More than 1.6 billion people in South Asia - Bangladesh, India, Pakistan, Nepal, Sri Lanka and Myanmar - have experienced substantial economic growth over the last decade. But, the population lives on less than USD 1.25 per day and a large portion of the population lacks access to finance, infrastructure and basic social services. The opportunity for creating impact through the deployment of capital into various organisations has now been made available, which will increase incomes and create employment. The significance of impact investing in industries is very essential for these countries.
WHAT IS AN IMPACT INVESTMENT? The term impact investment was coined in 2007 by an initiative coordinated by USA's Rockefeller Foundation. According to the Global Impact Investing Network (GIIN), impact investment is defined as investments made in companies and organisations with funds with the intention to generate social, environmental impact alongside a financial return. GIIN defines the practice of impact investing by the following four core characteristics:
n Intent of the investor to generate social and/or environmental impact
n Generate a financial return on capital and, at a minimum, a return of capital that ranges from below market to risk-adjusted market rate
n Investor's commitment to measure and report the social and environmental performance and progress of underlying investments
The Bangladesh Securities and Exchange Commission (BSEC) defines impact investment in the Alternative Investment Rules 2015 as follows:
Impact fund means an alternative investment fund, which invest in equity and equity linked instruments of such companies, organisations, and funds, which are engaged in activities with the intention to generate a measurable and beneficial social or environmental impact in addition to financial returns, as justified with international recognized criteria.
IS BANGLADESH READY FOR IMPACT INVESTMENTS? At present, the political environment in the country is relatively stable. There is a strong belief among local and foreign investors that the political changes will continue peacefully and there would be a positive economic growth, capital market stability and foreign direct investments inflows. Bangladesh has the third-most active impact investment market in South Asia after India and Pakistan, where Development Finance Institutions (DFIs) have deployed over USD 830 million while other (non-DFIs) impact investors have deployed about USD 120 million.
Bangladesh is the eighth most populous country in the world with a total population of 168 million. The population is relatively young where 58 per cent is between the ages of 15-54 years. Such a large young population translates into a large potential labour market.
Bangladesh economy has grown around 6.0 per cent per year in the past decade. More than 15 million people moved out from poverty since 1992 alongside with significant improvement in the human development index.
The growth of gross domestic product (GDP) has been primarily driven by the diversification of industry and service sectors. Agricultural, industrial and service sectors have grown in absolute terms, even though agriculture has dropped to 16 per cent in terms of percentage of GDP (Bureau of Statistics). Manufacturing, which is part of the industrial sector, is a booming segment, especially due to large and expanding textile and garment industry. The export target of readymade garments (RMG) is well thought-out to be USD50 billion within 2021.
Bangladesh capital market is a good exit destination and is currently a good option for replacement of debt and financing for expansion projects.
Bangladesh is the third-most active country after India and Pakistan in impact investment market, and the country's market is still nascent. In Bangladesh, 15 impact investors are currently active with a total of USD 955 million, of which USD 834 million has been deployed by the DFIs (development finance institutions).
TARGET AREAS FOR INVESTMENT: The high growth sector, especially ICT (information and communications technology), manufacturing and energy are appealing due to their growth potential. GIIN is a global network seeking to attract mainstream investors in Agriculture, Energy/Environment, Financial Services, Water and Sanitation and ICT sectors. The Social Impact Investment Taskforce (SIITF) focuses only on social areas, which include disability, criminal justice, unemployment, etc.
CHALLENGES FOR DEPLOYING IMPACT CAPITAL IN BANGLADESH: Investors are fairly optimistic about Bangladesh due to the present political stability, demographic trends and GDP growth, but there are still some challenges to overcome. The challenges are:
n Proper due diligence
n Structure for investment
n Follow up of investments
n Exit
Lack of good governance and financials of many companies are the difficult part to structure a deal. Investors face various difficulties with the owners of companies regarding value of equity and unwillingness to dilute their ownership. Therefore, business owners prefer debt.
Power supply is not consistent and small and medium enterprises require backup support, which eventually increases the cost of business. Road infrastructure is very poor and traffic conditions in major corridors slow the business and raise costs. We have liberal policies but execution is very hard and the process is also slow.
IPO (initial public offering) is the most favoured exit strategy as yield of the return is the highest. Apart from IPO, secondary sales, trade sales and owner buyback are all viewed as favourable exit options. Although, IPO is the preferred strategy for exit, unfavourable regulations and long lock-in periods, can act as barriers faced by the equity investors.
Although still at the nascent stage, many players active in the impact investment market recognise that Bangladesh is at an inflection point. New Private Equity (PE) and Venture capital are emerging in the country.
Meer Sajed-ul Basher FCA is Managing Director & CEO,Impress Capital Limited.
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