Impact investing is gaining momentum, and Sub-Saharan Africa, with its notable potential, already attracts 12 % of global flows. However, a lack of in-depth analysis still hampers these opportunities.
Understanding impact investing
The world of philanthropy and investment is divided into three main categories with distinct objectives: donations, impact investing, and traditional investing. These approaches illustrate the range of strategies available for allocating resources based on financial, social, or environmental goals.
Characteristics of impact investing
The Foundation for Studies and Research on International Development (FERDI) highlights in its report « Impact Investing in Africa : Lessons from a Sector Mapping » the lack of consensus on the definition of impact investing in the existing literature. This type of investment aims to balance financial returns with social or environmental benefits, using both direct and indirect approaches.
In a direct approach, social impact is prioritized, with financial goals secondary. Conversely, the indirect approach focuses first on financial returns while seeking to generate positive social effects. Expected returns can range from market-comparable to slightly below market rates, while the desired social or environmental impact remains crucial.
Concepts of intentionality and additionality
Impact investing is distinguished from traditional funding by two key concepts: intentionality and additionality. Traditional investors may also achieve positive effects and adhere to environmental, social, and governance (ESG) standards.
However, impact funds prioritize generating social, environmental, and economic benefits. This approach emphasizes positive impact before considering capital allocation or financial viability. Expected financial returns can range from highly concessional to above-market rates.
Additionality refers to investments that would not have occurred without the intervention of impact investors. Besides providing capital, these investors help enhance developmental outcomes by highlighting these results.
Impact investing landscape in Sub-Saharan Africa
Impact investments in Sub-Saharan Africa exceed foreign direct investments (FDI), which account for an average of 3 % of global flows. However, the total volume remains relatively modest, standing at 2.51 billion USD out of a global total of 20.57 billion USD. In comparison, FDI and official development assistance in the region are significantly higher, with 70.15 billion USD and 53.97 billion USD, respectively, in 2021.
Despite these modest figures, impact investing in the region is experiencing substantial growth, with an average annual rate of 14.2 %. This rate lags behind other areas such as the United States and Canada, where growth reaches 53.4 %. In contrast, the Middle East and North Africa region shows a slight decrease of 0.44 %.
Key target beneficiaries
Most target companies are located in Nigeria, South Africa, and Kenya, the region’s most dynamic markets. The most attractive sectors for impact investors include agriculture, finance, energy, health, and technology. This focus reflects the continent’s major development challenges and the potential profitability of businesses in these areas. Conversely, impact funds are nearly absent from hydrocarbons and major telecommunications companies, and typically do not target mature enterprises.
Impact investors : Local players remain a minority
Most funds operating on the continent come from outside. The five main impact investors in Africa are :
- Mirova, a French asset management company
- The Rise Fund, based in the United States
- Blue Orchard Finance, a multi-financing private fund based in Switzerland and a member of the Schroders Group
- Africa Finance Corporation, based in Nigeria
- New Forests, based in Australia
Local investors account for only 16 % of total assets under management. Despite some dynamism, local presence in this sector remains weak. Analysis of legal profiles reveals that nearly 85 % of impact investors are independent private actors. These funders use a variety of financial instruments, including equity, mezzanine, debt, and guarantees. However, equity constitutes about 50 % of financial contributions, showing a preference for this type of investment.
Medium-sized impact investment funds, managing assets between 1 million and 250 million USD, represent over 50 % of the funds surveyed. In contrast, mega-funds with more than 1 billion USD in assets make up only 7.1 % of the total number of impact investment vehicles in the region. Despite their low numbers, these mega-funds control over 80 % of total assets under management, indicating a significant concentration of financial resources.
