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.

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 USD in 2006 to approximately $564 billion USD in 2016. Likewise, venture capital funds, which were responsible for growing companies such as Hewlett-Packard and Apple, are constantly on the prowl for companies that can provide Facebook- and Google-type IPO successes, even in low-income countries.

Unfortunately, there are not enough of these types of opportunities in these regions. One reason is that Investments and funds are often modeled after those from more developed and prosperous countries, which require a five- to seven-year investment horizon with very specific financial return hurdles.

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. This is where impact investments, aptly referred to as patient capital, can play a pivotal role.

According to the Global Impact Investing Network (GIIN), “Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals.” In essence, 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 2020 GIIN report, the amount of assets managed by impact investors topped $715 billion USD.

Read the full article about global impact investing by Efosa Ojomo at Christensen Institute.