When the pandemic struck, the first priority had to be healthcare and a focus on urgent Covid relief. Governments did the heavy lifting, but impact investors also played a role in providing emergency relief.
In the US, Impact Assets of Bethesda created its Covid Response Fund to invest in companies and projects that advance the immediate fight against the pandemic, e.g. treatments and vaccinations.
Similarly, in Europe, Franklin Templeton’s Social Infrastructure Fund invested in two much-needed hospitals in the epicentre of the coronavirus in northern Italy.
As the dust settled, it soon became clear that impact investors needed to support their investees in their financial challenges arising from Covid.
Fine-tuning investment terms
And while there has been little change in the choice of investment vehicles (private equity and private debt remain the two preferred instruments) there has been a need to ‘fine-tune’ financing, says Giselle Leung, managing director at the Global Impact Investing Network (GIIN).
Leading impact consultant Arabella Advisors is cautioning investors to “reassure investees that you will continue to be a source of patient and flexible capital and are open to adjusting investment terms.”
This may mean delaying interest payments and postponing loan maturities, helping investees access capital through loan guarantees or providing capital through bridging loans.
This fine-tuning is borne out by the 2020 GIIN survey ‘The impact investing market in the Covid-19 context’. In response to the pandemic, 76% of investors described providing non-financial support directly, or indirectly through a technical assistance provider.
This was in addition to the provision of additional capital (60%) and introductions to new investors or potential co-investors. 38% relaxed interest payments – and more still described allowing principal deferrals – efforts that reflect adaptation among debt portfolios.
Continued support for emerging markets
Beyond operational and financial changes, there have been significant developments in investment priorities and investment missions. Geographically there were fears that the pandemic would lead investors to ‘stick closer to home,’ and $90bn of capital left emerging markets in the first quarter of 2020.
Nonetheless, as the pandemic has unfolded, there has in fact been a continued focus on emerging markets. This is particularly true of the government agencies that are major impact investors.
Nick O’Donohoe, CEO of the CDC Group, the UK development bank, said that “the pandemic has underlined the urgent requirement to better support African countries."
Build back better
Looking forward, as Sarah Gordon, the CEO of the Impact Investing Institute observes, there is a desire to create a “just and green recovery …in emerging markets,” and to “build back better.”
Investors are looking at broader issues addressing food insecurity due to the disruption of the global supply chain, and challenges in water, sanitation and hygiene.
Schroders' $350mn Covid-19 Support fund supports those small businesses in developing and frontier economies which according to Peter Harrison, Schroders chief executive, have been “hit disproportionately hard” by Covid-19.
It is managed by BlueOrchard Finance, the Zurich-based impact investing boutique Schroders bought in 2019, and is supported by the international development finance agencies of the UK, US and Japan and Germany’s state development bank, KfW.
Increased focus on social issues
This capital is much needed. As Tokunboh Ishmael, co-founder and managing director at Nigerian investment firm Alitheia Capital stated: “… particularly where Covid-19 has revealed gaps in social services, health, education and infrastructure. The virus opened up the curtains and showed us that we have not invested enough, either publicly or privately.”
In the United States, Covid has exposed fissures in society and the economy along racial lines, a fact highlighted by the Black Lives Matter movement and the housing crisis. Impact investors in real estate are looking to address this, as noted in a recent report by PWC and the Urban Institute.
This increased focus on social issues is indeed noticeable. Amit Bouri, CEO and co-founder of GIIN notes that traditional banks—who were just beginning to show interest in impact investing before the crisis—are now ramping it up. “We’re seeing a groundswell of interest from mainstream institutions.”
Triodos Investment Management’s impact equities and bonds director, William De Vries agrees that “the growing awareness that things have to change is a worldwide phenomenon." And it’s not just institutions.
De Vries says Triodos has seen a €100mn net inflow and that “investors, especially those in Western Europe and the Nordics are becoming more convinced of the need to invest in a more impact-conscious way.”