Global development advisors Dalberg have released an extensive report on the state of social impact in South Asia.
Composed in partnership with the Global Impact Investing Network (GIIN), the report covers Pakistan, India, Sri Lanka, Nepal, Bangladesh and Myanmar, documenting the scale of investments, preferred vehicles, industries that have benefited and the challenges that investors face.
Throughout the region there is a diverse array of investment opportunities. India exhibits the greatest focus on renewable energies and environmental impact. In most other countries investments tend to focus primarily on social impact.
“The largest amounts of capital have been deployed in the sectors of energy, financial services (including microfinance), and manufacturing, and these remain active sectors for investment. Energy investments have been a combination of supporting infrastructure development in under-electrified areas as well as investment into renewable energy technologies towards improved environmental impact,” Dalberg has reported.
“There is also growing interest among impact investors in other sectors such as agro-business, health, and information and communication technology (ICT), and in businesses providing basic goods and services to the base-of-the-pyramid (BoP) consumers.”
India remains the region’s top destination for impact investments. The sector is currently valued at US$1.6 billion, but has received aggregate capital of US$5.4 billion between 2004 and 2014. India is consequently host to approximately 50 impact investment funds and the largest number of country specific funds in the region.
Pakistan is the region’s second investment destination. While aggregate capital is valued at US$1.9 billion, almost one-third of its eastern neighbour, the industry has thrived less on foreign investment, but on optimism amongst the domestic business community that has delivered seven impact investment funds. It has also benefited from a relatively favourable regulatory environment and strong history of entrepreneurial activity, Dalberg reports.
This is echo-ed in part in Bangladesh, arguably the genesis of impact investment and where Development Finance Institutions (DFIs) have a long-standing presence. While impact investment activity in Bangladesh has scored many prominent points over the past decade, aggregate capital since 2004 is US$995 million. With nine impact investment funds present in the market, Bangladesh continues to exhibit a disproportionate impact rate relative to its size and neighbours.
Still emerging from the tumult of civil war, Nepal’s impact investment sector remains nascent. Just US$17 million has been deployed over the past decade, although US$54 million has been raised and committed by DFIs and funds for future deployment. This underlines the strong fundamentals in Nepal that exist in its neighbours.
Sri Lanka is enjoying a post-war economic boom and political stability that has undoubtedly been a boon to investment. “Nearly US$500 million has been deployed to date in Sri Lanka, demonstrating the potential for capital flows across the region if the market climates are investment friendly,” Dalberg reports.
Confidence in Sri Lanka is further supported by 11 country-specific funds that it is host to. However, Sri Lanka’s small overall market size and gaps in enterprise capacity continue to impose limitations for investors.
Myanmar is South Asia’s new frontier market in which investment impact models stand on fertile ground. The deployment of just US$12 million in Myanmar is unsurprising in current circumstances, but is set to experience a dramatic change with US$109 million committed for deployment over the next two to four years.
While country-specific funds are growing, most capital is being deployed via DFIs. The majority of this,60-70%, has been deployed through debt instruments. This is the preferred vehicle due to the lower risk appetite, a lower level of due diligence, and less active management of the investment when compared with equity investments. These trends are more pronounced amongst foreign funds.
Accordingly, DFIs tend to target mature companies given internal capacities to absorb large investments, most DFI investments have been in the USD 10-50 million range. Smaller investments in early-stage companies have been more limited to date and most investments by non-DFI investors have been below USD 1 million.
The largely restricted scope focused on mature companies is also symptomatic of the region’s challenges. Regulatory issues, deal sourcing and issues of scale typify the hurdles that investors must face.
Regulatory issues are a common theme, related to complexity, variability, inefficiency, and restrictiveness. Dalberg also reports that entrepreneurs also face barriers in establishing and scaling businesses, as bureaucratic processes add to the transaction costs and time required to establish a business and to maintain compliance with regulations during growth phases.