You have probably been taught to treat regulation as weather. You model it, you discount for it, you insure against it, and you hope it stays calm long enough for you to exit. Most investment memos on emerging markets carry a paragraph called "regulatory risk," and it usually sits near the end, somewhere between currency and political instability.
We think that paragraph is in the wrong place. In the markets where the largest new value has been created over the last two decades, the state was not the weather. It was the architect. It decided whether the market would exist, who could build in it, and on what terms. Whole categories of value now sit exactly where the state and the market meet, and capital that refuses to look at that seam misses them.
Where the money goes
Start with the numbers. UNCTAD’s World Investment Report 2026 found that global foreign direct investment rose 6% to $1.6 trillion in 2025, ending two years of decline. Inflows to developed economies rose 11%. Developing economies managed 2%, reaching $901 billion. The world’s 20 largest host economies took more than 80% of the total, and the least developed countries received $43 billion, about 2.7% of global flows (less than a quarter of what Latin America and the Caribbean alone attracted).
Now set that against the need. UNCTAD estimates the annual investment gap for the Sustainable Development Goals in developing countries at about $4 trillion, up from $2.5 trillion in 2015, when the goals were adopted. That gap is more than four times everything that flowed into every developing economy through FDI last year.
There is no shortage of money in the world. The trouble is that capital prices the state as a hazard, and so it stays away from exactly the sectors where the state is unavoidable: payments, energy, health, education, public data.
That is a pricing error, and it is a large one.
When the regulator says yes
In 2007 Kenya had a mobile operator with a money transfer idea and no law that clearly covered it. Before M-Pesa launched in March 2007, the Central Bank of Kenya sent Safaricom a letter which, in CGAP’s account, did not formally approve the product. It did something more useful. It set conditions, including an audit trail of every transaction and compliance with an anti-money-laundering bill that was still in draft, and it let the service run while the rules caught up.
That letter was a regulatory decision with commercial consequences. Nine years later, a study by Tavneet Suri of MIT and William Jack of Georgetown, published in Science, estimated that access to M-Pesa had lifted 194,000 Kenyan households above the poverty line (2% of all households in the country), and that about 185,000 women had moved out of subsistence farming and into business or retail.
Would a regime that insisted on a full banking licence have produced that? We doubt it very much.
Who built India’s payments market
India offers the larger version of the same lesson. On 8 November 2016, the government withdrew the ₹500 and ₹1,000 notes. By the Reserve Bank of India’s own count, ₹15.31 lakh crore of the ₹15.41 lakh crore withdrawn came back into the banking system. That is 99.3%. Judged by the cash that was meant to disappear, the exercise achieved very little.
Judged by what it pushed people toward, it changed the country. The Unified Payments Interface, a public payments rail run by the National Payments Corporation of India, had launched that same year. It handled roughly 2 million transactions in December 2016. In September 2026 it handled 24.07 billion, worth ₹29.37 lakh crore, an average of about 802 million every single day.
Multiply September by twelve and you get roughly 289 billion transactions a year. Visa’s entire global network processed 257.5 billion transactions in its 2025 fiscal year. A single Indian public rail now moves at that scale.
Every UPI app you have used in India runs on rails the state designed and a regulator governs. The companies that won there did not win in spite of policy. They won because they built for it.
When the regulator says no
The same power cuts the other way, and it cuts fast. In July 2021, China’s "double reduction" rules required tutoring companies teaching the core school curriculum to register as non-profits, barred them from raising money through share sales, shut out foreign capital and banned tutoring on weekends and holidays. On 23 July, TAL Education fell more than 70% in New York, New Oriental 54% and Gaotu 63%. A sector described as worth $100 billion was redrawn in a single policy cycle. Within months, according to China’s Ministry of Education, the number of offline training companies had fallen 83.8% and online ones 84.1%.
India’s crypto market has lived through the swing in both directions. In April 2018 the RBI barred banks from facilitating virtual currency transactions. On 4 March 2020 the Supreme Court set that circular aside as a disproportionate restriction. Then came tax. From 1 July 2022, a 1% tax deducted at source applied to crypto transactions above ₹10,000. The Esya Centre estimated that domestic exchanges lost up to 81% of their trading volume between 1 July and 15 October 2022, and that about ₹32,000 crore (roughly $3.85 billion) in trading moved to foreign exchanges between February and October that year.
The trades did not stop. They simply left, and they took the tax base and the domestic industry with them.
Was any of this unforeseeable? Not to anyone who was reading the state as closely as they were reading the cap table.
What policy-aligned capital means
It does not mean capital that lobbies for exemptions, or founders who treat regulators as obstacles to be managed around. That version tends to end on a day like 23 July 2021.
It means backing companies whose growth serves what the state is already trying to achieve, so the regulator has its own reasons to want them to succeed. M-Pesa’s audit trail gave Kenya’s central bank visibility over money that had moved as cash. UPI gave the Indian state a payments system it could see, measure and govern. In both cases the commercial model and the public objective pointed in the same direction, and the market scaled because of it, not despite it.
Crypto in India shows the reverse. When a product’s growth and the state’s priorities pull apart, the state does not lose the argument. The founders do.
That is the test we apply at Exalt Fund. We look for ventures where technology, governance and public purpose overlap, in the United States, India and select emerging markets, where the regulator is a stakeholder rather than an afterthought. We ask what the state needs before we ask what the market will pay. And we are patient, because policy moves on the timeline of legislatures and courts, not quarterly reports.
Is that a slower way to put capital to work? Sometimes. It is also the only way we know to still be in the room when the rules are written.
The regulator is going to shape your market either way. Did you build for it?
