3 Aug 2022
What’s next for Impact Investing in Africa?

What’s next for Impact Investing in Africa?

Authors
Laurent Capolaghi

EY Luxembourg Partner, Private Equity Leader

Entrepreneur, passionate and keen to assist our clients navigating the changing landscape of Private Equity.

Aïssata Coulibaly

EY Luxembourg Partner, D&I Leader

Passionate about building relationships, meeting new people, experiencing new cultures. Resourceful. Looking for opportunities within the problem.

3 Aug 2022
Related topics Private equity

Africa is home to the youngest population in the world, with a median age of less than 20 years, and 70% of the population under the age of 30. Nearly half of global impact investment capital goes to Africa, according to the Global Impact Investor Network's 2020 survey. Let’s deep dive into the central role the continent could play in the years to come.

A promising outlook with tangible outcomes and returns

The idea of Africa as a place of political unrest and economic stagnation has persisted for many years, and it continues to harm the continent. Thankfully, a fresh perspective has surfaced. The modern African narrative is now being driven by increased investments from both domestic and foreign investors across a variety of industries, which has given way to a fast-expanding middle class and increasing consumer power.

Recently, the new free trade agreement: AfCFTA (African Continental Free Trade Area) – enabling Africa to be the largest free trade area in the world, made up of 53 participating members – came into effect on 1 January 2021 and presents a potential income gain for Africa of 450 billion US dollars by 2035.

While the treaty aims to bring 30-million people out of poverty, raise the incomes of 68-million individuals, cut red tape and simplify customs and tariffs, nearly 600 million people still do not have access to electricity, four out of 10 people live in extreme poverty, and more than two hundred million people still suffer from malnutrition. Estimates by the Brookings Institution suggest that Africa requires an additional 256 billion dollars in funding every year until 2030 to meet the Sustainable Development Goals. The continent is clearly primed to experience one of the century's biggest economic developments.

The three themes for Impact Investing on the continent

Appetite for impact investing from global investors has started to surge recently. Indeed, while 16% of impact investors1 have been making impact investments for more than 20 years, more than half of firms only started within the previous decade.

This appetite keeps growing in Africa as the Global Impact Investor Network's 2020 survey demonstrates, with 52% of respondents intending to increase their allocation in the continent.

Three sectors – all of them fully aligned with the United Nations’ Sustainable Development Goals – are fueling the growth:

The healthcare sector has seen substantial development over the last two years and is expected to continue to be a major focus in 2022. Healthcare is the fastest growing area for impact investing according to the survey and it also plays a major role in supporting societal impact, a major objective for private equity on the continent. Indeed, impact investments have the capacity to deliberately fill the funding gap in many areas of the healthcare ecosystem, including drug and vaccine development as well as physical infrastructure or epidemic prevention and response.

Secondly, the role of African FinTechs in promoting financial inclusion has seen significant activity from investors. Democratizing financial instrument access is not new and is critical to ensure economic progress in the region. As an example, according to EY2, the gross domestic product (GDP) of Kenya may grow by 30% solely due to increased penetration of the financial sector in the country. One of the most effective drivers to increase financial inclusion in Africa is mobile money. In addition, crowdfunding led by emerging FinTechs shows the potential to mitigate the limitations of small and medium-sized enterprises to access the traditional banking segment.

Lastly, renewable energy is one of the sectors with the fastest growth rates in many African nations. Lower prices for renewable energy, especially solar, are driving investments. In 2022 and beyond, attention will continue to be paid to addressing the strong, ongoing need for sources of energy. In order to bridge Africa’s energy gap by 2040, investments would have to be multiplied by four to reach $1203 billion per year. 

How does the Limited Partners / General Partners ecosystem grow on the continent?

The active role of worldwide Development Finance Institutions (DFIs) and International Finance Institutions (IFIs) in the private equity and venture capital fields has long been an essential source of capital for managers, investing in the region and promoting focus on environmental, social, and governance (ESG) matters.

The tandem between public money brought by public institutions and private investors has proven to be a major driving force. On one hand, DFI and IFIs can provide the initial seed capital to launch a project while on the other hand private managers bring along with them private investors to invest in the continent. This ‘blended finance' has been very successful in mobilizing significant amounts of commitment, which are in turn deployed on the ground to generate both financial and extra financial return.

The EU's Sustainable Finance Disclosure Regulation has certainly accelerated the trend and several large private equity houses have announced their ambition to launch dedicated products investing in the continent. Another tangible witness of the increased attention from the private sector towards Impact Investing and thus the African continent is the recent acquisition of boutique Impact Investing firms by large asset managers. One can name the acquisition of majority stake in Blue Orchard by Schroders and of responsAbility Investments AG by M&G. Such partnerships initiated by Tier 1 asset managers are clear signals of the accelerated development the continent should see in the years to come.

Data: Barrier or opportunity for the growth of impact investing?

To unleash major investments, improved data is a crucial component. However, relative scarcity of data will tend to discourage impact investment in many African economies. This effectively stifles much-needed investment into the region. Lack of data among others increases the cost of due diligence and makes it more difficult to value assets.

Businesses listed on limited African public exchange platforms have higher trading fees compared to companies in developed markets. Furthermore, collecting confidential data for due diligence frequently requires investors to spend more time and money, which raises expense costs. Moreover, it is difficult to agree on pricing, risk and return, and common valuation approaches are far more difficult to use when there is a lack of data. African nations must deal with this issue quickly to create a robust climate that encourages investment. But thankfully, increased attention to the traditional asset management industry and the continent’s FinTech development present a chance to address this issue.

Governments and investors should encourage the production as well as the demand for data to resolve this situation. Firstly, as a prerequisite for sovereign investment, DFIs and multilateral organizations should insist on gathering and disseminating economic data and official statistics. Moreover, African governments could provide incentives for business owners to create market data aggregation and reporting firms to meet investor demands for information. Finally, governments, public and private organizations ought to broaden their assistance to investors with an interest in Africa and create a friendly environment for capital markets.

Moving forward

To move forward, fast and in a sustainable fashion, Africa needs actions including strong resilience plans, an improved business climate, and the accelerated implementation of AfCFTA. This, together with a new social pact between government and business, partnering in designing and implementing sustainable businesses, will certainly propel Africa to new heights.

[1] Global Impact Investing Network – Annual Impact Investor Survey 2018

[2] EY – How banks can play a stronger role in accelerating financial inclusion

[3] International Energy Agency – Africa Energy Outlook 2019

Summary

Africa is home to the youngest population in the world, with a median age of less than 20 years, and 70% of the population under the age of 30. Nearly half of global impact investment capital goes to Africa, according to the Global Impact Investor Network's 2020 survey. Let’s deep dive into the central role the continent could play in the years to come.

About this article

Authors
Laurent Capolaghi

EY Luxembourg Partner, Private Equity Leader

Entrepreneur, passionate and keen to assist our clients navigating the changing landscape of Private Equity.

Aïssata Coulibaly

EY Luxembourg Partner, D&I Leader

Passionate about building relationships, meeting new people, experiencing new cultures. Resourceful. Looking for opportunities within the problem.

Related topics Private equity