This piece was co-authored by Christimara Garcia, a volunteer at the Christensen Institute and founder of Catalyze Innovations Initiative, a Brazilian market-creating innovation action tank.
Globally, more and more people are beginning to recognize the role of the private sector and more specifically, innovation, in helping poor countries become prosperous.
Investment vehicles, including private equity and venture capital funds, are now deploying capital to more emerging markets than ever before. Private equity flows to emerging markets more than quintupled from $93 billion USD in 2006 to approximately $564 billion USD in 2016. Likewise, venture capital funds, which were responsible for growing companies such as Hewlett-Packard and Apple, are constantly on the prowl for companies that can provide Facebook- and Google-type IPO successes, even in low-income countries.
Unfortunately, there are not enough of these types of opportunities in these regions. One reason is that Investments and funds are often modeled after those from more developed and prosperous countries, which require a five- to seven-year investment horizon with very specific financial return hurdles.
Such financial return expectations are understandable in wealthy countries, since businesses can typically plug into existing infrastructure straight from the start, thus enabling quicker returns. In contrast, capital deployed into poorer countries with less developed institutions, infrastructure, and capital markets has little to no choice but to be patient as these nations slowly build systems that can support future investments. This is where impact investments, aptly referred to as patient capital, can play a pivotal role.
According to the Global Impact Investing Network (GIIN), “Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals.” In essence, impact investments have the potential to fill a void that traditional financing is either unable or unwilling to fill. Although the size of the global impact investment market is small compared to the tens of trillions of dollars of assets under management globally, the industry is continuing to grow. In a 2020 GIIN report, the amount of assets managed by impact investors topped $715 billion USD.
Impact investing: Improving healthcare in Brazil
The size of the global impact investment industry might still be small compared with traditional investments, but impact investments can serve as binoculars that help traditional investors see opportunities they would ordinarily disregard. For example, consider LGT Impact Ventures’ investment in Dr. Consulta, a chain of health clinics in Brazil. More than half of Brazil’s 200 million citizens don’t have access to quality healthcare, and thus have to use the public system, which is inefficient and often underfunded. To help mitigate this disparity, LGT Impact Ventures (LGT) invested $10 million in Dr. Consulta in 2014.
To fully appreciate LGT’s investment and why such an opportunity would have initially been unattractive to the typical investor, consider that Dr. Consulta provides services to those who live in poverty. In addition, approximately 30% of Brazilian municipalities don’t have hospitals and a quarter have no doctors. This means that Dr. Consulta couldn’t simply plug and play into existing systems and improve them. The organization had to create them.
Dr. Consulta today employs more than 1,300 doctors and treats more than 100,000 patients monthly. Since its founding, the hospital has grown at 300% year over year, and with LGT’s help, has expanded to operate 50 health management clinics across São Paulo. This chain of clinics is so efficient that it is able to provide diagnostics exams such as MRIs, blood tests, and mammograms at an affordable price for the average Brazilian. Dr. Consulta, which has been largely funded by impact investments, is now scalable enough to attract further investments from traditional investment firms that would otherwise be reluctant to invest in early-stage businesses.
Because access to financing is one of the most difficult challenges that entrepreneurs in low- and middle-income countries face, impact investments can play a critical role in unlocking viable opportunities that would otherwise be missed by traditional investors.