Emerging and Growth Markets | January 30, 2023

What 672 private debt and equity funds show about impact investing in emerging markets

Dennis Price
ImpactAlpha Editor

Dennis Price

ImpactAlpha, Jan. 30 – After a pandemic-related pause, institutional investors are again moving money into private impact funds in emerging markets. But only a small fraction of those funds are managed locally.

In its latest market snapshot. The Swiss impact investing specialist Tameo identified a whopping 672 fixed income and equity funds, run by 346 fund managers, which collectively manage $84 billion in assets focused on emerging and frontier markets (representing about 7% of assets in the $1.2 trillion impact investing market.

Fund managers launched at least 84 new private market impact funds targeting Africa, Latin America, Eastern Europe and South Asia in 2021.

Managers located in emerging and frontier markets manage just 8% of impact assets under management. U.S.-based managers made up 25% of the total and another 43% of the managers were in Switzerland, the Netherlands, the U.K. and Germany.

Ten investment firms manage roughly one-third of private impact assets in emerging markets, but Tameo’s Ram Narayanan told ImpactAlpha, “There are more and more smaller fund managers emerging in developing countries.”

Pandemic rebound

In a survey of a subset of 198 funds (managed by 94 managers), Tameo found total assets grew 16.9% in 2021, a year after the pandemic nearly halted asset growth to 1.6%. Fund managers surveyed expected a modest but positive growth in 2022 of 6% (Tameo’s 2022 data will be available later this year). Among the managers surveyed: Aavishkaar Capital, Deetken Impact, Elevar Equity, responsAbility and Vox Capital.

The spread of sovereign debt and currency crises presents a major challenge; about two-third of all debt investments are denominated in hard currency.

Impact themes

Microfinance remains the biggest part of the portfolio of the funds overall, but among the new products, multi-sector funds that invest across the Sustainable Development Goals made up the largest number of new products (31).

Tameo found 18 new climate and energy funds and a dozen focused on small-and mid-sized business development.

Equity impact funds have caught up and surpassed fixed income funds in number (357 equity vs. 218 fixed income) as well as assets ($42 billion vs. $32 billion). “You can now invest for impact in many ways,” says Narayanan. “What excites me is the diversity in the market.” 

Impact and accountability

Women make up roughly half of managers’ workforces, though only about a third of leadership positions.

To be included in the universe of impact funds, Tameo screened for funds with a stated intentionality of social or environmental impact at the core of their strategy as well as processes for measuring it. Among those surveyed, nearly all monitor impact at least once a year and 92% report impact performance to their investors.

“There’s a lot of accountability,” says Narayanan. “This is really what differentiates our market from traditional finance.”