The Challenge for Impact Investors in this Next Phase of COVID-19

This article was also published to ImpactAlpha.
 

The most disruptive pandemic in more than a century is entering a new phase, with economies in the West slowly re-opening while COVID-19’s epicenter is shifting to South America and cases are spreading in Africa.
 

But while governments in the developed world are proposing trillions of dollars in additional stimulus to prop up businesses and households whose livelihoods have been threatened, the situation is much different in the developing world—requiring private investors to step up.

Decisive actions by many governments in Africa proved to be an effective first step and demonstrated a well-managed effort in preparedness to the virus’ spread. However, these efforts consumed major parts of available budgets and resources. And mobility restrictions imposed to slow the spread of the pandemic have only added to the economic headwinds—including the global slowdown, supply chain disruptions, and the sharp decline in commodity prices—acting against the African economy, where 80% of trade is to international markets.

Here, the immediate threat—beyond the healthcare crisis—is finding a way to help essential service providers get through the pandemic so they can continue to do their good work. Here, COVID-19 is challenging the private sector to do its part.

In the first real global crisis in the era of impact investing, it would be a mistake for private investors to remain on the sidelines and let governments and multilateral institutions around the world  carry the burden all alone. Indeed, the question impact investors will ask one another in the years to come is: “What did you do when COVID-19 pandemic erupted?”

For years, impact investors have been vocal and persistent advocates of the power of private capital to bring about positive social, economic, and environmental change. In the developing world, impact investing is often about something much more elemental: helping deliver critical services such as clean water, food, affordable housing, and healthcare to communities that local governments simply cannot or do not serve.

In the developed world, the big economic worry right now is helping businesses and consumers get back on their feet as stay-at-home orders are lifted. In Africa and the developing world, the more pressing concern is whether companies that serve as safety nets for low- and middle-income households in need can continue to provide critical services during—and after­—the coronavirus pandemic. With predictions of 20 million people potentially losing their jobs and as much as a third of the workforce being affected in Africa, there is a real concern that tens of millions of people will be pushed into poverty, wiping out the progress made in the last 30 years toward the U.N.’s first Sustainable Development Goal of “No Poverty.”

That’s why in April, Vital Capital launched a new debt facility, starting with an initial $10 million in capital, to offer loans for essential businesses to get through this wave of coronavirus. We know that without such assistance, many well-run companies making a positive impact—and that under normal circumstances would be financially sound—may be forced to stop operating in this period of social distancing. We need to buy them time by providing the necessary financing and management tools to get past this unprecedented crisis successfully.

For nearly a decade, Vital Capital has worked these types of purpose-driven initiatives throughout sub-Saharan Africa. Attracting capital in this part of the world has always been a challenge, and that was before the new obstacles created by the spread of COVID-19.

Impact investors who care about earning market rates on their purpose-driven investments should consider the effective return on this type of investment. Building a healthcare facility from scratch might require $20 million in capital. To prevent an existing one from closing its doors might only require a loan of $1 million. There’s also the additional value of forging new relationships and building trust with businesses that, once past this crisis, will be critical players in their regions.

We implore impact investors in other parts of the world to extend similar lifelines to vital, impact-oriented businesses. In Africa, we know that governments and development banks will step in to save large, strategic assets as well as infrastructure projects nearing completion. We also know that many local commercial banks will likely prioritize their existing clients and outstanding loans. And we know where that leaves many micro, small- and medium-sized enteprises, which account for more than 70% of employment in Africa and 40% of the GDP. That’s according to McKinsey & Company, which calculated that $50 Billion are required in the next 3 months to save these 90 million (MSMEs)

Meanwhile, the developing world can’t count on the same level of foreign investments as they’ve enjoyed in the recent past. In Africa, foreign direct investment is already projected to fall 30% to 40% due to the coronavirus economic shocks, according to the United Nations, as money that would have been directed to the region is likely to stay in the U.S. and Europe to shore up domestic economies.

In this odd period of hyper-isolation, investors in the West may wonder why they should care about saving small businesses in Africa when there are plenty of companies and communities in need closer to home. But if this pandemic demonstrates anything, it’s how interconnected we all are, and that economic black swans, which affect our own well-being, cross oceans quickly.

The question that impact investors must ask ourselves is: Will we be true to ourselves and our values at this consequential moment in history, when the communities we serve need us now more than ever? Or will we effectively isolate ourselves from this crisis, and let the positive impact we’ve made in recent years fade away?

GIIN’s Flagship Report Recognizes Vital’s Pioneering Leadership Role in Impact Investing

We are thrilled that Vital Capital was highlighted in the Global Impact Investment Network’s flagship report, the 2020 Annual Impact Investor Survey.” The report incorporates data from more respondents than ever before – almost 300 impact investors – focusing on their investment activity, capital allocations, performance, and impact measurement and management.

 
 

To mark the 10th edition of the study, this year’s report looks back on the impact investing industry’s significant advancement over the past decade – and it starts with Vital Capital’s 2011 fund launch. The timeline “Notable Commitments Over the Past Decade” on page 20 of the report begins with our successful $350 million investment fundraise. We are proud that our smart, targeted investments have delivered essential development impact to millions of individuals in low and middle-income communities and helped kick-off a decade that has seen so many important developments in impact investing.

 
 

The report also features Vital’s insights on how the impact of the COVID-19 pandemic reinforces the need for investments along SDG themes. Though each firm’s contributions are unattributed, you can find our quotes on page 65. In addition, Vital’s data contributed to the survey’s research.

 
 

Some key findings from the report:

  • Most respondents (57%) indicated that they are ‘unlikely’ to change the volume of capital they plan to commit to impact investments in 2020: This uninspired response from the industry underscores the need for additional funds similar to the Vital Impact Relief Fund.
  • Strong performance is motivating investment activity: One critical driver of market growth is the industry’s performance – in both impact and financial terms – over time. 88% of respondents report meeting or exceeding their financial expectations. In terms of impact performance, 99% of respondents noted that they have met or exceeded their expectations since inception.
  • “Sophistication of impact measurement and management practice” is cited as one of the greatest areas of progress over the past decade: Impact measurement and management (IMM) practices enable impact investors to demonstrate real results and ensures accountability. IMM practices now reflect greater sophistication and strategic use of tools. As the market matures, much opportunity still exists for greater depth and refinement.
  • Interest in key sectors and geographies (excluding outliers): Top sectors to which respondents allocated capital were energy (16%), followed by financial services (excluding microfinance), with 12% of sample AUM. The majority of capital is allocated to developed markets (55%), with the top region of investment being US & Canada (30%). Top asset classes are private debt, comprising 21% of the sample AUM, while public equity accounts for 19%.
  • Growth marked by 17% compound annual growth rate (CAGR) among repeat respondents: Among repeat respondents to the GIIN’s 2016 Annual Impact Investor Survey (2015 year-end data) and this year’s survey, aggregate AUM grew from USD $52 billion to $98 billion.
  • The current market sizing was calculated to be USD $715 billion based upon assets of the 294 respondent investors from the 2020 Annual Impact Investor Survey.

 
 

Vital discusses how the Vital Impact Relief Facility can support African SME’s with Environmental Finance

In a recent interview with Michael Holder for Environmental Finance, Vital Capital Managing Partner, Mr. Nimrod Gerber discussed the economic crisis facing Africa as a result of the coronavirus pandemic and how small- and medium-sized businesses stand to be most affected. Mr. Gerber described how Vital Capital has adapted its core strategy to extend support to these companies with the launch of the Vital Impact Relief Facility, explaining that: “This is what impact investment is all about: we see the need from being on the ground, not from our theoretical model. The need right now is to preserve impact and to save existing value – not necessarily to build new impact, as with our greenfield projects.”

 
 

He also issued a rallying call for investors to preserve impact and value by backing these otherwise viable companies that have recently joined the “missing middle” of financially underserved businesses: “Fantastic companies, which are creating an important impact for their communities and have good financial performance, are now fighting for survival. And unless someone acts fast there’s going to be a massive destruction of value.”

 
 

In discussing how Vital Capital is supporting its existing portfolio, Mr. Gerber explained that in addition to putting in place World Health Organisation guidance on workplace practices as part of its standard ESG practices, in many cases the investment team are “rolling up our sleeves,” helping out overloaded CEOs as if they are working for the companies themselves: “they are calling banks, talking to creditors, arranging international alternatives to existing supply chains.” With Vital Capital’s deep and long-established presence in the region, Mr. Gerber also revealed how Vital’s team can bring some “extra perspective” to management teams that may not have encountered too many crises before.

 
 

The full article can be found online here (subscription required)

 
 

Examining the Economic Impact of Covid-19 in Africa

Our team recently participated in webinars hosted by GIIN and Big Path Capital focused on the economic consequences of COVID-19 in Africa and on the role the impact investment must play. These discussions have been illuminating and served to further shape our thinking and approach to supporting impactful businesses providing services to communities throughout our target geographies in sub-Saharan Africa.

We wanted to share some of the key takeaways:

The pandemic is already affecting businesses, demanding urgent, direct action

While the full extent of the public health emergency caused by COVID-19 in Africa has yet to unfold, the economic impact is already undeniable. Supply chains are being disrupted, foreign investment is drying up and governments don’t have the financial clout to offset the effect of the “stay at home” mobility restrictions they’re imposing. This threatens the livelihoods of employees and the communities these businesses serve. As our managing partner, Nimrod Gerber commented during the Big Path Capital panel: “One thing for certain is that the economic crisis is already a reality… it’s already happening. We cannot sit on the fence; impact investors need to step up now to secure businesses delivering essentials for local populations.

The ‘missing middle’ is most at risk

Against this backdrop, it’s the small and medium-sized businesses that are most vulnerable. While the very small ‘mums and pops’ businesses may be able to manage, and large strategically important companies will be at the top of the list to receive what government aid is available, it’s mid-sized companies – the financially underserved missing middle – that are most at risk. The harsh reality is that as financing channels have dried up, many previously viable and successful firms now find themselves in this bracket – and this missing middle has grown dramatically in just a matter of weeks.

Impact investors have a key role to play

It’s these businesses that need to be supported: to survive the crisis; to maintain the positive economic and social impact they have on their communities; and to position them to thrive in the future. The good news for investors is that it presents a significant opportunity to create both impact and financial value – there are plenty of great companies with fantastic profitability that, without the stresses presented by the crisis resulting from the COVID-19 pandemic, wouldn’t be in difficulty.

This is a test for impact investing

There is an opportunity for impact investment to demonstrate it truly works. Investors are in a position to create real impact and to be financially rewarded but it requires a flexible approach and urgent and immediate action.

The risk is that if these companies are left to fail, it would represent a terrible destruction of both value and impact. The damage caused and cost of failing to act would be great – not just for the businesses and communities affected, but also for the credibility of impact investing more broadly.

Vital Capital awarded EMPEA Sustainability & Operational Excellence Challenge Winner

Vital Capital was awarded as the winner of the EMPEA Institute Sustainability & Operational Excellence Challenge 2017 for its management of Luanda Medical Center at the EMPEA/Financial Times leadership summit in London. Congratulations to LMC for their superior operations.

 

For the full case study:

 
 

Vital Contributes to the GIIN Impact Measurement in the Healthcare Sector Report

The GIIN has released a new report, Network Insights: Impact Measurement in the Healthcare Sector. The report features commonly-used impact metrics and measurement approaches by Vital Capital and other leading investors in healthcare delivery in emerging markets.

The report is a key step to greater transparency and shared learnings in the sector. This is GIIN’s second in a series of Network Insights publications that aggregate common practices and perspectives from impact investors.

For the full report: https://thegiin.org/knowledge/publication/network-insights-impact-measurement-in-the-healthcare-sector