An interview with N’Gunu Tiny, Founder and Executive Chairman of the Emerald Group on the difference impact investing has made in Africa and what its future looks like.
Why should impact investors be interested in Africa?
Investors the world over are interested in putting their money where it will be of use. Impact investment is growing year-on-year, and for those who really want to make a difference, Africa is the logical place to start.
Africa is home to a fast-growing population that is rapidly shifting towards urban areas. When we also consider its wealth of resources, we can see why Africa is going to ramp up to become an economic powerhouse during the 21st century.
However, within this exciting continent that is packed full of potential, there are so many problems. Around 40% of people living in Africa do not have access to safe drinking water. A further 237 million people are considered malnourished, 600 million live without electricity and 20% of all children under 11 aren’t in school. All of which, quite clearly, offers enormous possibilities for impact investors who truly want to make a difference to people’s lives and people’s future.
What is the current status of impact investment in Africa?
We can safely say that impact investing has definitely taken hold in Africa. It’s far more than a passing fad for overseas investors. There are so many opportunities for investors to work on systemic social issues while also meeting consumer needs and making a profit.
Impact investment opportunities in Africa include everything from strengthening basic infrastructure to supporting the agricultural sector and widening access to technological communication. Last year’s survey by the Global Impact Investor Network (GIIN) shows that 43% of global impact investors have at least some funds in Africa. A further 52% intend to increase their investment in Africa by 2025, making it the most popular emerging market region for impact investment.
What is behind this surge in interest in Africa from impact investors?
If we look back at 2015’s Sustainable Development Goals (SDG) from the United Nations (UN), we can pinpoint the beginning of the change. This is when investors began to become interested in Africa’s potential.
There are 17 SDG goals along with lots of associated targets and they help investors visualise the future of their role in the global economy. Impact investing itself remains a relatively loosely defined concept, but with things like the SDG goals, there are tangible markers to shape the debate and to shape investment decisions.
An increasing number of business leaders and managers are beginning to specifically align their future strategies with SDGs. This is naturally blurring the traditionally defined line between private equity funds focusing on Africa and dedicated impact investment funds. I think that we will continue to see these cross over until they essentially merge. The future for humanity has to be driven by corporate impact investment, and we are now at a tipping point.
How has COVID-19 affected impact investors in Africa?
The pandemic has, of course, slowed down investment across the board. One of the biggest barriers for impact investors interested in Africa has been the interruption of due diligence. As valid and accurate information is difficult to get hold of, site visits and a programme of due diligence is vitally important for impact investors. It’s the only real way they have of understanding the situation in the locality they’re interested in.
A high proportion of Africa countries don’t have the infrastructure to provide accessible and relevant corporate records. Additionally, the quality and accuracy fo local media reporting can be difficult to ascertain. For many impact investors, physically visiting the site in question is preferable. They will want to talk to people who work in the business and get a good understanding of how it’s operating.
COVID-19 and its associated restrictions on travel from overseas has forced managers to change their approach. A GINN survey conducted in June 2020, when the pandemic was at its peak, showed that 76% of respondents viewed travel restrictions as a big problem for their due diligence.
If you’re thinking that video conferencing is the obvious answer, it’s worth remembering that many parts of Africa don’t have the necessary technological connectivity. This has led to increasing numbers of asset managers sharing due diligence information with other investors and using local partners much more extensively than before COVID-19. They’re being forced to rely on whoever they have on the ground in Africa, which does have the benefit of growing local networks in Africa.
Is impact investment in Africa now low risk?
No, it isn’t. Impact investment in general still has higher risks and usually lower returns. This is why, despite increasing global interest in impact investment, the overall amount of money invested is still a tiny proportion of total assets. And in Africa, impact investment is nowhere near the level it needs to be to usefully deal with the continent’s future challenges.
Indeed, according to the Brookings Institution, Africa needs an extra annual investment of $256 billion each year running up to 2030 to reach the SDG goals. Even before COVID-19, fundraising in Africa was becoming more difficult. We have seen periods of hype, when more funds were raised for private equity in Africa, followed usually by market correction.
Now that the pandemic has hammered the global economy, it’s not possible to predict that there will be an immediate explosion in impact investing in Africa.
What kinds of challenges are slowing down investment in Africa?
I think that there is a level of risk aversion that isn’t reflected in reality when investors think of sub-Saharan Africa. More than a third of potential investors consider the currency risk across the region as ‘severe’.
Of course, investors have always been cautious about risk and they will continue to be. But these risks can absolutely be managed and the focus should be on value creation for investors.
The old idea that there’s no money to be made in impact investing has thankfully been consigned to the past. And investors can consider the fact that Africa has so far weathered the COVID-19 storm better than much of the rest of the world as a positive. Economically, the pandemic has damaged Africa. This is particularly so for South Africa, which chose to implement very strict lockdown early on in the pandemic.
But, despite all of the terror of 2020, there is definitely a deserved feeling of optimism among impact investment leaders. There is a collective wish to rebuild the global economy in the wake of this unprecedented pandemic, and this is bringing investors closer together with a common purpose.
For investors, the pandemic has been a wake-up call of sorts. It’s time to reassess our place in the economic recovery and take that responsibility throughout the corporate sector. And when investors do this, they will see that Africa with its immense challenges and its immense potential, is the ideal place to make this tangible difference.