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Impact Investing

‘Africa’s business landscape may be challenging, returns are as high as 100%’

The Impact Investor’s Foundation (IIF) recently launched an impact investing landscape report on Nigeria and Ghana. On the sidelines, TELIAT SULE (BusinessDay Research Unit) engaged ASTOU DIA and ANITA AIGBOGUN both of Dalberg Advisors on the relevance of the report to current and prospective impact investors interested in the African continent. Excerpts.

Kindly give us an overview of the report that Dalberg wrote which was launched by IIF

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My name is Anita Aigbogun, a consultant and part of the Dalberg Advisors team which carried out the Nigeria-Ghana Impact investing research between September and November 2019. The new report relies on the GIIN (Global Impact Investing Network) report 2015 and updates the readers on how much capital has been deployed since 2015 and in what sectors; what the deal sizes are; what challenges impact investors have closing deals and in terms of the policy landscape. It also highlights examples from other countries that can be an inspiration to fill up the gaps.

To update the 2015 study, we analysed available deal databases such as EMPEA and AVCA. In addition, we contacted over 50 impact investors active in Nigeria and Ghana to get additional data on resources they have deployed in the region since 2015, the type of deals they closed, and the constraints they face operating in the region, especially in Nigeria and Ghana which represent more than 50% of the market.

Impact investors are targeting a wider range of sectors. In the 2015 study, there was a concentration on agriculture, financial services, and technology. Now the impact investors are widening their coverage, investing in sectors such as energy, transportation, or education.

Through conversations with investors, we realised that specific policy changes can be a major catalyst for growth. In Nigeria, policy changes in the energy sector (e.g., the strong work of the Rural Electrification Fund [REF] within Nigeria’s Rural Electrification Agency [REA] in enabling off-grid energy investments) have unlocked growth. However, there are also cases in which policy and regulatory complexity inhibited investment (notably in areas such as financial inclusion, where a tight and changing regulatory environment constrained the industry for some time).

What kinds of inspirations could local impact investors draw from the report?

DIA: This report aims to fill in the information gap with regards to the impact investing landscape in Ghana and Nigeria. It shows the growing importance of impact investing in the region and the attractivity of Nigeria in particular. This is evidenced by the fact that despite a worsening economic climate, the number of impact investors active in Ghana and Nigeria increased markedly.  The report also sets out a number of policy recommendations for consideration with regard to the impact investing sector.

How do you think local impact investors can make a headway considering the amount of bottlenecks they face in this country? 

It is important to acknowledge that although policy and advocacy work can unlock further transactions, policy has not stopped investment in Nigeria. However, there is room for improvement in many areas. First, there is a lack of clarity in the definition of impact investing. In this study, we have kept the GIIN definition that refers to ‘investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.’ A lot of development finance institutions’ (DFIs) lending to government for roads, electrification supports, falls into that category and are accounted for.  This broad definition does not help in recognizing impact investing as an asset class and making the required policy changes to enable local fundraising.

With most capital in the market seeking commercial returns, there are significant challenges in driving blended finance. Leveraging concessional capital from DFIs and blending it with private and locally available money could help deliver greater social impact on a longer horizon.

AIGBOGUN: Other points came out during the launch of the report. Some investors are noting the fact that capital is not really “blended” as the returns expected are the same for all investors. Another thing that will help address this is some formal education and increased awareness to help stakeholders understand how blended capital works and how it can be used to better direct private capital.

How is Dalberg contributing to changing the landscape and lifting some of these challenges?

Dalberg is a global advisory firm that partners various organizations in the space. With our 26 offices across the globe, we are able to draw lessons and experiences from the US, Europe, and Asia and can support institutions, such as the African Development Bank (AfDB) and IFF, shape the African landscape.

Dalberg also incubated and launched Convergence, global network for blended finance that generates blended finance data, intelligence, and deal flow to increase private sector investment in developing countries.

DIA: In other countries such as Senegal and Cote d’Ivoire, we incubated and supported the launch of investment clubs and funds “by women for women” (Women’s Investment Club, WIC). As we realized there was a finance gap for small and medium enterprise (SME), female-owned businesses, we designed a mechanism to tap into local savings to scale women-led businesses. WIC’s vision is to give women privileged access to modern financial instruments for inclusive economic development.

AIGBOGUN: Dalberg is also a member of the Impact Investor’s Foundation (IIF) board.

Do you have special funds for women-led enterprises in Nigeria?

DIA: Having specific funds tailored towards women businesses can go a long way to uplift women and the country as a whole. We are planning to replicate the WIC initiative across Africa and definitely in Nigeria.

AIGBOGUN: Recently, we conducted a study for EFina (Enhancing Financial Innovation and Access) specifically focusing on women where we focused on what was driving the behaviours of women towards finances and how we could support women-led businesses in Nigeria.

From your findings, how could you liaise with government to improve the impact investing landscape in Nigeria?

DIA: This body of knowledge can support advocacy that will lead to improvements in the business environment in Nigeria. Anita made mention of the energy sector earlier where tailored policy changes resulted in increased investment. An organization like IFF can bring to governments attention some of the recommendations of the study and make the case for policy changes that have the potential to bring even more investment (close to $5 billion were invested in Nigeria since 2015).

Checking impact investors that support Sustainable Development Goals (SDGs), there are hardly firms of African origin. Doesn’t that pose a serious challenge?

DIA: Domiciliation of impact investing funds within West Africa is not easy as most countries have far less flexible and modern legal frameworks, fewer tax incentives, and less stable political and economic systems than Mauritius, the US, or the UK. The lack of tax incentives remains one of the main reasons why funds operating in the region are mostly domiciled in Mauritius. However, the decisions of investors to register in foreign jurisdictions do not prevent them from doing business in Nigeria or Ghana. As such, most often, when you look at the nationality of the fund manager, you will see a strong representation of Africans that understand the context in which they are operating. So, out of the 23 fund managers that we interviewed, the majority were of African origin.

What is the outlook for impact investing on the African continent?                   

I am very optimistic because almost every day of every month, someone is raising funds to invest in Africa. This is because, when you see the growth in Africa, despite the environment, investors can really get something valuable in return. It is risky, but the return potential is five to ten times higher on the African continent compared with other markets. In other words, Africa’s business landscape may be challenging, returns are as high as 100%.  Based on the analysis and on the conversations, we are optimistic about the potential of impact investing.  The more we can make the environment more conducive the more we will see funds operating and located in the region. In five years, the number of impact investors in Nigeria and Ghana has tripled, imagine what would happen if the challenges are removed.

Aren’t their challenges in coming up with an appropriate model to measure impact investing?

As mentioned earlier, the first challenge is the definition. One of the pillars of impact investing is that you track and measure impact investing. What we see is that people labour to get money maybe from DFIs, but then, they do not measure and track the impact. You will see something like XYZ Firm gave out money to create say about 20,000 jobs, but nobody is actually measuring if such firm truly created 20,000 jobs.

So, one of the recommendations is to have a more stringent definition of what can be classified as impact capital and to require impact investors to have formal and well-developed impact metrics that are measured and reported regularly. This would also help in defining potential impact capital incentives and mitigating the risk of ‘impact washing’.

AIGBOGUN: DFIs that are providing concessional funding must also clearly specify their objectives when they are releasing funds to the impact investors and put in place mechanisms to ensure that these investors are directing their funding to meet the specified objectives. Impact investors need to go beyond intentionality and commit to measuring and tracking impact.

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