IMPACT FUNDS CAN PLAY POWER ROLE IN AFRICA

ONE OF THE most common complaints heard from the private equity community in Africa centres on the relative lack of availability of quality investment targets capable of delivering the returns expected by their limited partners (LPs), the underlying investors in their funds to whom they have a fiduciary duty to provide an expected rate of return on the capital deployed.

While this is by no means a problem unique to Africa, and is in fact a common refrain heard globally, Africa presents a unique challenge in terms of the limited number of investment opportunities available as well as their comparatively smaller scale.

This is largely a symptom of gross domestic product (GDP).

According to the World Bank, Sub-Saharan Africa’s GDP amounts to $1.649 trillion (R223.55trln), which represents just more than 2 percent of global GDP.

Africa still comprises a relatively small portion of the global economy, which makes it difficult for more commercially-minded private equity funds that are not only tasked with finding quality investment targets, but are also competing with other investors for a limited number of potential acquisitions.

However, this also represents a rather unique opportunity for impact investment funds to play a powerful role in meeting the investment needs of Africa.

If we consider the definition of impact investing as capital deployed for the purposes of making a positive social and environmental impact, as well as generating financial returns for investors, then we see that this form of investment approach – with its more flexible return parameters

– is possibly better suited to a landscape where patient financial capital is not only a virtue but a necessity.

Since the concessionary capital that is typically deployed into impact funds tends to originate from Development Finance Institutions, quasi-government or governmentlinked sources with a specific agenda to effect change in certain sectors or geographies, the financial return criteria are somewhat more lenient than for their purely commercially driven private equity peers.

While it is true that the LPs of impact funds are often still driven by financial returns, they are also often willing to accept a discounted return in exchange for the knowledge that their capital is making a meaningful social or environmental impact.

Whereas commercial capital deployed into a strategic, but growing sector like education in Africa may target an internal rate of return upwards of 25 percent, an impact-oriented fund may be satisfied with return in the region of 12 percent provided it was achieving its social mandate.

Impact funding not only has the opportunity to be the patient capital that Africa needs, it is suited to the continent’s idiosyncratic risks.

Nevertheless, one shouldn’t fall into the trap of thinking that impact investing is not of sufficient scale to meet Africa’s investment requirements.

A report by the Global Impact Investing Network showed that the total assets under management of impact funds doubled in the last year to $228bn, up from an estimated $114bn since mid-2017.