Despite a challenging funding environment, Africa’s economic evolution is opening up opportunities for impact investors, with manufacturing, technology and infrastructure among a host of sectors capturing interest.
A new breed of funds is targeting areas where investors can tap the growth potential of indigenous companies in need of capital and operating expertise.
These funds have impact maximisation baked into their models, matching aggressive return objectives with ambitious targets for improving livelihoods and supporting sustainability.
A series of product launches this year has piqued interest. In September, Abidjan-based Joliba Capital, an African private equity firm majority-owned by multi-country investment platform LBO France, announced the first close of its inaugural Joliba Capital Fund I, at €55m.
Targeting a diversified portfolio of small and midcap firms in francophone countries in Western and Central Africa, the fund is aiming to generate superior returns while deploying ESG strategies to maximise impact, promote gender diversity and ensure sustainable growth within portfolio companies.
A driver for the fund is the region’s economic dynamism. As Guy Van Der Mensbrugghe, managing director for Africa at LBO France, told Impact Investor, GDP growth in western francophone African countries has been positive, sustained and dynamic. GDP growth rates range at an annual average 5%.
Joliba has a wide sectoral focus covering consumer-driven areas such as agribusiness, manufacturing, fast-moving consumer goods, education, healthcare, financial services, and logistics.
The investment theme is tied to the emergence of a larger middle class, who with their increasing wealth are eager for consumer goods. “The key strategic positioning of the Joliba fund is to invest in small and mid-cap companies that provide products and services for consumers,” said Van Der Mensbrugghe.
Early November saw another Africa-focused fund close. Norrsken 22, a tech growth equity fund formed by the co-founder of payments unicorn Klarna, closed its first African fund amid strong investor demand. Norrsken22 raised $205m (€190.8m) for the tech growth fund, $5m above target.
Natalie Kolbe, South Africa-based managing partner of Norrsken22, told Impact Investor that technology is key to unlocking Africa’s potential.
“About 60% of our population is below the age of 25. We cannot build schools fast enough, we cannot capacitate them with the proper teachers. We can’t build hospitals fast enough, we can’t capacitate them with doctors. The only way that you bridge that gap is with technology,” she said.
Scalability is the watchword here. “We’re not necessarily going to be looking to invest in businesses that are in a niche market,” said Kolbe. “We’re looking at mass adoption, and an impact that can scale really quickly, and that can do so in a capital-light way.”
Norrsken22 was deliberate about the sectors it chose to invest in: fintech, edtech, healthtech, and what it calls market enablement, B2B businesses that break down barriers to trade – of which there are many in Africa.
Infrastructure is an increasing focus for investors. Late October saw the Green Climate Fund join with Africa Finance Corporation to implement the Infrastructure Climate Resilient Fund, aimed at introducing climate-resilient infrastructure as a new asset class in the African investment landscape.
The $240m junior first-loss equity investment in the fund will seek to catalyse investments from private sector investors and pension funds and unlock the financial potential by securing reliable infrastructure services across 19 countries.
That fund followed in the wake of another infrastructure-related fund that closed in July, the 12-year closed-ended Africa50 Infrastructure Acceleration Fund (IAF), set up to galvanise investment flows into the development of critical infrastructure across the continent. The IAF has commitments from institutional investors to unlock transformative infrastructure projects across various sectors, including energy, transport, telecommunications and water.
Investors are looking at manufacturing as well. The African Union’s Agenda 2063 aims to accelerate Africa’s industrialisation, with the goal of increasing the continent’s share of global manufacturing value-added from the current level of about 1.5% to 7% by 2030 and 15% by 2063.
Manufacturing potential in Africa is associated with the expansion of the middle class across the continent.
“In the past, with limited purchasing power in the hands of the middle classes, there were not necessarily enough volume potential across several industries to allow local manufacturing to benefit from enough economies of scale,” said Van Der Mensbrugghe.
The capacity of African countries to lift people out of poverty, create jobs and integrate into the global economy is strongly linked to their ability to develop manufacturing. That, though, raises a challenge. Advancing industrialisation has historically been a carbon-intensive process, resting on products that are traditionally big contributors to greenhouse gases, such as steel, cement, plastics, and aluminium.
Responsible and sustainable industrialisation is nonetheless central to the continent’s economic development, and a clear focus for Africa-oriented funds.
The ESG dimension is for example very important for the Joliba fund, according to Van Der Mensbrugghe, first of all because it has been a key dimension of investment within LBO France for many years. As such, it was heralded in the fund strategy, and was attractive to the major investors in the fund’s first closing. The funds backer development finance institutions are France’s Proparco, the International Finance Corporation and the Netherlands’ FMO.
“They look for performance, of course, but it’s really a mix of targeting good opportunities, with good potential for performance, and with a strong ESG dimension,” said Van Der Mensbrugghe.
Localising manufacturing has an important role to play in keeping emissions low – even though Africa, with 16.7% of the world’s population, has contributed only 2.9% of cumulative global carbon emissions.
As the market grows, the logic for local manufacturing will increase. Add to that the increasing costs of moving goods around, and net zero objectives, and it makes even more sense to produce locally.
This doesn’t mean a prescriptive investment remit excluding traditional industrial businesses. While responsible manufacturing is a target for the Joliba fund’s investments, it does not preclude identifying more traditional manufacturing operations that it believes it can improve with a significantly enhanced ESG plan.
Tech will inevitably play a role in this process. According to Norrsken22’s Kolbe, one area where tech can make a big difference in manufacturing is through automation of processes, aiming for zero-defect manufacturing.
“There’s a lot of tech that can be layered onto the manufacturing process that can make the manufacturing process so much more efficient, by doing things like using Big Data analytics to see how we can improve the output of the manufacturing line, or to make it more efficient from an input cost perspective,” said Kolbe.