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:
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