Q&A: How to make money work harder for impact

LONDON — Achieving the Sustainable Development Goals can open up an estimated $12 trillion of market opportunities — but investors are still grappling with the question of how to create investable deals, especially in emerging markets.

Some market opportunities — often those responding to persistent market failures or testing out new solutions — require more flexibility or a higher degree of risk than many investors are willing to take.

The U.K. development finance institution CDC Group has spent the past 70 years investing in economic development. But new — and increasingly urgent — development challenges, as well as the global momentum around the achievement of the SDGs, has led the institution to adopt a new, flexible approach to risk.

The use of catalytic capital lies at the core of this new model, which allows CDC to innovate investment opportunities where the possibility of pioneering impact calls for more flexibility around risk.

“The ambition was that we should keep pushing to make our money work harder for impact,” said Yasemin Saltuk Lamy, deputy chief investment officer at CDC.

With the new approach, CDC hopes to advance its three impact goals: enhance inclusion, promote innovation, and reach deeper into frontier markets, said Saltuk Lamy.

As part of this strategy, CDC has partnered with the U.K. government, the institution’s sole shareholder, to design a new catalytic capital commitment with greater risk-return flexibility. By the end of 2019, it expects to have existing commitments and a pipeline of over $500 million, and another $1.5 billion to invest next year.

“We’ve already set out some specific strategies where we’re trying to address a need within a sector — for example, to close gaps in value chains or financing,” said Saltuk Lamy. “We expect to build on that work in other sectors.”

Speaking to Devex in London on Oct. 7 at “The future of development finance: Closing the SDG funding gap,” Saltuk Lamy explained what lies behind CDC’s new investment approach.

This conversation has been edited for length and clarity.

Why are these types of investments — focusing on higher risk settings — important if we are to bridge the SDG funding gap?

There is a space that just won’t be appropriate for commercial investors, and this portfolio of catalytic capital is exactly the space we should be working in. Over time, that space might graduate to being able to receive commercial capital. It might not, but we can take the risk and determine what path it’s going to take.

What has CDC learned from your use of catalytic capital so far? And what kind of impact have you seen?

We’ve learned a lot about what different forms of market-shaping impact can look like. To give you an example, Gridworks is working to invest in utility-scale transmission and distribution of electricity — those are projects where you’re going to have to work with governments and those conversations are going to take many years. Some of them may never arrive at an investable opportunity, but some of them might.

The uncertainty of starting the conversation and maybe having three years go by until you have an investable opportunity is in and of itself [a risk] not that many investors are willing to take, but that’s exactly the type of risk that we’re willing to take.

To deliver market-shaping impact you often need a portfolio approach — it’s rare that one transaction can move a market. But sometimes it is possible, and this has been the story with MedAccess. Its very first volume guarantee, which, as an $18 million transaction with Hologic, enabled this challenger manufacturer of HIV viral load testing equipment, to come into a space with significant incumbents and really change the procurement of that market.

Some 48 countries can now access lower-cost testing and could save public sector purchasers up to $50 million in the procurement of that equipment over the next four years and beyond. That’s a pretty incredible result in one year. So those are two really different types of market-shaping impact that we have seen through the portfolio already.

There are certain risks that you’re willing to take as an investor, but others might be out of scope. How do you approach this issue?

When I started in the job my title was deputy CIO for higher risk strategies, or higher risk portfolios, which is not really the right way to articulate it. You should really start by asking what impact are you trying to achieve. And then to achieve that impact, do I need to take a higher risk or a different kind of risk? Step two is to articulate your risk appetite and make sure that you’re also clear about what risk is not in scope.

The risks that we are willing to take include things like working in a market that’s just developing, where the business model is just working out revenues, costs, and determining what customer demand actually is. Sometimes there’s a first-mover advantage, sometimes there’s a first-mover disadvantage.

Our catalytic capital would very much be open to taking some of that first-mover disadvantage risk — working with companies offering products that customers don’t yet know about or understand.

We might also be working in spaces where there are emerging trends that are not yet valued by the market as well as collective action problems. So if there is an intervention that needs a set of actors to come together in order to get over the economy of scale threshold, then that’s another place where we would be happy to work. MedAccess offers another great example of this in that they can aggregate procurement to increase sales volumes and decrease the prices of medical technologies, opening access up to more people around the world.

What's the main lesson you’ve learned in your role so far — and one call to action you would give to others looking to adopt this kind of investment approach?

After spending time with CDC’s investment teams, I started to understand that it was really important to have what we call the “sandbox” — a space where you could try one thing, as long as you have a good architecture on what impact you’re likely to have.

You can almost do anything in the sandbox as long as you think you can deliver pretty well on one of our three impact objectives — to enhance inclusion, promote innovation, and reach deeper into frontier markets. You can then use the sandbox to better understand what potential market-shaping path you might uncover by making this one investment.

No matter what kind of investor you are, you can always innovate for impact. That can be intimidating because it can often — especially if you are new to the space — feel like you’re going to sacrifice rigor. So my call to action is to be smart and work really hard to articulate what you would be willing to do if you’re climbing up the impact ladder. And then be brave, because you’ll think you’ve figured it all out, but of course, there will be things you haven’t anticipated — unintended consequences you might find yourself encountering along the way. You have to be smart, and then be brave.