Private Investment Is Changing International Development. Here’s What You Need to Know.
The shifting priorities of corporations and investors are changing the world of international development.
By Kristin Kelly Jangraw, INVEST Senior Communications Advisor
Every day dozens of discouraging headlines bombard readers. But obscured behind that 24-hour drip are some promising trends — slow-moving but powerful — that are cause for real optimism.
One is a sea change in how companies are doing business. Rather than focusing on profits alone, companies are assuming new leadership on social and environmental issues, integrating purpose with profitability.
For example, in August the Business Roundtable, a group of 200 CEOs chaired by JPMorgan’s Jamie Dimon, publicly redefined the purpose of a corporation. Businesses should no longer prioritize shareholder value above all else, they argued. Instead companies should provide value to customers, invest in employees and communities, protect the environment, and deal fairly with suppliers.
This announcement came quickly on the heels of Larry Fink’s 2019 Letter to CEOs running companies in Blackrock’s investment portfolio. Fink’s message was that “profits and purpose are inextricably linked” and “the world needs your leadership.”
These are strong statements from the world’s largest asset manager and many of the world’s largest companies. They are backed by a lot of capital and a lot of talent.
Organizations like the U.S. Agency for International Development (USAID), which leads the United States’ development and humanitarian relief efforts, have recognized these shifts and their potential to move the needle on the world’s hardest challenges. Many donors are reorienting their efforts around private-sector engagement and blended finance to align flows of capital to development priorities.
At the same time, because of low interest rates in developed economies, investors are looking to new markets for higher returns. Consumer spending is growing much faster in emerging markets than developing markets. And, in 2018 Africa was home to six of the world’s ten fastest growing economies. Despite these promising trends, there are some significant barriers to investment, from small deal sizes to high transaction costs.
USAID INVEST Strategic Investment Advisor Vanessa Holcomb Mann works closely with the investment and development community. She has spent most of her career at the intersection of development and the private sector, working on the design and launch of U.S. Government initiatives, such as Power Africa, the Global Entrepreneurship Program, and now INVEST. Each one uses the ingenuity and resources of the private sector to drive increased investment and development outcomes. Her perspective is informed by her experiences in the private sector, ranging from consulting to leading consumer packaged goods companies, private wealth management, and as an angel investor.
I recently sat down with Vanessa to get her thoughts on the state of play for investors in developing economies.
The following interview has been edited for clarity and length.
Kristin Kelly Jangraw: You have been thinking a lot about the role investors play in international development.
Vanessa Holcomb Mann: Yes. The initiative I work on, USAID INVEST, is just one example of how donors and the investment community are working together more closely. Across the board, donors are looking for ways to unlock private capital that is sitting on the sidelines and could have a significant positive impact. As donors increase their focus on the private sector, they increasingly understand that they can no longer treat the private sector as a monolith. Private sector actors have varying investment targets, risk-return profiles, constraints, and even reasons to invest.
Right now, we are preparing to release a report that USAID commissioned on a growing wave of Corporate Investment Partnerships. It highlights how companies are becoming increasingly important investors in developing and emerging markets. It also explores the investment models that successful companies are using to address global issues that affect their businesses as they respond to pressure from consumers and investors and grapple with material risks to their operations. And it makes recommendations on how development agencies like USAID can enable more of these investments and align them with development goals.
Jangraw: What can donors do to mobilize more private capital and counter risk perceptions and convince investors to enter emerging and frontier markets?
Holcomb Mann: Well, it’s not just perceived risk. There are very real risks in these markets. For example, there can be corruption, currency risk, and information asymmetries, as well as high transaction costs. That’s why concessional capital is so valuable. By concessional capital, I don’t mean just grants or first-loss capital, but also loans with more-patient terms and equity investments where returns are capped below market rate. I don’t think donors realize what an important offering that is in the markets where they work — not just to make one transaction work in the short term but also to build a track record and deepen capital markets. Over time, markets mature and become more efficient, making it easier for investors to come in over the long term without donor support.
It’s really important for donors to work closely with investors and intermediaries because those players can validate what kind of concessional capital is truly needed in a given market. They have a deep enough understanding to build a capital stack for a company — that is, the mix of different layers of investment capital — that will make sense and be successful in attracting commercial investors.
Jangraw: What does it look like to support those intermediaries in emerging markets?
Holcomb Mann: USAID is starting to do this more and more. For example, it recently provided catalytic capital through INVEST to Women’s World Banking Capital Partners Fund II, an asset manager focused on women’s economic empowerment in developing economies. This is a space that despite increased attention is under-funded in many markets and has the potential to have a big impact, so USAID is working to unlock the constraints that investors are facing.
Through INVEST, USAID recently released two additional requests for proposals focused on gender-lens investing. For these proposals, USAID asked investors, fund managers, and technical assistance providers to propose and substantiate the type of support they need — both in terms of capital and technical assistance. This approach lets USAID use direct market feedback to structure its programs and target its funding to close very specific gaps for emerging-market investors aligned with USAID development outcomes.
Donor support to investors and fund managers, whether through technical assistance or by injecting concessional capital into their funds, can give intermediaries the runway to develop a track record in a new market, invest in smaller deal sizes, or more nascent industries.
I’d love to see more resources also go to intermediaries looking beyond traditional investment models, since we know that traditional private equity and venture capital models are not always well-suited to many of the markets where USAID works. That’s not to say there’s not an investment opportunity there. It’s more often the case that the financial product doesn’t match the deal size, the cost of managing risks, and available exit opportunities. One of INVEST’s partners, Convergence, has been funding innovative structures through its design funding window, but I think there is a lot more potential and need in this area.
Jangraw: How can donors get a deeper understanding of where investors are coming from?
Holcomb Mann: It takes people who understand investment and development to evaluate whether to support specific fund managers, and we likewise need to bring in both of those skillsets to evaluate companies looking for support and the merits of a specific transaction. It’s important to bring together traditional development sector experts with the people who really understand investment structures. Those skillsets don’t often exist in the same person, so we have to be intentional about collaboration.
Say you wanted to evaluate a company focused on providing safe drinking water in an underserved market. You would need someone with financial expertise to judge the company’s business case and a development expert in the water sector, who can assess its impact and where it fits in with other interventions that are already happening in the sector. If you look at only one side — the business case or the impact case — you can unintentionally make flawed decisions.
Jangraw: What are some of the biggest gaps that we need to close to mobilize more private capital for development?
Holcomb Mann: We definitely need a stronger evidence base on what works to mitigate risks for investors in different situations. The only way we will be able to develop the structures that work for these markets is by taking some risk and testing different approaches in different contexts and then filtering those learnings out. But measuring the impact of blended finance approaches is tricky, and the industry hasn’t settled on one way to do it.
In the past we have leaned too hard on leverage numbers — how much private capital you can bring in per donor dollar spent — but that doesn’t capture the true impact of that funding. And very high leverage ratios may actually be red flags that should make us consider whether those transactions would have happened anyway without donor support.
Instead donors should focus on those sectors or countries where investors cannot go on their own — where donor support is needed to make investments happen. In nascent sectors or early-stage businesses, where concessional financing is really needed, you probably will not see those high leverage ratios that people strive for and celebrate, and that’s okay.
Jangraw: Any final thoughts on investing in emerging and frontier markets?
Holcomb Mann: These markets are shifting rapidly, and those forces create opportunity and risk at the same time. There has been a lot of local innovation responding to unmet needs in developing countries and a lot of small companies seizing the opportunity to upgrade and leapfrog the existing infrastructure. If you do the math — taking that wave of innovation and multiplying by population growth and urbanization and additional expendable income — you can see the opportunity right there. It can make so much more sense than investing in saturated, developed markets. There are honestly such great investment opportunities. And you’re putting your money to work in a way that can have a big positive impact. But it’s not for the faint of heart.
To learn more about INVEST, visit www.USAID.gov/INVEST