Burgess COMMENTARY

Why does the social impact community talk so much about impact investing as if impact investing is something new and good? The hard fact is that all investing has impact, and a very large amount of investing has very bad impact on people, place and planet.

As far as I am concerned it is high time we called to account every investment so that society knows the impact ... positive or negative ... on people, place and planet. Every economic activity pulls in resources, and produces outputs, good and bad. These activities change the state of people, place and planet ... and in many cases there is serious value destruction.

The story of Africa is tragic. There are huge investments in Africa that are value destroying for people, place and planet while generating substantial profit returns for investors and influential insiders.

Sadly, the World Bank and the Regional Development Banks have done little over the past several decades to set the stage for value adding investment that optimizes for people, place and planet in a meaningful way. They should have done a lot better.

Peter Burgess TrueValueMetrics

IMPACT INVESTING IN AFRICA

The African Development Bank (AfDB) abandoned its Abidjan headquarters in 2003 shortly after civil conflict broke out in the Ivory Coast. After spending ten years in Tunisia, the Bank announced that it will begin moving its headquarters and 1,500 employees back to Ivory Coast at the end of this year, hoping to make it in time to celebrate its 50th anniversary in November 2014.

The Financial Times reports that the move will deliver a big blow to the economy of Tunisia, a nation who is recovering from a 2011 uprising and ensuing political volatility, but will bolster confidence in Ivory Coast, a sub-Saharan African nation who is emerging from years of war and political unrest.

Analysts view this step as a testament to the resurgence of sub-Saharan Africa as well as Abidjan as the economic centre of West Africa. Only, what’s different from ten years ago is the emergence of another type of tool: impact investments.

Put simply, impact investments are a deployment of capital aimed at generating a positive social and/or environmental impact along with a financial return. Today, impact investments are made in a combination of different forms of capital including debt, equity, grants, and loan guarantees.

Because their intention is to generate a positive societal impact and financial returns, they fall under two categories: impact-first investments or financial-first investments.

Impact-first investments are made by private foundations or development finance institutions such as AfDB, who place less emphasis on generating market-rate returns and are willing to provide longer-term capital, making them great investors for early-stage companies. Whereas financial-first investments are made by investors who seek at minimum market-rate returns, such as venture capital funds.

According to the Arabella Advisors, the size of the impact investing market in Africa is between $300-400 million per year. Sub-Saharan Africa, especially in Kenya and South Africa, represent large areas of interest and growth.

Shouldn’t the market size be bigger, you ask? What’s unique about Africa is that some believe all investment in Africa, regardless of intention, fits the definition of impact investing. The definitional debate hasn’t been settled yet, but there is growing consensus that impact investing can help Africa thrive for a wider number of its people.

Impact investing activity in Africa

It would be inaccurate to say that the growth of impact investing is seen throughout Africa for the simple fact that stability, which differs from nation to nation, contributes to the level of investment activity. Nonetheless, in areas where there is greater stability, there are examples of participation in the impact investing movement.

South Africa, which has been the primary beneficiary of foreign direct investment in sub-Saharan Africa, and Nigeria, following closely behind, are two of these areas.

Organizations engaging in impact investing in South Africa include impact investment advisory firm Nexii, Cadiz Asset Management through its High Impact Fund designed to fund small- and medium-sized South African enterprises, and impact investing facilitator GreaterGood. In Nigeria, the Tony Elumelu Foundation uses impact investing to support African businesses.

Other countries include Ghana, Kenya, and Senegal. Ghana’s Venture Capital Trust Fund provides capital financing to small enterprises in order to reduce poverty through job creation. The Kenya Social Investment eXchange is a platform that bridges social enterprises and social investors. In Senegal, the Impact Investing Working Group was established to identify how to increase opportunities for impact investment and social entrepreneurship.

Improvements needed

Although challenges around transparency and uncertain political and business environment influence the level of impact investing activity, for regions with a relatively stable climate, a desire to develop the impact investing industry is apparent. According to a report by the Dalberg Global Development Advisors on impact investing in West Africa, impact investors and policymakers are ready to address some of the challenges surrounding the industry in the short-term.

They include matching the demand and supply and responding to infrastructure challenges.

Matching demand and supply

In the impact investing industry today, a concept that is often thrown around is “pipeline creation”. This refers to the fact that there is a gap between investors’ appetite and the number of “investment-ready” firms. So the need at the moment is to create a pipeline of opportunities for impact investment.

In order to match this demand and supply, social enterprises need to be nurtured. One recommendation for Africa is to address the skills gap among entrepreneurs so that they have the knowledge and access to information required to turn their ideas into bankable projects.

Another is to reduce the risk and transaction costs associated with small enterprise financing. It is difficult for businesses to obtain financing in the $1,000 to $10,000 range. Developing products suited for the needs of smaller enterprises and increasing technical assistance can address this issue.

On the other hand, investors need to adapt their investment practices to the local climate. Some are unwilling or unable to change their investment criteria while others have unrealistic social impact expectations.

Certain challenges are more stubborn than others. For example, impact investors find it difficult to do business with an informal sector, which is how a majority of African businesses are set up. However, there is a lack of incentives to convert to formal business structures due to the costs related to licenses, taxes, and other operating costs.

Infrastructure challenges

In West Africa, impact is measured using a wide range of tools and done on a case-by-case basis. As a result, investors can’t compare the returns and without performance data, they may be inclined to have unrealistic expectations. Even though there are a number of successful case studies about social impact and financial performance in Africa, experts believe evidence of performance against standardized metrics is critical.

In line with screening performance, finding and making impact investing deals is another challenge. There are currently few financial intermediaries in the region to facilitate investments.

A final major infrastructure challenge is the limited information on successful “exits”, which would discourage new entrants in the market. While impact investing deals are deliberately longer-term, investors too will eventually need to realize an exit strategy. According to a J.P. Morgan report that analyzed over 2,200 transactions, few exits were realized to date. Demonstrating successful exits would be a critical step forward for impact investing, as it shows social enterprises to be financially viable and that it is truly possible to do good and do well.

MELISSA IP ... Melissa is the founder, editor-in-chief, and 'queen bee' of Social Enterprise Buzz. Follow the buzz on Twitter and Facebook.