ImpactAlpha, February 13 – The how-tos of exiting impact investments are always a hot topic of conversation among emerging market investors. IPOs are uncommon. Private equity is often unavailable. And secondary markets, in which investors can sell their stakes directly to other investors, are undeveloped.
British International Investment is looking to seed a secondary market for impact funds as a way of derisking emerging market fund investments and recycling capital to new fund managers. Its first deal in the new strategy, it sold its stakes in funds run by Aavishkaar, Novastar Ventures and Adenia Capital to Swiss impact investment firm Blue Earth Capital.
“We view this transaction as an innovative approach for blended finance,” said said Blue Earth’s Nicolas Muller. The UK development finance institution took the initial investment risk; Blue Earth’s acquisition “will help our fund managers build a diverse investor base and reduce their dependency on DFIs,” added BII’s John Owers.
First secondaries
The portfolio sale includes BII’s stake in Aavishkaar Goodwell India Microfinance Development Company II, a joint project of India-based Aavishkaar Group and Netherlands-based Goodwell investments. The fund makes small equity investments and provides technical assistance to microfinance institutions in India.
BII invested $15 million in 2012. BII invested in Adenia Capital’s fourth private equity fund for mid-sized African businesses in 2016.
African impact tech venture fund Novastar Ventures Africa Fund II has been part of BII’s fund portfolio since 2018.
Catalytic capital
Given the widening sustainable development and climate finance shortfall in emerging markets, development finance institutions are coming under increased pressure to be more catalytic and risk-taking with their capital.
“Mobilization is a key part of our strategy,” said Owers.
BII’s secondaries strategy aims to encourage existing emerging market investors like Blue Earth to dial up their capital commitments, and also to encourage new investors into the market.
“This will be achieved by providing visibility of the underlying investments in the funds, shorter hold periods and access to a diverse fund portfolio for potential new investors,” he said.
