Episode 79: The trillion-dollar investment gap

Thank you.

Hello and welcome to the CFA's latest In Conversation podcast. This podcast is aimed for investment professionals and it focuses on topics that really matter to the profession today. I'm David Manuel. I work as an independent consultant after about 30-35 years involved in asset management. I also now work as one of the sustainability champions at the CFA, promoting sustainable and impactful investment.

Joining me today is Chris Machani, founder and CEO of Impactable Investment Group, and that's a firm that specializes in impact investing in emerging markets, and it focuses on creating a measurable... set the social environmental benefit while prioritizing financial returns. So he's got over 25 year experience in finance and Chris has worked across asset management and private equity.

He's gained significant expertise, particularly in emerging markets, which is the focus of his fund now. So Chris, welcome. I think maybe if we start off by exploring how you arrived at the idea of Impactful Investment Group and share a little bit of your journey to now.

Thank you so much. I really appreciate that introduction. It's great to be here with you today and talking about one of my favorite subjects, which is impact investment. In terms of my career, I started on a derivatives prop desk in the city.

So it's an investment bank trading the bank's own capital. And relatively soon into my career, I decided I wanted to launch my own fund. So I launched a hedge fund. The first fund was about 20 years ago. And when I launched the fund, one of the key drivers for doing so was actually not just to make.

money but also to in one sense make money to give money so we set up a charitable structure a foundation so as the fund did well and assets grew the returns were generating uh management fees and performance fees that went into the foundation so moving on from that i mean i think over time what we realized is that journey that we've been on or i've been on from

starting my career of just making money to moving on to making money to give money the foundation increasingly focused on uh you know particularly africa but also other emerging markets where we could fund development and we went on that kind of

uh you know well-trodden journey of maybe you just start with sort of handouts and actually realize actually you know we need to integrate uh supporting business so we funded microfinance and then realizing actually that there's a whole range of smes that need some finance so that expanded to sme finance i mean went through that chain. Really appreciated.

um that journey and it was just some incredible stories of some of the projects we supported and went to go and see that i found inspiring in my in my day job as an investment manager but also realized that there's a limitation in the amount that philanthropy can do and maybe even should do depending on your view that philanthropy is you know often a one-off gift and that recycling that comes from investment

isn't there. And also the scale of the issue and need of emerging from impact investing is quite significant. So we've got a multi-trillion dollar SDG funding target. that can't be met by philanthropy alone. So all of that led me to the decision that actually I want to integrate both the impact side and the investment side. And that's been a multi-year journey for me.

And over the last year or two, we've been focused on coming to market with impact investment funds that focus on emerging markets, have high impact and also competitive non-concessionary returns. And that's what we're doing at Impatible. That sounds quite inspiring, Chris. The final coming together of your experiences in philanthropy with your expertise in more mainstream investment career.

You've chosen, I believe, to focus on private credit in emerging markets. And I just wonder why do you think the opportunity is right now to scale up from the kind of philanthropy investments that you've been making in the past? So if you look at it from a Western mindset, I think there is a wild underexposure to both emerging markets and impact investment. A lot of the pension funds in this side of the world have got exposures pretty close to zero in the sum of those two.

And certainly very low. Certain markets are cutting edge. You know, I look at the Dutch and some of the Scandi countries and their exposures are increasing. And there's certainly pressure from various groups, including underlying pension holders. to increase that impact and emerging market exposure but at the moment just to be clear across the board on average it's very very low but this is an emerging mega class we've got an enormous tailwind both from

demographics, from growth and the need for impact to this particular space. How do you get investors and particularly those large institutional investors off the sidelines that we need in this space in order to meet the scale of this? multi-trillion dollar funding gap and that's been the question that we've been posing ourselves as impactable and the answer that we've come up with having looked at both private equity uh private debt private credit

And a variety of other strategies and also public markets is one that probably does need to be private markets. Public markets are too complex. They're too well established. The companies that are there to suddenly. try and back in sort of integrated impact within their whole business models and some of the more emerging private entities where they've got a longer investment cycle. and also are able to be a little bit more innovative, you're able to integrate Impact a little bit easier.

So we decided on private markets and we do have a pretty detailed private equity strategy that we would like to launch next. that will be secondaries led, which is a whole nother conversation. But on the private credit side, what we realise is that that's a low risk way for these institutional investors to make this first step or early steps.

into emerging market impact. And this really is a vast market segment. I mean, within Africa, we've got a two and a half plus trillion dollar funding gap for SMEs alone. And that's just one subset of. uh some of the markets in which we're operating and a lot of participants don't realize you know how large emerging markets are over 80 percent of the population and growing as both a nominally and a percentage uh this year

Or this last year in 2024, IMF forecasts of growth. So almost all of the countries with over 3% real GDP growth were in emerging markets. and clearly you know with a i keep on mentioning this trillion dollar funding it's actually over four trillion dollar funding gap per year to meet the sdg targets by 2030 with currently a global impact investment market of a little over a trillion and less than half of that in emerging markets. We're way, way short.

Ultimately if we don't find investable opportunities that can have this positive impact in these regions that most need it, we're facing some very serious problems here on the west as well. It's not just as simple as putting your head in the sand and taking the ostrich approach. What happens when, and we know that projections are for another 2 billion people to be born in emerging markets, that 2 billion population growth globally is happening.

exclusively in emerging markets, because during that time period, developed markets are going to shrink. And of that next 2 billion, 1 billion will be born in Africa, for example. What happens in Europe, where A billion people are born in a warming Africa with no job prospects. So ultimately, we've got a problem here that is a global problem. And the solution is to find impact investment, I believe.

at scale that can be both inclusive and green in terms of the growth that it catalyzes whilst also making investment returns that are suitable for the institutional investors that need to come off the sidelines.

So, I mean, you mentioned the sort of philanthropy and you've also got multinational development banks involved.

but all of which have got a priority for some kind of social good. Your investment is return driven as well as impactful. Where do you fit into the ecosystem? Are you completing the ecosystem or are you going to be... uh very much working with either of those two groups the philanthropy or the development banks well i think to be successful we need to work with all parties but ultimately what we're doing is as i mentioned before non-concessionary returns

And that's an essential part to bringing a scalable solution. Why is that? Institutional investors are not able, even if they wish to, which many of them may not, to invest in investments that are concessionary. That's not the way they're set up. So if you want to pull money into impact investment, it has to be a competitive return if you're going to do it at scale. And so we are return driven in that sense.

But we're also very much impact driven and integrating those two is the fundamental behind what we do. So we can't invest in anything that wouldn't have clear integrated impact, that wouldn't have IMM impact measurement and monitoring processes. that were suitable high enough standard that didn't meet our impact criteria. Your question about who does what and what the different roles of the MNDBs, the DFIs, the multilateral development banks.

philanthropy, what role can it play? And I personally believe that it's really important that the different participants really try and stick to their particular role where they can have most impact, stick to their lane. And in what way can they do that? Well, I think the MDBs and the DFIs have been set up to catalyse

institutional investment and increased participation in these harder to invest in markets. The way that you do that is that you can, with that capital, invest in concessionary returns. So over time, we've seen a pressure on the DFIs in particular and other groups there to really increase their notional returns rather than their impact return. I think that that pressure should subside somewhat.

so that they can catalyze institutional investors without the requirement for high returns. But vitally also plan out when they withdraw their funds, because what you... can see in certain instances and i'll give you an example we were speaking to a leading water investor the other day and there's been a lot of

well-meaning money coming into water investment in Africa is obviously an essential service. It's heart-wrenching when communities and individuals don't have access to water, sanitation and basic hygiene. and the implications for their health can be very, very significant. So I put this comment in that context. But also what's happening is we're seeing so much money coming in to support that heart wrenching issue.

and that the money coming in is typically requiring only a concessionary return. What that means is that whole water sanitation market in certain regions is unable to stand on its own two feet. and certainly unable to do so at scale. So whilst we need that discounted capital to come in, we need that discounted capital to step away at the right point so that a strong market can emerge.

um that is non-concessionary and that vitally importantly can scale and the other point in terms of both scale and and the ecosystem is that I think what a lot of people don't realise, or maybe they do realise, but the struggle with how do we manage it on a return or an investment basis is that there are obviously institutional voids in some of these emerging markets. Now, what can that mean? It can mean that there aren't...

you know, functioning markets and where people kind of meet and trade and where pricing is agreed. There aren't the level of regulatory and oversight and there isn't necessarily the same ability to enforce agreements. now that can become an issue so bringing an investment on its own is good

But bringing it alongside these other parties who can help catalyse that investment with the ability to be concessionary. And then also doing it with local regulators and ecosystem players who can help, you know, if you like. overcome those institutional voids and also provide investing in opportunities that potentially address those institutional voids which therefore converts that threat into an opportunity for example creating an ecosystem and market

in areas where that market does not exist can really be very beneficial. So what do you think the main pain points are for institutions to start supplying with capital that's needed?

elements of de-risking coming from the philanthropy and the catalytic equity from development banks and the development of local regulations that will reassure people with some of the risks. But what are the pain points that you have to address when you're... going to institutions, providing them to put money into impact investing in emerging markets. The challenge is that you've got to meet at least five criteria. And this is what I call solving the Rubik's Cube.

and if you look across the market of this kind of over a trillion dollar now impact investment market what you can see is there are relatively few players who genuinely solve all these factors and we'll get back to that in a second so what are those factors Well, first and foremost, as we already said, you've got to make competitive returns. You've also got to have high enough social and or environmental impact.

You've got to have managed and low enough risk. You've got to be institutional quality and you've got to be institutional scale. Now, if you look across the market, we look across the opportunities for institutional investors to come into this space, what you tend to find.

is that most of the opportunities out there fail on one or more of those factors. So it's deeply impactful, but it's concessionary. Or it's impactful with decent returns, but it's just so small that the subscale nature of it means that institutional investors

can't actually invest. So what we're finding is, if you look across again, the impact investment market of the funds out there, over 60% of them currently are under 100 million. So they're just instantly written off by the bigger institutions. And those are over a billion.

quite a few of them don't meet some of these other criteria. So the challenge that we're setting out at Impactable to do, and actually we've spent the last two years doing deep dive research and preparation for, is to launch a product that can meet All of those factors, high enough return, high enough impact, low enough in managed risk, institutional quality at an institutional scale. And we're aiming to launch a multi-billion dollar impact private debt product that does that.

So where are you finding opportunities that have that scale in emerging markets? Are there particular sectors or particular markets or maybe particular events in the water sector which the banks have to step back from?

Where are you seeing the opportunities? What kind of things would you think you'll be investing in? Well, the way that we've come at it is to say, look, if you look at any particular subsector impact category or even just sub region. that the capacity for scale is often limited. Not always, but often. To maximise our investment universe, we're coming at this from a pan-emerging market perspective.

focused on Eastern Europe, but principally Africa and Asia with potential for Latin America. And we're deliberately pan-sector and with an impact focus that's relatively broad. So the impact focus ultimately goes down to us. with focusing on green and inclusive growth and that will have an impact across three impact channels which is economic well-being resilient communities

and climate and energy transition. We're ending up with a portfolio or a pipeline of opportunity here that's sort of roughly 50% sort of climate related and 50% social related, but several of the investments have multiplying impacts across. multiple channels and multiple SDGs. All of everything that we do should ultimately, often through a secondary or tertiary effect, but ultimately have a positive impact on the lives of people at the bottom of the pyramid.

4.9 billion people who live on less than $10 a day. So that's the approach that we've taken is if you go broad across the regions, across the sector, across the impact channels, but you have a very clear methodology and IMM processes for reporting back and the impacts that you want to have, then what you can do is you can do a number of things. One, you can be quite choosy on the investments. You can aim at the higher end of the returns. You can also do it at significant scale.

And then the question becomes, how do you operationalize that and execute that? Yeah, a very good point. The operational challenges of actually deploying the money and monitoring it, etc. How do you go about... doing that do you have is there existing infrastructure that you can use to make the job easier or are you having to build your own on the ground network the simple way of saying what we're doing is we're building up a very significant co-investment

partnership network so we've got partnerships with some of the leading investors in emerging market impact private debt private credit and those partners are typically finding that they do a lot of due diligence on the ground with local presence for each of the opportunities, the trades that they're involved with. And that can be a 12-month process.

It's quite time consuming. It's quite costly. But then if you want to manage a private debt portfolio in these regions in a sensible way with managed risk, you need to have a highly diversified portfolio.

What that implies is that you've got relatively small maximum position sizes in each trade. So what we're finding is across the board that almost every one of the dozens of leading EM private debt players that we've spoken to almost every one of them has said yes when i've asked the following question do you during your normal investment cycle have excess pipeline and what that is is both a huge waste

currently and also a huge opportunity. Because if you think about it, you've got on one side these big institutional investors who are desperately trying to find scalable investment opportunities and claim they can't find them and they can't often.

And then you've got these funds on the other side who say, we're frustrated. We've done all these due diligence. We've got the opportunity. We've got long track histories that show the drawdowns for this space are actually way lower than people expect. It's a huge opportunity. We can't find people to invest.

And so what we're doing effectively is our strategy is to some degree meeting in the middle. So we're working with these co-investment partners. We're looking through first on an anonymized basis and then on a more detailed basis on the portfolios and saying, right, okay.

these are the opportunities that might fit for us. We're putting that into a portfolio. But most importantly, what we're doing is on the operational side is we're piggybacking off they're already very well established research processes origination processes deal structuring monitoring reporting they've got experts already in place on the impact side as well the investment side that's hard to do um and so we're leveraging all of that it's a pay-to-play model for us for them

but it's giving them the opportunity to scale up and us the opportunity to wrap a product together. Over time, we will continue to build out our own on the ground.

origination and of course our own underground teams and therefore that origination will become an opportunity for those players too as we invest together and the other thing that we're doing is also building up a secondaries expertise and with a lot of these players what you find and what's one of the big issues in emerging markets is there is very limited secondary markets and without that market depth

what happens is that exits particularly in private equity are much harder to come by uh but also uh you know there isn't that level of confidence that investors can have that if for whatever reason they need to get out, they can't get out because there is no secondary market. So it has multiple effects, not just those. And what we need to see is a growing depth of the secondary markets. Now, emerging market impact, private debt, secondaries is about as nascent as it gets.

in the secondary markets. So, you know, it's a really interesting area. And what we're principally doing is working with some of our co-investment partners to say, look, if you need to move around your portfolio, we're here to help and building up. But if anyone's speaking, you're hearing our voice right now is interested in discussing any of these factors.

then of course we're here to chat and we really want to work with other partners here and support them with the capital that we expect to be coming in from our investors to see these markets grow in a way that's mutually beneficial for all. That's very fascinating what you're pointing out there, the lack of liquidity in the whole chain from philanthropy all the way up to, I guess.

eventual public quotation, which in some of these countries actually means quoting on a developed market stock exchange. So you've got a great task to complete there.

Maybe it might be interesting for the listeners to get an example of the kind of things you're working on. I don't know if there's a case study that you can talk about where you've seen private credit put to work. of the particular opportunities that you're looking at, where you can obviously redact some of the details, but to give a flavour of the kind of things you're going to do.

Well, there's multiple opportunities. I'll just skim through a couple. Some of them will be more interesting to some people than others. I look in Africa, there's a number of financial services companies that we're involved with. Some of them have a tech-based angle that can increase efficiency, and as they scale out their product offerings, they need capital to do so. So one, for example, is helping to provide funding to Ghanaian market traders.

And one of the issues there is that these Ghanaian market traders go to the wholesalers in the morning and they can buy these goods and then bring them to market and have 100% markup on those goods in one day for everything they sell. So it's got a very large margin, but they just simply don't have access to finance. And it's ultimately throughout all that we're doing, there is that thing. It's just really providing we need access to finance.

By providing that access to finance, what it means is, of course, that they can grow their inventory, they can grow their stores. And I think just a little point here is that a lot of people really question the interest rate side of.

private debt investing and emerging market impact. And there are some voices that were table-thumpingly excitable about the idea that we must be extremely low with all of the interest rates that we charge. We'll speak to that Ghanaian market trader is my answer to them. Because they really don't care what the annualised return rate is or interest rate is. Is it 8%, is it 15%, 20%? You know, it really doesn't make a difference because that's an annualised rate versus 100%.

turnaround or gross margin on one day gross margin for their core business. So when that money comes in, Sometimes there are other parties in the financial services space that help with decreasing the cost through, for example, remittances. And what we find is that both by providing efficient capital, lower costs than maybe some of the other sources that they could get that capital from and or decreasing the cost of remittances, then you can actually save enough money, for example, to help.

that family put their children to school. So we're talking literally a couple of transactions on a remittance basis, for example, can literally put a child to school for the next several months. The point I'm trying to make here is that the direct impact which is

pulling in revenue that's sustainable for that family, growing a business from a micro business to a small business, the long-term impact of that for the economy, for the local community, for the family. But then also there's these multi-layers of impact as you go down.

We really are keen on the green space as well, of course. Renewables is a big thing. But one of the big things about renewable energy that isn't always explicitly mentioned is that there is a very high correlation to energy provision and long-term development prospects. Put simply, when a community has access to energy then that community tends to thrive and development outcomes improve.

so what's vitally important we all know this today is that we don't just provide energy access dirty old coal and these other forms of uh you know unhelpful forms of energy provision for the environment, but actually we can provide at least as efficiently and often more efficiently access to renewable energy. So one of the opportunities is solar.

for example, where we're helping or we've got the potential to help one investee scale up their solar provision across the emerging markets that we're speaking to. Another one would be access to e-vehicles and e-transportation. And Kenya is a leading market for this, but certainly there are a number of others where we're seeing as that scale up capital comes in through debt, we're seeing an ability for the financing of those new vehicles to be less costly.

for the e-tuk-tuk drivers all the way up to the e-buses and everything in between in terms of vehicle size and then what happens is that we see entire again value value chains around that electricity supply and storage develop and we see, for example, larger scale solar systems, mini grids that are set up.

to support the electrification of these vehicles and that whole electrified network. So again, that's another opportunity that's both having a direct impact on the bottom of the pyramid in terms of lives, livelihoods and incomes. and also having a positive impact on the environment. And the theme, again, across all of this is just seeing green and inclusive growth.

portion of investment professionals, if anyone's been inspired to want to get involved in this kind of area, what are the skills or maybe the mindsets that you see as needed for professionals who want to do the kind of things you're doing? What we really need in this sector are high performing specialists. IMM practices are complicated. Integrating into already complicated investment frameworks is also complicated.

Private market investments isn't necessarily easy. None of this is easy. And what that means is, and what has been where the rubber has hit the road in terms of our team development, is actually you need more qualified people, not less.

Now there's a lot of different areas across those different practices both on the investment side and the impact side where impact investment needs that support and What I would suggest for people who are interested is maximize your strengths, maximize your specializations. Allow yourself to be driven by your passions, because even across environmental and social issues, there's a huge range of opportunities geographically, subsectors, etc. Lots of different areas in which you can focus.

So be driven by your passions, your strengths, your specialisations. And one of the things I'd say is always be curious. Keep pushing the envelope of your understanding. For a lot of people, this impact investing sphere is just a black box. They don't know a lot about it. Sounds interesting. Integrate social environment impact, great. But out of ignorance, frankly, a lack of understanding.

fear, maybe sometimes just lack of bandwidth and time. People often just chalk that up to, well, it's just this kind of side market where returns aren't possible. We can't make a living and we can't go there. And all of those things are wildly untrue. So how do you build up and overcome those issues? How do you build up your knowledge base? We've got to learn.

right there's a lot of really good courses out there and as this is the cfa podcast i'll give a a plug to the actually excellent cfa courses so both the esg and the impact courses are very good i think that rigorous learning experience, not just through those courses but through others, but those are very good ones, is really helpful for people to be able to understand frameworks and for a commonality of framework that will then be applied across the industry.

So, yeah, give it a go. That's the big thing I'd say. There's lots of opportunity out there.

Yeah, it sounds really exciting. Not only in terms of the opportunities out there to make investments, but also the opportunities to build a really robust and strong infrastructure to support investing. So Chris, do you have any key takeaway message for the investment community? We all share in a global problem. We have to direct more capital towards emerging markets and towards impact investment.

There is no other way to fill the four plus trillion dollar a year SDG funding gap and meet our global ambitions by 2030. We talked about some of the problems and some of the issues that will result. if we don't scale that market billions of people born into extreme poverty slums expanding lack of access to education healthcare many things that we would view as universal rights. The risk of not investing in emerging market impact investing is hard to underestimate. But also,

The opportunity is hard to underestimate. This is an opportunity that spans most of the globe. It's an opportunity that is demographic with billions of people. already providing an opportunity for investment and billions more projected to grow into these emerging markets. When we talk about growth, There is an economic growth opportunity here. These markets are seeing some of the fastest growth and some of the fastest growth in history. India, for example, has exactly that.

the fastest growing middle class in history. 18 million people a year are entering the middle class in India. What would happen if you front loaded your investment ahead of that demographic boom? What would happen if you got in front of that growing middle class? If your investment catalyzed people moving from extreme poverty to a sustainable income stream to a middle class?

And you can do that at vast scale in rapidly growing markets. This is a huge investment opportunity as well as a huge impact need. Also in emerging markets, there is a huge opportunity.

because tech progression can happen in one step. Imagine development occurring, industrialization occurring, whereby you don't have to, for example, go from a slow analog system to a fixed line to a mobile phone, you can provide services that go jump over all of that learning in regions that don't currently have any of those services and go to what is the latest and greatest tech.

adoption what that means is that we can have investment that has impact and investment return at a lightning fast speed with huge potential demand already in place and what i'd say is for almost everyone and certainly everyone from a Western background or Western location. Almost everyone listening to this podcast is under-invested in emerging markets and under-invested in impact investment. And both professionally and personally,

you can push to increase that weighting. All investment ultimately has externalities. And for each of us, we can choose. And the question for those listening to this podcast today is are you going to be intentional? about ensuring that the externalities of your investment again both personal and professional are positive or not i want to challenge the mindset you can make strong returns and have very positive social and environmental

impact. That is an end. It may sound like it's a lot, may sound like it's outside of your wheelhouse of your understanding, but I can tell you with certainty that both of those things can and do go hand in hand. So my advice is work professionals who can help you on this. Build your understanding of the space, as we already talked about. Take the first steps. And if any of you are keen to better understand these market regions,

how you can integrate impact into your investments, then please don't hesitate to get in touch. We'd love to chat further. Chris, thank you so much for being with us today and for... communicating some of the passion you've got for having impact in emerging markets, along with the opportunity both for financial return, but also for investors to end up being doing the right thing and being on the right side of what promises to be.

a huge investment opportunity. Just a reminder that the next episode of our In Conversation podcast will be available through the usual CFA UK email with links and also through our social media channels. You can subscribe to the podcast so you don't miss any episodes. And that's available through SoundCloud channel or Apple Podcasts. So until next time, thanks very much for listening and have a good day.