Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
offered. Many BoP consumers suffer from a BoP penalty - paying a higher price for
lower quality goods and services than consumers in wealthier markets – to procure
basic services from subscale and inefficient private sector suppliers. The BoP penalty
exists because of the cost of delivering services into regions where infrastructure is
poor and access is expensive 45 , and sometimes because of the lack of competition to
make service delivery more efficient and drive down prices. C.K. Prahalad evidences
the BoP penalty by comparing prices paid in a shanty town outside Mumbai with
prices paid for the same products or services in a higher income area of Mumbai. For
credit, municipal grade water, diarrhea medication, rice or a phone call, the poverty
premium ranges from 1.2x to as high as 53x for the residents of the shanty town 46 .
Efficient business models can provide such products or services at a lower cost to the
consumer while maintaining a profitable operation.
A framework for sizing the market opportunity
Below we present a more detailed explanation of our methodology for measuring the
invested capital requirement and potential profit opportunity in selected businesses
and sub-sectors within housing, water, health, education and financial services
targeting BoP populations.
In Table 6, we have summarized the results of our analysis. The remainder of this
section is devoted to walking through the resources and assumptions used in each
sector to determine the potential impact investment capital required. Our approach
for the non-financial sectors varies from the approach taken for financial services, so
we have divided the section accordingly. Within the non-financial sectors, we have
applied a consistent methodology to each sector to determine potential invested
capital required and potential profit opportunity. This methodology will be explained
at length using housing as the example and then presented in summary form for the
other sectors.
One of the greatest challenges in characterizing the impact investments market is
determining its potential size. The market spans many sectors, where business
models and local management capacity may differ dramatically, but also several
geographies where cost of supply (particularly distribution, infrastructure and
logistics), governmental constraints, competitive landscape and hence the feasibility
of a given business model, vary significantly. To overcome these difficulties, we
make a number of general assumptions.
General assumption #1: Business models transfer across regions
In trying to estimate potential market size, we approach each sector independently,
pairing an estimate of the potential size of the target customer base with the
cost/revenue structure of a successful impact investment business model. One of the
significant assumptions we make in this methodology is the transferability of
business models across regions. Clearly, there are many reasons why a successful
business in one region may fail to generate profit in another. As discussed above,
many impact investments operate within constraints that vary across regions and
countries such as poor infrastructure, inefficient distribution channels and supply
chains, unstable access to energy sources, differences in consumer preferences, and
external factors such as governmental interventions or tax regimes. The most
45 The Next 4 Billion, World Resources Institute and International Finance Corporation, 2007.
46 The Fortune at the Bottom of the Pyramid, C.K. Prahalad, 2010.
42