Impact investing, one of the fastest-growing areas of asset management, continues to gather momentum. According to the Global Impact Investing Network, the industry had $502bn of assets under management at the end of 2018, more than twice the previous estimate of $228bn at the end of 2017 — itself double the amount reported the year before.The strategy is firmly in the mainstream, with the likes of Goldman Sachs, Bain Capital and BlackRock — to name just a few — adding impact products to their portfolios. Managers have announced increasingly large fundraisings, such as the Rise Fund raising $2bn and UBS, which has pledged to raise at least $5bn for impact investment.Sub-Saharan Africa has been a beneficiary of this growing appetite, with 14 per cent of all impact AUM allocated to the region last year (behind North America and Latin America).
But can Africa access the latest surge of impact capital from increasingly large funds?In Africa, impact investment has the potential to complement public spending and official development assistance, by crowding-in private sector capital and skills to reduce the vulnerability of the continent’s economies to external shocks, while providing a market-based solution to socio-economic needs.
The region also presents a plethora of possibilities for impact, ranging from areas of social concern such as housing and education to areas of climate capacity such as agribusiness and clean energy.beyondbricsEmerging markets guest forumbeyondbrics is a forum on emerging markets for contributors from the worlds of business, finance, politics, academia and the third sector. All views expressed are those of the author(s) and should not be taken as reflecting the views of the Financial Times.Despite the mostly untapped potential, there is a barrier to unlocking large-scale global impact capital, which is a shortage of investable opportunities for large global investors.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.So, what’s needed to overcome the barrier and mobilise much-needed private capital to Africa?In my view, it’s about applying some thought to what it means to invest in impact and broadening the sectors of focus, from mostly energy and financial services to include underserved areas such as infrastructure, which received just 4 per cent of impact capital last year.Africa has a yawning infrastructure gap that requires spending of between $130bn and $170bn annually just to keep up with growing demand. But the capacity of multilateral funds and national fiscal resources to finance it is no more than half of that amount. There is clearly an opportunity for large, global investors to play a part in bridging the gap by allocating to existing African infrastructure funds with a strong focus on ESG that are building impact outcomes for the continent.
Take the Kigali Bulk Water Supply Project in Rwanda as an example. Once complete, this large-scale water treatment plant will provide 40m litres a day of fresh, clean water, meeting 40 per cent of Kigali city’s potable water requirements.Secured and sustainable water supply will have a hugely positive impact on the socio-economy of Rwanda and represents a major milestone in its government’s vision to build an economically prosperous, developed country. This is a strategically important project and the first water public-private partnership concluded in sub-Saharan Africa. Yet, with a total project cost of $61m, it is simply too small for a large institutional investor to participate in on a standalone basis.
As part of a portfolio of assets within a fund structure, however, this challenge becomes surmountable.So, if the appetite and the opportunities for investment in African development exist, why isn’t this translating into committed capital? What’s holding global investors back? I believe that it’s primarily because of the perceived risks of investing in Africa being much higher than the actual risks. While we’re seeing greater interest from the global investor market than at any time previously, there remains a need to educate the various stakeholders on the asset class and adjust risk perceptions.In fact, because of their origins in development finance and their familiarity with Africa’s investment profile, African infrastructure and private equity managers typically allocate more time and effort to risk management and ESG issues than their peers in more developed markets, even for funds that are not explicitly impact-focused.There is potential for large global investors to support a developmental agenda and create positive impact in Africa. They just might need to scale further into the African infrastructure space to do it.