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January 25th, 2023
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Unlocking the Potential of Frontier Finance
Global Impact Investing Network | | Sep 10, 2019
Unlocking the Potential of Frontier Finance assesses key features of frontier finance impact investments and finds significant opportunity for making an impact in this sector.
Based on analysis of 40 frontier finance transactions, 10 interviews, and a workshop discussion with 39 investors and other ecosystem players, this report uncovers significant financial and impact motivations for entering the space and identifies recommendations to scale the market to achieve global development goals.
The report was produced with the support of the DOEN Foundation, the John D. and Catherine T. MacArthur Foundation, and the Omidyar Network.
Executive Summary
Impact investors have a long history of practicing frontier finance, or investing to improve the lives of low to lower-middle income people in emerging and frontier markets. They’re motivated by the significant potential of frontier finance investments to create deep, lasting impact while tapping into markets with strong growth potential and an emerging consumer class. Ultimately, many frontier finance investors are driven by an intention to effect broader systemic change on the financial systems in frontier markets.
See: Blockchain Technology and the UN: The Sustainable Development Goals
Yet capital flows fall far short of demand for investment in these markets – and far short of the estimated capital gaps required to achieve the Sustainable Development Goals (SDGs). For impact investment in frontier finance to reach its full potential, investors require more clarity around the common features and performance of such transactions and strategies to address the challenges they face in the market. This research seeks to answer these questions by analyzing a database of 40 frontier finance transactions, 10 interviews, and a workshop discussion with 39 investors and other ecosystem players.
Through the transaction database, the Research Team found that frontier finance investments play myriad roles in the market and have diverse features. Common features include:
- Relatively small ticket sizes, with an average ticket size of USD 1.1 million and a median of USD 385,000;
- Use of both developed market and emerging market currencies (60% and 40%, respectively);
- Primarily market-rate return targets (74%), with a majority of investments meeting or exceeding financial performance expectations (87%); and
- Primarily social impact objectives, with commonly targeted SDGs including decent work and economic growth (SDG 8; 50%) and no poverty (SDG 1; 48%).
See: How Data-driven Strategies Can Improve Impact Investing Outcomes
This research found constraints to frontier finance activities from difficulties raising (in the case of asset managers) and deploying (in the case of asset owners) capital; educational gaps across the capital supply chain; and high transaction and operating costs. Five primary strategies can begin to address these challenges, namely to:
- Unlock grant capital to act as a de-risking mechanism to individual investments and support the broader impact investing ecosystem;• test and refine financial instruments and structures to strengthen the appropriateness of investment products;
- Expand and strengthen partnerships among investors and with other ecosystem players;
- Strengthen forums for investors and entrepreneurs to exchange ideas and share lessons learned; and
- Elevate and celebrate success stories.Collaborative and coordinated efforts among investors and field-builders are required to advance these strategies and, ultimately, to unlock capital flows, improve the efficiency of frontier finance transactions and operations, and champion high-impact solutions in frontier and emerging markets around the world.
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