OTW partners share their thoughts on the role and prospects of impact investing in emerging markets after the global pandemic.
Q: The current economic climate has changed many impact investors’ risk appetites. How do you expect investors’ criteria and approach to change under this climate?
A: First, Fund Managers will focus on ensuring the survival of their portfolio companies with their existing capital base. The present economic climate is a stress test for portfolio companies and Fund Managers are likely to divert much needed capital for overall business survival, mitigating risks of liquidity shortages, and retaining jobs.
Second, investment commitments overall from Limited Partners to PE/VC funds are expected to shrink given the current uncertainties. Regardless, the fundamentals behind impact investing will remain constant; impact investors are likely to proceed with careful risk assessment. COVID has shown which sectors and economies are more resilient and we can expect investments to flow in that direction.
With this shift, the role of Development Finance Institutions (DFIs) will become even more prominent. Although DFI support is expected to reduce considerably, investment in the form of technical assistance is becoming a popular means of supporting local SMEs through this period.
Q: Post COVID-19, what are the sectors or sub-sectors that would attract investments in emerging markets? What are your anticipations for investments in industries such as tourism and hospitality, where COVID has made the most impact?
A: One thing that is clear is that companies operating in the essential services or basic needs sectors such as healthcare, agrofoods, logistics, education and renewable energy will garner immense attention from investors. The pandemic has also proven the importance of Information and communications technology (ICT) and e-commerce moving forward. However, there will be pressure for companies operating in these spaces to deliver and upgrade their technology, infrastructure and supply chains to strengthen operations. Regardless of sector, businesses with clear and concrete plans to manage risks and bounce back from the downturn are more likely to get noticed by investors.
The hospitality sector took the hardest blow and it might take another two to three years for tourism related businesses to take off fully. Investors will not be too keen to bet their bucks on this sector until a clear end to travel restrictions is in sight and individuals feel safe to travel again. If you happen to be in this sector, proving that you can adapt and survive through COVID and having a clear business plan for the ‘new world’ will help you obtain investments in the future.
Q: What kind of role do you see impact investments playing in the post-COVID economic recovery for emerging markets?
A: Currently, impact investments only account for less than 1 percent of global investment. But COVID-19 has necessitated the adoption of impact investment strategies to build more resilient portfolios where positive socio-economic changes can be realized. Even BlackRock, the world’s largest asset manager, is seeking a tenfold increase in investments where Environment, Social and Governance (ESG) components are well addressed.
In the short-run, impact investors can make an impact by supporting companies actively with advice and flexible terms to help investee companies sustain. DFIs can also play a role in emerging markets by providing additional working capital, funding accelerators and business development programs, connecting and supporting government funds, and mobilizing third-party capital.
Looking forward, impact investors will be using lessons from COVID to judge and support plans of entrepreneurs (who should now have assessed their risks more extensively). We expect the impact-oriented mindset to prevail; investors will be looking to support companies that can prove their resilience and support them in their recovery and growth moving forward.
Q: In what ways has COVID changed the investment climate in Nepal/Myanmar?
A: The investment climate in both Nepal and Myanmar has been challenging even before COVID. In a sense, not much has changed for impact investors with a long-term collaborative focus; investments in these frontiers have always required that investors be patient and committed in order to seize the economic opportunities the countries present. We remain optimistic that the case for FDI in frontiers will soon gain merit, and FDI policies will change in the near future to encourage FDI inflows as part of the COVID recovery plan.
Q: Supply chains and trade partnerships of Nepal, Myanmar and other frontiers in Asia are heavily linked to those of China and India. Moving forward, how important will it be for frontiers to develop resilient supply chains locally and diversify its trade partners?
A: COVID has demonstrated that dependency on one or two countries poses great economic and political risks. Businesses around the world are rethinking and transforming their business strategies to manage disruptions in their supply chains, and businesses in the frontier economies should also do the same.
This calls for effective supplier relationship management across regions rather than focusing on China and India. Both Nepal and Myanmar should diversify their supply chain and build stronger relationships with other neighboring countries such as Vietnam, Indonesia, Cambodia and Bangladesh. COVID also presents an opportunity for frontiers like Nepal and Myanmar to become manufacturers for companies looking shifting their production base.