Unlocking the Potential of Frontier Finance

These investments are motivated by the significant potential of frontier finance investments to create deep, lasting impact while tapping into markets with strong growth potential and an emerging consumer class. Many frontier finance investors are driven by an intention to effect broader systemic change on the financial systems in frontier markets. Frontier finance investments have diverse features, including relatively small ticket sizes, with an average ticket size of USD 1.1 million and a median of USD 385,000. The majority of investments use both emerging market and developed market currencies, with 60% and 40% of transactions, respectively. Primarily, frontier finance investments have return targets of USD 1.1 million and a median of USD 385,000, with a majority of investments meeting or exceeding financial performance expectations (87%). The primary social impact objectives of these investments are commonly targeted Sustainable Development Goals (SDGs), including decent work and economic growth (SDG 8; 50%) and no poverty (SDG 1; 48%). Despite the potential of frontier finance investments, capital flows fall far short of demand for investment in these markets. The research found constraints to frontier finance activities, including difficulties raising and deploying capital, educational gaps across the capital chain, and high transaction and operating costs. To address these challenges, five key strategies can be employed: unlocking grant capital to act as a de-risking mechanism to individual investments and supporting the broader impact investing ecosystem; testing and refining financial instruments and structures to strengthen the appropriateness of investment products; expanding and strengthening partnerships among investors and with other ecosystem players; strengthening forums for investors and entrepreneurs to share ideas and lessons learned; and elevating and sharing success stories. The research analyzed a database of 40 frontier finance transactions, 10 interviews, and a discussion with 39 investors and other ecosystem players. The findings highlight the importance of collaborative and coordinated efforts among impact investors and field-builders to champion high-impact solutions in frontier and emerging markets. By working together, these stakeholders can address the challenges in the market and unlock the potential of frontier finance to create lasting impact. The research identified several key features of frontier finance investments, including their diverse roles in the market. These investments can be used to address a range of social and economic challenges, including poverty, lack of access to financial services, and limited economic opportunities. The research also highlighted the importance of partnerships and collaboration among investors and other ecosystem players in advancing the frontier finance market. The Sustainable Development Goals (SDGs) are a key focus of frontier finance investments, with many investments targeting SDG 8 (decent work and economic growth) and SDG 1 (no poverty). The research found that a majority of investments met or exceeded financial performance expectations, with 87% of investments achieving their return targets. However, the research also highlighted the challenges faced by investors in raising and deploying capital, managing transaction and operating costs, and addressing educational gaps across the capital chain. The five key strategies identified in the research can help to address these challenges and unlock the potential of frontier finance to create lasting impact. By unlocking grant capital, testing and refining financial instruments and structures, expanding and strengthening partnerships, strengthening forums for sharing ideas and lessons learned, and elevating and sharing success stories, stakeholders can work together to advance the frontier finance market and achieve the SDGs.