A study published by Bridgespan Group lays out the challenges that are unique to African-based impact funds and suggests solutions needed to stimulate investment flows.
Bridgespan Group, an advisor to non-profits and philanthropists, has released a report that throws into sharp relief the problems of African-based impact fund managers in accessing capital, with some saying that applying the “impact” label to their funds hinders rather than encourages investment.
In addition to oft-cited constraints on private equity investment in Africa, such as regional risk perceptions, currency volatility and limited exit opportunities, the report highlights further obstacles to attracting investments where social or environmental impact is a major focus.
The authors said African-based fund managers, or general partners (GPs), needed to play a more prominent role in shaping impact investment in Africa, taking advantage of their lived experience, networks, and access to opportunities.
For the report, “Closing the Capital Gap on Impact Investment in Africa”, Bridgespan interviewed 25 stakeholders, including private market investors, development finance institutions, philanthropists, and other impact investing specialists.
Those interviewed reported that the traditional rules of due diligence work against African GPs seeking investor capital. Those looking for strong fund managers tend to look for a track record of successful investments, an experienced team and, ideally, large fund-size target, some or all of which African GPs may struggle to offer.
The report also found that while there was growing evidence that impact investment could generate attractive returns, while also targeting environmental and social impact, this was not a universally held view among African investors. It said some African GPs believed that an “impact” label attached to a fund deterred limited partner (LP) investors who may still view impact investing, not as a commercial prospect, but more akin to philanthropy.
Daniel Steenkamp, senior project manager at the Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town told the report’s authors that even African GPs who self-identified as impact investors may not want to be identified as “do-gooders that sacrifice the performance of the fund”. He said that “many African GPs emphasise the fact that they can work on a strictly commercial basis”.
Change of approach
More catalytic capital from first-mover funders would help, according to those contributing to the report, as that would help African-based funds to build up their portfolios and credibility and then attract further investment. However, philanthropists, the group that might be most likely to provide it, have proved reluctant to do so, the authors said.
The report suggests a number of new approaches that could bring in more investment from first-mover investors who have more autonomy to change their investment practices, as well as asset managers and owners with longer investment horizons and more flexible mandates.
First-mover funders could invest seed capital directly in recently created African GPs, rather than via intermediary funds. The report cites Mastercard Foundation’s $200m Africa Growth Fund, launched in 2022, as an example of what’s possible in this regard. The fund invests in African-owned and -led investment fund managers, especially those with. focus on youth and jobs for women.
They could enable a GP to invest in a number of deals before a fund reaches its first close to help it build up a solid track record that would be attractive to other investors.
Another way of building a track record would be to allow an African GP to manage part of another fund’s investment portfolio. Smaller investment minimum requirements could also open up investment flows to worthwhile funds.
To overcome due diligence concerns, the authors suggest creative solutions, such as that deployed by Oryx Impact, which has developed proxies for track records at some recently created GPs by looking at the experience of the individuals involved prior to joining. Oryx co-founder Tessa Guardans told Impact Investor in a 2022 interview that the company was committed to supporting local talent in Africa, saying: “Who is going to know better how to do business and how to invest in African countries than somebody from that country who is already investing there?”
Commenting on the report on social media, Jamie Broderick, a board member at the UK-based Impact Investing Institute said: “Conventional private equity investors may not be ready for Africa. But investors looking to have a catalytic impact on an emerging investment ecosystem should be looking more closely at African private equity.”