Investments focused on fostering social or environmental goals are playing an increasing role in East Africa, which a new report says is a global center for so-called impact investing.
Nearly $10 billion in impact-investment funds have flowed into East Africa, the report, produced by the U.K. Department for International Development (DFID), the Global Impact Investing Network (GIIN) and Open Capital Advisors, reveals.
Nairobi is the nexus of this funding and the base for many of the managers handling it, the report says, with about half of the $9.3 billion invested in Kenya.
Neighboring Uganda and Tanzania receive 13 per cent and 12 per cent of the pie respectively. Ethiopia is trailing at 7 per centof the total.
According to the report, impact investment is becoming an increasingly significant component of overall investment in the region.
The report defines impact investors as “those who invest with the intention to generate a beneficial social or environmental impact alongside a financial return and who seek to measure the social or environmental returns generated by their investments.”
The report notes, however, that the overwhelming majority of the $9.3 billion total comes from development finance institutions (DFIs), organizations such as the World Bank that have traditionally dominated the financing space in the developing world.
Only $1.4 billion of the total comes from funds that aren’t related to DFIs, a sign that, while the impact-investment world is gathering pace, it’s still dominated by traditional sources of funding. Nairobi alone is home to dozens of such funds, often co-financed by state aid agencies from developed countries, and private-sector players, such as major Western banks.
Kenya will stay at the forefront of this type of investment in future, the report says, in part because of its better-educated workforce and relatively open markets.
Still, the positive financial outcomes of impact funding in the profitability sense are yet to be seen broadly, as few funds have successfully exited investments, the report notes.
It also says many potential target companies are not yet ready for investment, and that there is a dearth of senior talent and limited bank lending for smaller companies, making investing in the region challenging.
Amit Bouri, chief executive of GIIN, says East Africa is generating a great deal of excitement among impact investors and the key problems they’re facing aren’t unique to these investors but affect small and medium-sized enterprises more generally.
These smaller firms struggle with access to financing and are vulnerable to slumps in growth or other events that can influence the environment in which they operate. “There’s a tremendous potential for socially and environmentally focused businesses in East Africa,” Bouri told the Wall Street Journal.
“That said, it’s hard work, just as all investing is tough.” The sector attracting most interest is financial services, which accounts for almost 30 per cent of capital disbursed.
Other sectors getting attention include agriculture, energy, tourism and fast-moving consumer goods essentially those that stand to benefit from the ballooning middle class in Kenya and beyond. Impact investors often find themselves co-investing alongside purely profit-driven firms.
For example, Bridge International Academies, a well-known chain of privately owned, low-cost schools in Kenya and Uganda, boasts Bill Gates and Mark Zuckerberg as investors alongside the DFID impact fund.
That coexistence isn’t always easy, Bridge’s cofounder Shannon May told the Wall Street Journal in an interview earlier this year. Impact investors are often chasing different outcomes and using different measures for success than private-sector investors.
That can become cumbersome for these companies, in terms of financial reporting. It’s also tricky to measure success, when some investors are pursuing profits and others socially beneficial outcomes.
The impact-investing sector also faces a perception hurdle, with skeptics claiming that prioritizing social goals undermines financial ones, Bouri says.
Research published recently by GIIN suggests that is not the case, though. Its report on the study, released in May this year, said: “In aggregate, impact investment funds launched between 1998 and 2004 those that are largely realized have outperformed funds in a comparative universe of conventional [private investment] funds.”