What should Nigeria do to attract more impact investments?

Impact investment inflow into Africa is increasing, but the momentum could be better if certain hurdles are addressed. In the last few years, several billions of dollars on impact investments have come into the African continent, particularly, Sub Saharan African countries.  According to Rise Africa Rise, over 107 organisations have invested in Southern Africa with the global development institutions such as the Industrial Development Corporation, investing about $25 billion on over 7500 deals among South African companies.

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In May 2019, LeapFrog Investment, with focus on Asian and African companies, announced plans to invest $700 million in institutions in the two continents which are into healthcare and financial services. In June 2018, the African Development Bank (AfDB) approved $15 million for agri-business and food security in Africa under the Africa Food Security Fund scheme.

And according to the report by the National Treasury of the Republic of Kenya, between 1998 and 2004, Kenya attracted $4.6 billion through impact investing , representing 46 percent of the impact investing inflows into East Africa.  In the same economic bloc during the period, Uganda attracted 13 percent while Tanzania received 12 percent. Then, Ethiopia and Rwanda got seven percent and four percent of the total impact investing inflows into East African economic bloc respectively.

In 2016, IFC invested $66.8 million in Hygeia Nigeria, which is one of the leading private healthcare companies in the country. The firm offers comprehensive health insurance to individuals, families and small businesses.

Impact investments could booster public spending and development assistance according to Global Impact Investing Network (GIIN), through pooling together excess funds from the private sector and skills which will strengthen African countries’  vulnerability to external shocks, by providing solutions that would address environmental and social-economic needs.

One may be carried away by the few successes some countries have recorded as itemised above, that Africa is now a top destination for impact investing projects. Alas, this is quite not true because the global impact investments are worth $502 billion, which means, impact investments into Africa only account for a small percentage of the global impact investments.

To gain more attention from the global impact investors, there are quite a number of hurdles African countries; especially Nigeria must overcome to attract the desired level of impact investments.

Paul Boynton, chief executive officer, Old Mutual Alternative Investments, which is one of the largest private investment managers in Africa overseeing over $4 billion in investment, identified some of the challenges facing impact investments in Africa.

“A big-ticket institutional investor trying to find a home in impact in Africa will be constrained in terms of how much capital it can put away. A $300bn pension fund, for instance, seeking to write a cheque for $300m into an impact fund in Africa will know that this is simply not viable, because underlying investment opportunities of that scale do not exist. Even the vast clean energy opportunity in Africa remains constrained because of heavy competition driving up prices and compressing returns”, Boynton said.

The reason for the above, according to Rachel Keeler, is because high impact companies in Africa do not have the same pace of growth as the number of impact investment funds. Put differently, there are more impact investment funds than there are investable social businesses.

Related to the above is the absence of high-quality investment opportunities with good track record in the country. Impact investors have their diverse criteria for selecting projects. So, failure to meet these criteria might deny a firm of impact investing alliance. Basically, impact investors are driven by two major criteria, which are to generate a financial return on the investment within a given period, and, to realise the stated impact objectives in its field of operations.

This suggests that for Nigerian companies and projects to attract the desired level of impact investments, their promoters must be sure those two objectives must be present and sustainable.

Another hurdle firms in Nigeria must overcome to get the needed impact investment is to be able to state clearly the problems they are addressing. What exactly is the focus of your investment? Which problem are you trying to solve? The ability to pitch the project in clear terms will go a long way to attract impact investors in the appropriate areas.

Some firms’ mission statements make them unattractive to impact investors, according to Rise Africa Rise, an online guide to social entrepreneurship and innovation in Africa.

“This is the first question they ask as part of their impact framework. A company’s mission statement is usually closely linked to the problem it seeks to address. This reveals a lot about your company’s determination and ambition. As many investors are also expecting some form of financial return (except if you are getting a grant) they will want to ensure that the problem you are addressing has a sustainable commercial potential to generate the expected financial return”, Rise Africa Rise, stated.

Furthermore, impact investors in Nigeria are also having challenges in exiting investments across a broad spectrum of sectors. Many factors are responsible for this which include shallow financial markets for listed firms while a number of firms are not even listed on the Nigerian Stock Exchange (NSE).

Perception about a firm or project could either make or mar a project.  Consequently, the firms in the country also need to change the perception that impact investments are not that too viable within the Sub Saharan Africa, especially Nigeria.

Infrastructure financing on the continent is yearning for support. Presently, it is estimated that Sub Saharan Africa requires over $300 billion, to bridge infrastructure gap in the short to medium term. Nigeria, as the biggest economy on the continent is yearning for much of the funding for infrastructure financing. The global impact investor ecosystem is ready only that countries in Africa needs to make the infrastructure financing attractive.

Another challenge, according to GIIN, is inadequate policy and regulatory environment. The impact investment ecosystem in Africa is desirous of stable and enabling regulatory policy environment. This concerns the need to have a stable exchange rate regime and improve the ease of doing business for local businesses to thrive.

More so, there is a poor linkage between social enterprises, investors and innovation networks. This perennial problem persists because most of the social enterprises do not belong to professional bodies or formal networks. This creates a herculean task to investors trying to find investible enterprises.

Nigerian firms should also develop and standardise their capacity to understand and measure impact investment. According to GIIN, there is lack of consistency and standardised frameworks and metrics that sufficiently address impact information needs which could enhance comparison with prospective investment, and to be able to measure the performance of the impact investment against targets.