- Elevate and celebrate success stories. Asset managers and owners can address existing knowledge gaps by sharing success stories.
