It Takes Heart, Head...and Grit

The Wall Street Journal recently published an excellent article highlighting the trends and growth in the impact investing space. With Eurosif projecting that HNWIs will be investing 1.2 Trillion Euro in impact investments by 2013, wealth managers and financial advisers need to find creative ways to satisfy the blended appetites of their clients.

I want to discuss a statement made by Klaus Tischhauser, CEO of responsAbility Social Investments. He states that "the 'hottest' area of impact investing is small-business finance," and I completely agree with him.

One of the challenges in the impact investing market, especially funding directed to frontier markets, is that most of it is going into microfinance institutions (MFIs), or MFI funds. But as Mr. Tischhauser also notes, the microfinance sector is well established; and I would say oversubscribed. Many working in the field actually call microfinance: "sustainable poverty." Although I don't agree with this sentiments, I do believe local small and medium enterprises (SMEs) have been an overlooked asset class that hold the potential (albeit risky) for strong financial returns and local impact.

My only concern from the article was this statement "A typical holding is Silicon Valley-based Driptech, which has developed a novel drip irrigation system for poor farmers in India and China." Although this is an amazing technology, my hope is that these business innovations, and subsequent investments, are being looked for in-countries like Kenya, Ethiopia and Ghana. Understandably, this requires a considerable leap of faith from investors that many not be willing to travel around Africa searching for deals. And investing in an irrigation company in Silicon Valley is less concerning than an IT company in Uganda. Yet, in my opinion impact investing needs to get to this place soon - financing local firms in frontier markets. Why? Because of the multiplier effect: Local firms buy and sell locally, hire locally, and pay local taxes. SEAF, one of the leading SME investment organizations, claims that every $1 invested in a frontier market creates $13 of benefit in the local society.