WASHINGTON — The impact investing community is grappling with how the coronavirus crisis will affect growth and how entrepreneurs searching for capital in low-income countries will fare.
The past few weeks have seen the launch of a number of new coalitions and efforts to better collaborate. Some see an opportunity for financial industry transformation and impact mainstreaming, while others worry that money may flee for what some investors perceive as safer investments.
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The economic shock of the COVID-19 pandemic has led most investors to lose money, many to adopt a sort of holding pattern, and a large amount to pull back on investments in low-income countries. The United Nations Conference on Trade and Development is predicting that foreign direct investment globally could drop by 30% to 40% from 2020-2021, and significant decreases have already been seen in sub-Saharan Africa in a number of months.
But many impact investors are still investing, experts and investors told Devex, seeking to help companies they work with scale up in response to the pandemic or looking ahead to what investments may aid in the recovery and build future resilience.
The pandemic is a “seminal test for the impact investment field,” said Sean Hinton, CEO of the Soros Economic Development Fund, in a statement. Amit Bouri, the Global Impact Investing Network’s CEO, said that impact investing is “more important than ever” and called on impact investors to “lean into the moment.”
The funding environment for social entrepreneurs is not making things easy, but impact investors are looking to collaborate better to accelerate the pace of investment and streamline measurement and practices. Some even believe that this could be a turning point for global financial systems, experts and investors told Devex.
“We cannot afford to let impact not be at the center of the recovery because the way we tackle the recovery phase will shape whether we’re moving to a new economic order with impact at the center,” said Sebastian Welisiejko, chief policy officer at the Global Steering Group for Impact Investment.
Is there investment?
Economic shocks, market volatility, and uncertainty typically result in investors taking a more conservative stance, and while that has been true, some impact investors report that they are still making new investments.
While some investors have stopped making new deals amid the uncertainty, impact investors are a bit more opportunistic, said Meredith Shields, the Sorenson Impact Foundation’s director of impact investing, and are still looking to see how they can deploy their capital despite the challenges.
“I don’t know how long that will last, but so far I have not seen a complete door shut,” she said.
A return to pre-coronavirus investing levels in Africa is likely close to two years away, with sectors recovering at different paces, and the tourism business in particular is likely to suffer for an extended period, said Yemi Lalude, managing partner for Africa at TPG Growth, at a recent online event.
While investors are unlikely to rush into emerging markets when they are in a “risk off” orientation, the fundamental drivers of the African investment opportunity have not changed, he noted.
Investors working in low-income countries may also play a more prominent role, particularly in doing due diligence. Alitheia Capital, which is based in Nigeria, has had co-investors ask the firm to lead on due diligence, said Tokunboh Ishmael, co-founder and managing partner at Alitheia.
Alitheia Capital has always focused its investments on essential sectors such as health care, education, financial services, and energy and is “bullish” about continuing to invest in those areas, which may well have a bounce after the crisis, she said.
“The way we tackle the recovery phase will shape whether we’re moving to a new economic order with impact at the center.”— Sebastian Welisiejko, chief policy officer, Global Steering Group for Impact Investment
While some investors may still be deploying capital, how they’re doing so is changing as they factor in new risks. As a result, it will be harder for entrepreneurs to get large valuations, as investors will look for downside protections such as liquidation preferences on those deals.
But companies should not worry about their valuations and the terms — if they can raise cash now, they should, said Justin Stanford, co-founding general partner of 4Di Capital. Ishmael echoed that advice, adding that companies need to be more forward-thinking when it comes to raising capital and figure out how to make what they have last longer.
Impact investors are coming together in a number of collaborative efforts to better coordinate and accelerate the industry’s response to the pandemic and, in some cases, committing to sharing information about pipelines or due-diligence processes in ways they have not before.
The Global Impact Investing Network recently launched the Response, Recovery, and Resilience Investment Coalition to streamline impact investing efforts to address the social and economic consequences of the pandemic. The coalition will connect investors and aim to highlight investment opportunities, help fill financing gaps, and quickly deploy capital.
There is more of an openness among investors to see how they might collaborate to act more quickly and effectively as a result of the pandemic, Shields said.
The siloed operations and lack of transparency in the finance industry have generally carried over into impact investing, but the pandemic may change that, she said. Still, investors will be concerned about liability risk, so it will be critical to develop trusting relationships that make sense, Shields added.
“This pandemic is forcing a lot of industries to think differently about boundaries and roles and why they have certain protocols,” she said. “The reason we’re collaborating more now is that it is more critical than in the past.”
Another effort looking to boost collaboration around due diligence and investment pipelines is the COVID-19 Investor Coalition led by Village Capital. The company has published a pipeline of about 100 startups that are responding to the crisis and are looking for investment.
The coalition, a group of more than 20 investors, is looking to invest about $500,000 in the next few months, though the coalition is designed to scale and that number may go up, said Andrew Hobbs, Village Capital’s manager of product and technology strategy.
Village Capital has a unique model of investing that relies on peer evaluation of potential investments, a system it is working to move online in the next couple of weeks. It is considering how an expedited version of that system could be used for the COVID-19 coalition, which could help add due-diligence capacity to the coalition’s investors so that more deals can get done if the partners are open to it, Hobbs said.
The crisis has accelerated some things that were already happening, and Hobbs hopes the coalition will make it obvious that collaboration is beneficial and more of it should be done in the long term, he said.
An opportunity for growth?
Impact investing was growing and becoming more mainstream before the pandemic, but how COVID-19 will impact that growth and efforts at standardization is an open question.
The coronavirus has exposed the fact that the global capital system is basically broken, and while that might present an opportunity, the system still has “incredible inertia,” said Cathy Clark, faculty director of the Center for the Advancement of Social Entrepreneurship at Duke University’s Fuqua School of Business.
“This crisis will have a profound impact on economic development generally and specifically how we think about the difference between business and investing in society and the planet,” said GIIN’s Bouri. “I think a big mandate coming out of this is thinking about what is the purpose of our money.”
GIIN was founded in 2009 during the recession, and that economic shock created a reckoning “questioning the underlying assumptions of how we were investing,” which helped accelerate impact investing, he said. In response to this shock, the organization needs to translate high-level intentions into investment opportunities and measurable results, Bouri said.
“This pandemic is forcing a lot of industries to think differently about boundaries and roles and why they have certain protocols.”— Meredith Shields, director of impact investing, Sorenson Impact Foundation
There is an opportunity for this moment to drive major changes in the financial system, said Ronald Cohen, chairman of the Global Steering Group for Impact Investment, who has been advocating for a shift to a financial system that takes risk, return, and impact into account.
“It’s going to give the movement a very big push,” he said.“Crisis creates a lot of pressure to make sure money delivers what it's expected to deliver.”
If the more than $30 trillion in professionally managed assets that are invested to minimize harm could be pushed to measure impact, which investors could then use to assess their value, the impact would be transformative, Cohen said.
Governments could require mandatory reporting of impact, an issue that Cohen said he hopes will be discussed at upcoming meetings of the Group of Seven or Group of 20 nations.
While that may be an ambitious goal, there are other potential tangible impacts of the ways that the crisis has forced collaboration and changed practices.
Once investors have seen the benefits of greater cooperation, perhaps it will happen more. There could also be an opportunity to increase investment in companies that are more diverse — and not necessarily right down the road.
If investors start using more online tools, it could help make the case that “long-distance investing is a viable strategy in the long run” and help investors who like to be able to easily visit their investments branch out from places such as Silicon Valley, Hobbs said.