Impact Investment. Allman Keith А.

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      The most noticeable feature of Figure 2.4 is that there are some affluent geographies on the list, such as Singapore and Hong Kong. Even though the HDI is heavily weighted, there are still four other factors that favor developed countries. For this reason, it is necessary to take a closer look at the heat map that shows how the rankings were created. It is clear that there are trade-offs with each country that was selected. For instance, the first choice is Rwanda, a country that is very favorable because of a high development need based on HDI and acceptable scores on investment protection and contract enforcement. Insolvency and ease of starting a business are not very good, but the other factors still outweigh the low scores.

      The trade-offs are evident when Singapore is examined. It has the lowest HDI score of the top 15 countries shown, but makes it to the top 15 because of very high scores for contract enforcement and investor protections. It also has high scores for the ease of starting a business and insolvency mitigation.

      Investors can customize the weightings depending on the focus of their investment strategy. For instance, a debt investor may put more emphasis on insolvency protection and contract enforcement given the first lien position of debt on the assets of a company. Change the scenario selector on the sheet to Global Impact – Debt. When this is done, the results change and Ethiopia takes the top spot, primarily because of a more favorable insolvency mitigation score, which is important for debt investing.

      Keep in mind that this is only a method to start building a framework for geographic suitability and that each country should be examined in detail. For instance, Ethiopia as the top choice for Global Impact – Debt has a high need for development and a good insolvency mitigation score, but compared to the mean investor protection score amongst the top 25 (6.256), its investor protection score of 1.6 is very low. Depending on the risk appetite of the investor, this combination may not be suitable. Individual analysis is always required. Also, the data sets chosen here are not exhaustive or completely indicative of a perfect investment environment. Local due diligence should always be undertaken to vet country risk.

      Finally, impact investing does not have to only be done in emerging markets. There are many companies that are domiciled in developed countries that have focuses abroad or, as mentioned in Chapter 1 earlier, even in areas domestically that demonstrate need. However, investors in companies that are domiciled in developed markets and do business in emerging and frontier markets should still do a country risk analysis of the primary operational regions. Indirect risks can disrupt cash flow and quickly put stress on the viability of the company as a whole.

      Country Economic Analysis

      Although the previous analysis on country suitability included many investment related characteristics, economic indicators were notably missing. There are many economic indicators one could look to but two important ones that capture multiple subrisks are business cycle and foreign exchange. Even if a country is suitable for investment, the timing might not be right because of these two factors.

      Business Cycle

History has shown economists and businesses that there is a relatively standard pattern in the economy that creates a business cycle. Economies move through periods of growth, contraction, and back to growth. The time of each point in the cycle can vary widely, but this pattern is evident. Figure 2.5 depicts the standard business cycle.

Figure 2.5 The standard business cycle is important for investors to understand.

      Countries can exhibit their own unique business cycles or be correlated to other countries that may influence their economies. For this reason, an investor should always gather economic data on the country in mind to understand the business cycle. Sector specific investors must think about their sectors vis-à-vis the business cycles and their expected evolutions. For example, a housing project company may look attractive during the growth phase shown in Figure 2.5 since the economy will be getting better, discretionary spending will be higher, and credit will be loosening. However, during a recession phase credit might tighten up, making mortgages difficult to obtain and consumers focus on savings.

      Timing investment with the business cycle can be important given the holding time of many impact investments. Most equity impact investors hold on to their investments for five to seven years, if not longer. Debt investors average from one to three years for their investment horizons. The business cycle at investment and exit can have profound impacts.

      An ideal situation would be to identify the early part of the growth phase for an economy. This can be difficult, as statistics that are being shown will be based on the recession phase. However, these statistics are where opportunity can exist. Businesses will generally be down and business valuations may have decreased. СКАЧАТЬ