Alpha with impact: Unlocking smarter investing
Jessica Espinoza, CEO, 2X Global, on gender equality and investment performance in emerging markets
Tackling gender equality in the private sector could add US$ 28 trillion annually to global GDP by closing gender gaps in employment alone.
Private capital in emerging markets has the potential to unlock strong returns and scalable impact. Despite this promise, outcomes have often been mixed, leaving some investors wondering whether returns and impact can truly coexist. For investors to fully capitalize on the opportunity of return and impact, more innovative strategies are needed.
Drawing on the latest research, data, and best practices, diversity has emerged as a key value driver. Gender equality in particular has the proven potential to unlock outsized returns and impact at scale. Funds with gender-balanced senior teams generate a 10-20% higher net IRR than male-led funds. Yet women represent only 8% of senior investment professionals in emerging markets private equity and venture capital, suggesting that conventional fund models are leaving money on the table.
Only 7% of private capital goes to women-led companies, although those who do get funded make twice as much revenue per dollar invested compared to male-led peers. Women fund managers not only contribute to stronger fund performance, but they are also 3x more likely to invest in a woman CEO and 2x more likely to invest in businesses with at least one woman founder, creating ripple effects. Tackling gender equality in the private sector could add US$ 28 trillion annually to global GDP by closing gender gaps in employment alone, a market size bigger than the economies of the US and China combined.
Recognizing the business and impact case, development finance institutions (DFIs) launched the 2X Challenge at the G7 Summit in 2018, calling on the private sector to take up the challenge of moving capital towards gender-smart businesses. The 2X Criteria are a global industry standard for assessing and structuring investments that provide women with leadership opportunities, quality employment, finance, enterprise support, and products and services that enhance economic participation and access. They have been widely adopted by LPs, GPs and businesses.
The 2X Challenge’s original investment target of US$ 3Bn has been signifcantly overachieved, with DFIs and private sector co-investors having invested and mobilized over US$ 33Bn to date. This capital has been allocated to fund managers making ambitious commitments to becoming more diverse and gender-smart in how they invest, direct investments into companies and infrastructure projects as well as investments in financial institutions for onlending to gender-smart MSMEs. The next round of the 2X Challenge was just announced at the G7 Summit 2024 under which the full spectrum of investors is invited to join a new US$ 20 Bn target for the coming three years.
2X Global, a global industry body for gender lens investing (GLI), recently conducted a comprehensive mapping of private equity, venture capital and private debt funds across global markets that pursue a GLI strategy. The market size of the 273 surveyed funds represents at least US$ 7.9Bn, attracting capital from a broad range of LPs including sovereign wealth funds, pension funds, endowments, insurance, fund of funds, family offices, and DFIs. 78% of these funds report that their GLI strategy helps attracts investors. Interestingly, 61% of gender-smart funds also have a climate lens, leveraging the growing business case for investing at the nexus of gender and climate.
The top-quartile fund manager DPI with US$ 3.1 Bn AUM investing across Africa was the first fund to obtain 2X Flagship Fund status and closed their third fund ADP III at a record US$ 900M and over 500M in co-investment capital deployed alongside ADP III. The woman-founded and -led fund has innovated the way value creation is done in traditional private equity by mainstreaming the 2X Criteria across value creation plans, making gender a value driver for business. As of today, over 50% of ADP III’s portfolio companies are aligned with the 2X Criteria. DPI has made over 30 investments across its funds and never lost or had to wind down a company. DPI’s loss ratio is at a remarkable <1% compared to an industry average of 17%.
Horizon Capital is the largest private equity investor in Ukraine with over US$ 1.6Bn in AUM. The woman-founded and -led fund manager has attracted US$ 2.4Bn in capital, debt and equity to date, backed over 172 companies employing 80,000 people. Horizon Capital raised a staggering US$ 350M for their fourth fund HCGF IV in the middle of Russia’s full-scale invasion of Ukraine, attracting a diverse LP base with its market-based returns and strong impact thesis. HCGF IV is the first 2X Flagship Fund in Central and Eastern Europe, committed to both improving gender diversity within the fund manager and investing with a gender lens to build gender-smart portfolios using the 2X Criteria. Horizon’s women-led investee company Creatio, developer of a no-code platform to automate customer relationship management and enterprise workflows, just reached unicorn status at $1.2bn.
In recent years, emerging markets have seen established private equity fund managers mainstreaming the 2X Criteria across the investment cycle for better commercial and impact outcomes. At the same time, a new generation of fund managers has come to market with innovative GLI strategies.
A prime example is Alitheia IDF (AIF), the first GLI fund with a strategy that has women as key success-drivers in the investment value chain at its core – from the fund manager to the businesses in which it invests and their respective value chains. AIF spearheaded the first comprehensive GLI toolkit that has served as inspiration for the wider industry. By overlaying a gender lens on its tried and successful investment strategy, AIF achieves enhanced returns and economic and social impact at multiple levels. AIF closed its first fund, a 2X Flagship Fund, with US$ 100M in 2021 and has since invested over US$ 40M in 9 growth companies in Sub-Saharan Africa.
In Southeast Asia, Sweef Capital closed its first fund at US$ 45M in 2023, targeting equity or quasi-equity investments in 5-6 high-growth EBITDA-positive SMEs growing at 30-40% year-on-year. Its Gender ROI™ (resilience, opportunity, inclusion) framework represents an innovative approach to impact measurement, allowing the fund to create value at the nexus of gender and climate. Sweef is building a high-calibre set of LPs that includes pension funds, insurance companies, governments, foundations and family offices.
2X Global’s emerging fund manager initiative 2X Ignite has tracked over 100 new fund managers with innovative fund models beyond traditional private equity and venture capital. Examples include ATG-Samata investing in select markets in Sub-Saharan Africa whose first track record fund backed by a US family office reports an 87% gross IRR and 3x MOIC, combining equity, debt and revenue share for tech and non-tech businesses for greater portfolio diversification. New models also include innovative structures enabling missing middle finance for early growth stage businesses, a strategy pursued by Afrishela at the gender-climate nexus in African markets. Afrishela’s fund is linked to an enterprise development program which supports deal sourcing and due diligence across 6 African markets. Afrishela is also paving the way with new incentive structures, including impact-linked carry and incentives for portfolio companies.
Similarly, C4D Partners in India works with portfolio companies to make gender diversity a competitive advantage and has developed a proprietary gender lens toolkit to monitor, assess and guide the gender strategies of its portfolio companies. C4D has committed to investing at least 30% of the fund’s AUM in women-owned/led businesses and links carry to this target – a new trend that has emerged across emerging market regions. In Latin America, Amplifica Capital has established a VC firm with a thesis focused on digital inclusion, gender and climate change, demonstrating the value of women as entrepreneurs and investors and their key role in building a more inclusive ecosystem. Its LP base comprises individuals, family offices, corporates and institutions. 60% of investors in fund I are women compared to a 5% industry average.
For LPs and GPs alike, these trends present exciting opportunities. 2X Global and its more than 150 member institutions have advanced a suite of investment tools enabling investors to embed the 2X Criteria across all stages of the investment cycle – making gender a value driver, from origination to due diligence, structuring and value creation, all the way to responsible exits.
If you are a asset owner, asset manager or private investor and you
Want to join the global movement of gender-smart investing
Are keen to participate 2X Challenge and deepen your knowledge of the nexus of gender and climate finance
Want to network and collaborate with other like-minded investors
The next 2X Challenge with a new US$ 20Bn commitment has just been launched, providing LPs and GPs with a proven opportunity to move billions for greater impact and returns.
Funds with gender-balanced senior teams generate a 10-20% higher net IRR than male-led funds.
