Thursday, September 21, 2023

Quona’s investors back emerging markets fintech for impact

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“If you’re smart, now’s the time to double down in emerging markets,” said Monica Brand Engel, co-founder of Quona Capital, of mounting fear in an era of macroeconomic uncertainty and market volatility. “These people and these markets are very important to us and that will not change.”

It’s a feeling Quona’s investors seem to share. The emerging markets venture capital firm announces today that it has raised $332 million for its Fund III — well above its original $250 million goal — and three-quarters of its original investors have participated in this latest round. The closing of Quona’s third fund means it has now raised more than $745 million to support its investment thesis.

This dissertation is built around Quona’s focus on impact investing – the desire to deliver tangible social goods, as well as excessive financial returns through the companies it supports. “We strongly believe that financial services are the lever for dramatic change, both at the macro level and for individual households,” says Brand Engel.

To this end, Quona invests in fintech companies whose products and services promote financial inclusion. Through technologies such as mobile connectivity and cloud computing, these companies are giving consumers access to financial services that were previously beyond their reach – from banking facilities to savings, investments and insurance.

Quona certainly has the data to prove that the 65 companies it has invested in so far are making an impact. Portfolio companies in a dozen emerging markets employ 23,000 people, 35% of whom are women, served 30 million retail clients, 77% of whom were previously underserved, funded $2.4 billion in loans and enabled $12.3 billion in payments .

Commercially, these companies have also been successful. Collectively, they have generated $836 million in revenue. Quona describes the performance of the first two funds as the top quartile for comparable vehicles and Brand Engel cites loss ratios that are well below the industry average. Fintechs offer investors a natural path to exits, she emphasizes.

Quona is now looking for more of the same from Fund III, which will follow its predecessors by putting fintech for inclusion at the center of its investment case as it deploys the newly raised capital.

That is not to say that the new fund is a breakthrough. One nuance is that it will likely have a wider geographic spread than its predecessors, with many more markets now offering opportunities. India and Brazil, which have been the mainstays of Quona’s portfolios until now, remain important, says Brand Engel, but other countries also look exciting. She points to a growing number of opportunities in markets such as Mexico and Indonesia, as well as an increased focus on Africa, especially Egypt and Kenya.

The universe of fintech companies is also broadening, meaning the investment approach of the new fund will evolve. A good example is that Quona is now mainly interested in embedded finance – companies that offer financial services to support a broader value proposition. Enabling retailers to offer credit at the point of sale is one such theme.

The other difference with this new fund, Brand Engel adds, is that it leverages a wider range of Quona partners, with more local experts contributing ideas to deal selection. “We have people in multiple markets, not just the largest emerging markets,” adds Brand Engel. “They speak the local language and have been there for years; in many cases, our partners were born in these markets.”

It is a point of competitive advantage that Quona believes is particularly critical in today’s market environment. While his interest in emerging markets – and that of his investors – remains strong, there is no doubt that the risk is increasing. That requires more hands-on experience and expertise to navigate the uncertainty.

Brand Engel does expect loss ratios to increase in the coming months and years, though she says the magnitude of returns from fund winners will more than offset this. But she also points out that the fund is managed with a degree of conservatism. “We typically invest in entrepreneurs with a proven track record, and often in business models that have worked well in one market, but are now being trialled elsewhere,” she says.

In this sense, the fund is essentially betting on a company’s ability to execute on a particular strategy, concept, or technology, rather than taking a gamble on a completely new idea. And the flip side of the increased market fear is that Quona may face less competition for the best potential additions to the portfolio.

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