Giving Compass' Take:

• Impact investments can help fill voids in global development within poorer countries because investments can help build emerging markets that other businesses can not. 

• Will impact investments start to grow in popularity within global development as an innovative financing tool?

• Read about what some philanthropists think the next steps are for impact investing. 

Globally, more and more people are beginning to recognize the role of the private sector and more specifically, innovation, in helping poor countries become prosperous. We can do all the research and science we want, but if we don’t have firms that will create markets, we are likely not going to move the needle on creating prosperity in poor countries. But creating new markets in poor countries is both difficult and requires capital.

Investment vehicles, including private equity and venture capital funds, are now deploying capital to more emerging markets than ever before. Private equity flows to emerging markets more than quintupled from $93 billion in 2006 to approximately $564 billion in 2016.

Such financial return expectations are understandable in wealthy countries, since businesses can typically plug into existing infrastructure straight from the start, thus enabling quicker returns. In contrast, capital deployed into poorer countries with less developed institutions, infrastructure, and capital markets has little to no choice but to be patient as these nations slowly build systems that can support future investments.

Because businesses are often responsible for creating new markets that can pull in resources (roads, rail, schools, regulations, etc.) into poor countries, a traditional investment with a five-year horizon will not work for many market-creating opportunities in emerging markets. This is where impact investments, aptly referred to as patient capital, can play a pivotal role.

Impact investments have the potential to fill a void that traditional financing is either unable or unwilling to fill. Although the size of the global impact investment market is small compared to the tens of trillions of dollars of assets under management globally, the industry is continuing to grow. In a 2017 GIIN report, the amount of assets managed by impact investors topped $114 billion.

Read the full article about impact investment by Efosa Ojomo at Christensen Institute