Private Equity impact investing: a rhetoric or a reality?

A decade ago, this concept was barely known by the world, if not the case, by very few investors. The promoters of impact were mainly philanthropists via charitable aid and donations in order to increase the well-being of humankind. Impact investments “are investments made into companies, organisations, vehicles and funds with the intent to contribute to measurable positive social, economic and environmental impact alongside financial returns”, as defined by the IFC.

Over the years, investors such as Fund Managers, DFIs, and Foundations among others have witnessed the growing opportunities for Private Equity impact investing along with attractive IRR. In its Impact Investing Trends: Evidence of a Growing Industry report, which gathered data from 61 investors for the three-year period from 2013-2015, the Global Impact Investing Network (GIIN) found that impact investment assets under management grew by 18% per annum. In June 2018, the GIIN published the eighth edition of its Annual Impact Investor Survey and collectively 229 respondents reported managing a total of USD 228 billion in impact investing assets. Additionally, 225 investors committed more than USD 35.5 billion to impact investments in 2017, and anticipated committing 8% more – USD 38.5 billion – in 2018.

The UN estimates that achieving the SDG will require closing an annual investment gap of USD 2.5 trillion. The opportunities to promote social impact and environmental impact are tangible and investors should capitalise accordingly. Furthermore, according to Calvert Impact Capital’s 2018 Investors Survey Report, excitement for impact investment continues to grow amazingly:

Source: Calvert Impact Capital’s 2018 Investor Survey Report

Why Africa for Private Equity impact investing activities?

Over the last decade, in-depth research has concluded that Africa was the main destination for Private Equity impact investing activities. This was due to significant opportunities resulting from the demand, which arose in various sectors such as combating food poverty or renewable energy.

Policymakers in South Africa, Kenya and Nigeria have taken strides to boost investments in SMEs through Private Equity Funds (“PE Funds”). With investments in SMEs being among the top 5 Private Equity impact investing themes, there is potential to attract High Net Worth Individuals (HNWI) to allocate more capital towards investing for impact. Other PE Funds in East and West Africa have the potential to capitalise on these developments by targeting niche markets of HNWI who would like to adopt effective tax optimisation while maximising the positive social and environmental outcomes that their investments could generate.

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In addition, the United Nations Development Programme (“UNDP”) has identified several challenges when indulging in impact investing. One of the main challenges is the probability of incurring higher transaction costs as compared to a similar Private Equity fund.

Due to poor infrastructure over the continent, transactions costs or entry costs can be relatively high. Network coverage is still under-developed and can prove to be a hurdle. The lack of reliable social metrics makes the trade-off between IRR and social impact rather problematic. There is also a lack of research and development in order to better measure financial performance. Credible data on risk and return can help both existing and future impact investors better identify strategies that best suit their desired social, environmental, and financial criteria.

Benefits of impact investing

The benefits of impact investing are much beyond the challenges. It can supplement additional capital flows into developing economies, and stimulate private sector development where this is otherwise absent. Impact investment offers varied and worthy opportunities for investors to advance social and environmental programs through investments that also produce financial returns. By combining various forms of capital with different return expectations, social challenges can be addressed in more accessible manners than is attainable by the public sector alone. There is creation and growth of innovative enterprises that magnify the whole economy.

Source: Calvert Impact Capital’s 2018 Investor Survey Report

Why is this relevant to policymakers? The obvious difference of Private Equity impact investing from other forms of investment (which unintentionally generate positive and negative externalities) is useful for anyone willing to create and measure positive impact because it develops the toolbox of strategies at their disposal. Traditional tools of public funding and aid are used to address societal challenges (and help measure their success at doing so). Likely, private investors and institutions can be empowered to deliver substantial impact, with the outcomes to be assessed consequently. This is particularly relevant for African policymakers considering cultivating their capacity to drive development schemas.

Government intervention

The role of the government is critical when it comes to setting the rule for an impact economy. One of the common measures is to create a tax credit system for start-up businesses, thus encouraging impact penetration. Early support and grants from governments will definitely help to attract more impact investors, enabling sustainable development through impact investment.

Furthermore, the World Economic Forum has devised the following recommendations to facilitate impact investment:

1. Provide tax relief for risky or early-stage investments in which public benefit is created, but below-market returns are generated.
2. Cautiously revise regulations that restrict willing capital into impact investments.
3. Help de-risk the ecosystem through innovative funding mechanisms.

Measuring impact investing

The African Investing for Impact Barometer provides an overview of the rising trend for impact market and strategies, which are implemented on the African continent. The areas covered  to measure the positive impact are:

1. ESG INTEGRATION (Environmental, Social and Governance factors)
2. INVESTOR ENGAGEMENT (Influence at investee’s level)
3. SCREENING (based on norms, ethics and inclusion/exclusion of investments)
4. SUSTAINABILITY THEMED INVESTMENT (sustainable development)
5. IMPACT INVESTMENT (social/environmental plus financial returns)

On the other hand, the Global Impact Investing Rating System delivers the impact standards and rating system to smoothen a scaled-up marketplace for institutional investors, financial services intermediaries, and companies seeking mission-aligned growth capital and liquidity.

Why is Mauritius the most suitable Platform for Private Equity impact investing?

So, why using the Mauritius platform as the gateway for Impact Fund? While Mauritius may be insignificant in terms of country size, it is highly influential in terms of promoting Impact Funds. More than 600 investment funds with a focus in Africa have chosen Mauritius to structure their operations, its economy being among the top in Africa in terms of stability and prosperity. The continent offers investments opportunities in various sectors such as agribusiness, education, technology, infrastructure, renewable energy and food poverty eradication.

The Economic Development Board of Mauritius states that the island has a liberal trading Policy. In addition, its state-of-the-art logistics infrastructure and reliable support services are fully integrated into the international trade ecosystem. Mauritius is also a key member of regional economic blocs. It forms part of the African Union, COMESA, SADC and the Indian Ocean Rim Association, benefiting from no trade barriers. Mauritius also enjoys preferential market access to several export destinations through a wide network of trade agreements, most notably with the European Union and the USA.

Source: The landscape for impact investing in Southern Africa, the GIIN 

Local policy makers must work in collaboration with impact investors in order to create, realise and sustain impact markets. The Private Equity impact investing market in Africa is gradually gathering momentum. Leadership, coordination and concerted action are essential for the sustained growth of the sector. Comprehensive policy reforms must be implemented as and when required. Government leadership is key to remove barriers, build capacity, catalyse investment activities and harness the power of financial markets to address critical social challenges.

Sources:

1. The GIIN – www.thegiin.org
2. The UNDP – www.undp.org
3. The Economic Development Board (EDB) of Mauritius – www.edbmauritius.org
4. The African Private Equity and Venture Capital Association – www.avca-africa.org
5. Afrobaromètre – www.afrobarometer.org
6. Calvert Impact capital – www.calvertimpactcapital.org
7. Bridges Fund Management – www.bridgesfundmanagement.com

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