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Optimizing financial and social returns: Why Impact Engine invested in our Digital Growth Fund

A enormous thank you to Priya Parrish, Ander Iruretagoyena, and the team at Impact Engine not only for backing us in the first close of Next Billion Digital Growth I but also for sharing their views on why they invested.


What is the investment opportunity that you see by backing the Digital Growth Fund?  


The wave of digitization across the world starting in the early 2000s has created a significant and overlooked opportunity in emerging markets.  Globally, there are estimated to be around 5 billion internet users; Southeast Asia, Middle East & Africa, and Latin America already represent a third of these users, and emerging markets represent the fastest-growing segment of the internet population.  


The investment opportunity arises from the timely gap between this large and growing population of relatively new internet users and the lack of digital solutions that are available to them.  Individuals and micro, small, and medium enterprises in emerging markets share a common set of pain points that starts with lack of access to essential goods and services (including and especially financial services).  The digital economy is capable of democratizing access to these and empowers the economic mobility for the end users.

 

How, in your view, is the Digital Growth Fund targeting this opportunity? 


Local technology companies are solving pain points in their particular markets by adapting digital solutions that have been proven many times in other parts of the world.  Local digital economies require local technology companies to serve the needs of their growing user base.  However, technology companies need capital and expertise to grow and scale, and capital remains scarce today, particularly at the growth stage: companies that have real revenue ($5M+) and want to scale further, but in terms of size are already beyond the reach of local investors.


The growth stage still suffers from a lack of equity capital in emerging markets.  Early-stage companies raising equity rounds of up to USD 10-15 million are often funded by local venture capital investors; even these investment rounds tend to be supported by at least several investors, as their fund sizes (with some exceptions) do not allow them to invest larger amounts.  On the other hand, late-stage (pre-IPO) technology companies raising equity rounds of USD 50 million and above attract increasing interest from global investors who prefer to invest much larger amounts.  


These trends leave a gap for growth equity between local and global investors, and this gap represents an opportunity to work alongside local investors and attract global investors to an ever-growing wave of technology companies in emerging markets.  

 

Why Next Billion Capital Partners? 


We decided to back the team at Next Billion for two main reasons.  


First, the team has developed an investment strategy based on global pattern recognition.  The team monitors successful business models in developed markets and then tracks them across their target regions in emerging markets.  For us, this is unique in that when Next Billion decides to prioritize a business model, this decision is based on understanding adaptability for multiple emerging markets rather than just one, leading to better prioritization.  Once a model is prioritized, repeated evaluation of a particular business model allows for better and quicker analysis, and allows the team to be extremely valuable to portfolio companies.  For example, their first deal out of the new fund, Qoala - a digital distribution platform for insurance in Southeast Asia - comes on the heels of their studying role models like Wefox in Europe but also evaluating peers in other emerging markets, including eventually their investment in a similar company in India.


Second, the team has a strong impact and financial track record in executing this exact strategy.  Through their previous investments in 40 companies across emerging markets, the team successfully demonstrated its ability to generate attractive returns, achieve meaningful exits, and reach millions of target beneficiaries with essential goods and services.  The managing partners come from the IFC and responsAbility where in their roles they were investing in this very set of companies amongst their target regions.  All team members have personal connections to the target countries, and have dedicated their entire professional careers to their advancement

 

What is your impact thesis for this investment?  


With this investment we are doubling down on the thesis that technology is uniquely capable of enabling digital and financial inclusion, and that digital economy companies deliver impact at scale by providing affordable access to essential goods and services – including financial services - for the next billion households, women, and MSMEs in emerging markets.  


The digital economy is impactful in emerging markets because technology has the potential to solve acute pain points and democratize opportunity at large scale.  Every investment that the Digital Growth Fund makes will be in a company that promotes digital and financial inclusion, and every investment will correspond to at least one of the fund’s three impact strategies:


  1. Provide households access to affordable goods and services.  Household consumption in emerging markets is 60-80% of GDP, or roughly 1.5x the level of developed countries.  Nevertheless, the distribution of essential goods and services – including and especially financial services – is highly inefficient.

  2. Create employment and services for women.  Women in emerging markets face particularly large gaps in workforce participation and challenges in procuring services, such as financial, healthcare, and education.  According to the Council on Foreign Relations, closing the global gender gap in the workforce would add $28T to global GDP – and over 60% of this improvement would come from emerging markets.

  3. Improve productivity and access to finance for MSMEs.  MSMEs are a fundamental part of emerging market economies, accounting for 90% of businesses and 50% of employment globally; nevertheless, MSME productivity in emerging markets is highly inefficient, and opportunities for growth are limited.  According to OECD, MSMEs in developed countries are nearly 3x more productive than their emerging market counterparts, in part due to offline manual processes 


As longtime investors in this space, the Next Billion team is building cutting-edge, technology-specific impact and ESG practices for driving and measuring impact at its investee companies.  They will also be registered as a fully compliant fund under SFDR’s Article 9 and are amongst the few market rate growth equity funds who will operate under the 2X Challenge gender criteria.  

 

How does this investment fit in your portfolio and strategy?  


By investing in Next Billion, we gain access to nine emerging markets across three regions.  Diversification is particularly important to us in emerging markets given the additional geopolitical and currency risks.  Next Billion’s on-the-ground and seasoned expertise in these countries allows them to identify and select leading growth-stage companies, as well as consider macroeconomic factors when constructing the portfolio.  This approach is important to generate attractive risk-adjusted returns, as the potential higher returns in emerging markets can be offset by additional risks if not managed proactively.


As we’ve canvassed the investment universe for growth equity managers with the right experience and strategy for emerging markets, we noticed the lack of options for impact investors.  Investing in Next Billion therefore also fulfills our mission to help build the impact investing ecosystem, and we look forward to partnering with Next Billion to establish a category defining franchise.

 

About Impact Engine 


Impact Engine is a women-led and employee-owned registered investment advisor that has been working to build the impact ecosystem since 2012 through investments that deliver superior risk-adjusted returns and deep impact outcomes.  Based in Chicago, they invest exclusively in funds and companies that are driving positive impact in economic opportunity, environmental sustainability, and health equity.  They provide investment capital along all stages of the life cycle of an enterprise, from early-stage venture to private equity, investing directly in technology companies, through co-investments with our GP partners, and in funds across this spectrum.  Their multi-faceted investment approach ensures that they operate at the center of the impact innovation ecosystem, giving them unique access to differentiated, high-quality deal flow as well as comprehensive knowledge of the market. 


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