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Lessons in frontier finance from 40 impact investments

ImpactAlpha, Sept. 11 – The big opportunity in “frontier finance” for small and growing businesses: solving large problems for large populations.

Omnivore, an India-based venture fund, for example, invested in Delhi-based Skymet Weather Services in 2011 to generate better weather data necessary for crop insurance and lines of credit for India’s small farmers. The firm’s crop insurance scheme has reached 10 to 12 million smallholder farmers and helped settle 4 million crop insurance claims. Omnivore expects a greater than 5x return on its investment.

Still, “within these markets, opportunities for substantial impact remain unrealized,” says the Rachel Bass of the Global Impact Investing Network, which rounded up lessons from 40 frontier finance deals in “Unlocking the Potential of Frontier Finance.” What we learned:

  • Growth markets. Of the 35 investments that shared target return data, two-thirds target market-rate returns of 21% per annum. Average target returns for mezzanine finance deals, the highest among asset classes, was 23%. Almost 90% of investors report financial performance met or is exceeding expectations. 
  • Bread and butter. The GIIN cross-referenced the investments with the four types of small and growing businesses identified by the Collaborative for Frontier Finance (see, “The four ‘missing middles’ among small and growing businesses). “Dynamic enterprises” seeking growth through proven business models in established industries such as trading, manufacturing and retail attracted the bulk of the investments. The next biggest batch were “high growth ventures” aiming to scale through disruptive innovations.
  • Catalyzing capital. Most frontier finance is deployed through traditional investment instruments such as private equity or debt. Investors should explore “alternative” structures such as revenue-based repayment models, holding company structures, and evergreen funds, the GIIN advises (see, “Adobe Capital closes $30 million for Mexico’s impact entrepreneurs). 

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