AIR discusses the impact potential of private equity investment in the sector with Herman Marais, managing director at Agri-Vie Investment Advisors.
Since the first close of its USD 100 million Africa Investment Fund in 2008, Cape Town based Agri-Vie has been putting risk capital at work in food and agribusiness related businesses in sub-Saharan Africa. Investments in South Africa make up 40% of the portfolio, East Africa accounts for the balance. With a typical investment size of USD 6 to 8 million, Agri-Vie finds opportunities at the relatively lower end of the private equity scale. The fund’s twelve portfolio companies employ 8000 employees, and over 3000 smallholders are involved in their value chain. Whilst the projects it provides equity to are focused on the value added, processing end of the chain, the fund does not exclude primary production, and favors vertical integration. Agri-Vie is currently raising its second fund, aiming to raise USD 150 to 200 million.
Herman Marais believes financial returns and impact should not be alternatives, but can be delivered concurrently. Creating financial returns is necessary to attract and retain capital from increasingly mainstream investors. The nascent food and agri-business sector in sub-Saharan Africa in turn offers investment opportunities with significant inherent potential for impact.
Businesses in Agri-Vie’s investment universe typically operate in deep rural opportunities where employment opportunities are few and far between. Portfolio companies therefore play a large role in creating and sustaining livelihoods where subsistence had previously been the norm. Mr Marais explained how working conditions, safety as well as training and development are monitored to ensure the quality and sustainability of the jobs created.
Food processing businesses source agricultural produce from a mix of commercial farms and smallholders, bringing off take opportunities and technology transfer. This also allows standard setting for smallholders who otherwise lack the reference points and market intelligence necessary to successfully enter the market for their products.
It is important to keep in mind that these investments take place in the context of accelerating urbanization in the sub-Saharan Africa region. Investments in this sector do obviously play an important role in enhancing food security. Creating wealth and employment opportunities in rural areas can also be thought of as a means to counter-balance the migration movement towards the urban centers.
Impact targets on water conservation, energy, resources and risk management are set with investees, and Agri-Vie works with GIRRS to measure impact outcomes.
Investment in all things agricultural comes with its own brand of challenges. The lands right issue is one particularly relevant to the African context. Mr Marais believes interaction with all stakeholders and a strong linkage with the host communities is the best management technique.
The remoteness of the rural areas agri-businesses tend to operate in is a challenge in itself. Supply chain input logistics can be rather akin to Chinese puzzles. The infrastructure is more often than not non-existent, and companies have no choice but to provide financing for that which they require.
It is – very – often said that the agricultural sector is key to Africa’s future. It therefore is frustrating that the capital available to agri-entrepreneurs is somewhat scarce, specifically for smaller projects. Agri-Vie’s model is therefore an important contribution, hopefully one that will be emulated, and extended to the primary sector. Whilst there is no doubt that investment in the sector is not without its difficulties, funds such as Agri-Vie’s demonstrate that bringing the right mix of skills to bear can reap both significant financial rewards and meaningful impact.
A Dean’s Fellow at the University of Oxford and the Innovative Finance Lead at the Bertha Centre, Aunnie Patton took the time to take us through the Bertha Centre’s ambitious Social Impact Bond for Early Childhood Development project. Our most enlightened readers will no doubt recall the April 2014 publication by the Bertha Centre, in cooperation with Social Finance and Genesis Analytics, of a policy paper focused on the potential application of Social Impact Bonds (SIBs) to SME development in South Africa.
Building on their expertise in the field, and with financial support from Denmark’s LEGO Foundation, the Bertha Centre has been conducting further research into the potential use of SIB based structures for Early Childhood Development (ECD) initiatives in the Western Cape province of South Africa. The team is now ready to boldly go where no others have gone before, and proceed with the launch of a real-life initiative.
Amongst other findings, the afore mentioned report suggested an alternative structure to traditional SIBs might be better suited to a context where it might be beneficial for multiple approaches to a social issue to be piloted, and for the best social enterprises responsible for implementing the required interventions to be identified.
The Simplified Tariff Based SIB structure would see the establishment of an innovation fund, funded by government bodies, donors (HNWIs, development agencies, charitable foundations…) and corporations.
Further to deliberations amongst the innovation fund’s stakeholders, a list of the ECD outcomes the project aims to achieve would be drafted. Specific outcomes range from healthcare objectives such as the vaccination of pupils to learning outcomes linked to school readiness. Associated ‘Rate Cards’ would be produced, indicating how much the fund is prepared to pay service providers for delivering these outcomes through their work with communities. In a developing world context, it is possible that some of these service providers will be ‘profit for purpose’ social enterprises, in addition to the charitable trusts and other non-profits organizations more traditionally associated with SIBs in Europe and America.
The idea is for these documents to form the basis of a bidding process, where social enterprises make competitive proposals for the attribution of contracts for the delivery of the outcomes. This theoretically should ensure the impact is potentially delivered at the best possible cost to the fund’s contributors.
These social enterprises would then engage with investors, typically foundations and donors identified by the Bertha Centre with a specific focus on ECD. These investors would essentially undertake to provide the working capital necessary for the provision of the required interventions until the targets are met and a payment for performance from the innovation fund is triggered.
Emboldened by this comforting reassurance that the bills will be paid, intervention providers subsequently would enter a somewhat unfamiliar bidding war, and should the Gods of the auction look kindly upon them, be awarded their marching orders. Their achievements would be monitored, and as they converge with the desired outcomes, the fund would hand over a purse of gold, thereby completing the cycle.
Impact measurement is a crucial aspect of any such endeavor, and in this case will be outsourced to independent monitoring and evaluation (M&E) specialist consultants, who thankfully are anything but scarce in South Africa. Depending on the specific outcome, some measurements will be made on individual data points, whilst some will be on a batch basis. The diversity of outcomes does however constitute a challenge, and it will be interesting to see whether there is a significantly higher cost compared to more single-minded programs.
The intention here is interestingly to introduce rather progressive scorecards, where payments can be triggered as milestones or progressive levels of success are achieved – i.e. as increasing numbers of children are vaccinated or can stick the triangular block where it belongs – rather than the more usual binary scenario. This should make for the afore mentioned provision of working capital by investors less taxing, as cash starts flowing to the successful social enterprises at a relatively early stage.
As always with multi-stakeholders initiatives, specifically where government is involved, match making is a Sisyphean task mixed with a Man-on-Wire balancing act, and the Bertha squad have got their work cut out. If successful, the value to a society where social service delivery can definitely do with a fresh approach is potentially game changing. The selection of ECD, and area where next to no delivery is currently taking place will hopefully make for a slightly easier case. There is however no doubt that the potential applications of the model go far beyond.
What is a Simplified Tariff-Based Social Impact Bond?
For those who believe a picture is worth at least as much as the 846 words this article is made of, we strongly encourage a visit to the Bertha Centre’s website where the avid reader will find a link to the report we keep referring to, as well as updates on their commendable efforts.
The structure discussed in this article would be comparable to the Simplified Tariff-Based SIB providing BDS to early-stage SMEs (Exploration of Social Impact Bonds for SME Development, Bertha Centre, Social Finance, Genesis Analytics, April 2014), which is depicted below.
- Thomas Venon -
In this post-2008 world, any attempt at defending the benefits to society of financial markets, organized exchanges and futures trading in a social context is usually met with uncomfortable silence and disapproving stares. It is therefore refreshing to witness the newfound enthusiasm for commodity exchanges on the African continent.
Further to the relative success of Ethiopia’s ECX, Rwanda launched its own EAX in early 2013, and the forces of exchange building are at various stages of their work across the continent, seeking amongst other objectives to establish the formal trading environment necessary to accelerate the development of Africa’s agriculture sector.
The virtues of commodity futures markets in developing economies have been expertly documented in the UNCTAD’s 2009 ‘Development Impacts of Emerging Exchanges in Emerging Markets’ report. The 232 pages put together by Adam Gross, Leonela Santana-Boado and their team makes for a riveting read. Provided you have limited time and are solely concerned about their positive conclusions, you will however be pleased to learn that Norton Rose’s South African practice has conveniently summarized these in a two page article published last month. The reader will have little difficulty in locating a large number of similarly enthusiastic exposés on the positive aspects of this new development. We therefore thought that a somewhat more balanced report would be appropriate.
For the purpose of this article, we will try and look at a few of these through the eyes of the African small-scale farmer.
Commodity future exchanges in their modern form were originally launched to address the price-risk management needs on behalf of Midwest wheat farmers. The basic idea was to allow them to lock in prices for future delivery of their crops to their market counterparts. The cash requirements built into the margin trading system, and the challenge associated with teaching the masses the mechanics of futures based hedging make the prospect of any direct participation in futures market by a significant number of smallholders a remote one. The services of intermediaries will be needed for the ability to hedge against future price movements to benefit the grassroots.
The development of commodity exchanges should mean that the availability of both present (spot) and future (well, future) prices for the delivery of commodities, as well as the development of instruments such as warehouse receipts that can be used as collateral, make it more palatable for financiers to lend to a supply chain they have historically considered as far too risky. Once again, the effects of this phenomenon are initially only likely to be felt at the bottom of the supply chain in an indirect fashion.
The most immediate, and potentially the most important effect of the development of commodity exchanges in Africa, revolves around information. Price discovery, through the direct interaction of aggregate demand and supply for a commodity, is a basic feature of any organized exchange. The subsequent dissemination of this price information, present and future is the real game changer for Africa’s fledgling farmers.
Picture the current situation. Remotely located small-scale farmers’ interaction with the market for their crop is often limited to a single buyer. The buyer possesses the cash and exclusive knowledge of the market price. The farmer possesses mouths to feed, and a given amount of a usually perishable commodity. It is easy to see how knowledge of a ‘fair’ reference price would be of immense value to the farmer.
Similarly, when this same farmer needs to choose which crop to grow on his limited amount of land, information on price dynamics for the various varietals he can pick from will help him make an informed decision.
As the sector develops, and direct interaction with the market becomes a more realistic prospect, the ability to engage more directly with multiple buyers should result in fewer layers of intermediaries, resulting in an increased slice of the proverbial pie being retained by the producer.
It should therefore come as no surprise that the traditional traders who have been running the market for decades are quick to point out flaws in the exchange plan. In her ‘Africa’s Agriculture Commodity Exchanges Take Root’, This is Africa’s Eleanor Whitehead for example quotes a coffee trading house executive pointing out the challenge exchanges present for product traceability.
Given the product standardization and clearing house system usually required to create a functional market, this is a real, if not insurmountable issue. A far more serious concern lies in the very way commodity exchanges appear to be mushrooming across the African continent. As is often the case when an initial success, such as the ECX, attracts the attention of well-meaning funders, a gold rush seems to have taken hold of the commodity exchange building community.
Eleanor Whitehead again usefully relays the words of a ‘Malawi based structured-trade expert’ that ‘can’t help but think that this is an idea that donors and investors are buying into, but without having done research on the need for an exchange within every given community’. The expert chose to remain anonymous, no doubt fearing his access to these donors and investors might suffer from his appraisal of their due diligence prowess. The article also cites doubts on behalf of a market specialist about the wisdom of basing a local exchange in a landlocked country with precious little land and agricultural output, famous for its less than complete enthusiasm for transparency.
Here we can draw a useful lesson from the fortunes of the more established African stock exchanges landscape. The general rule seems to be that in Africa, stock exchanges are like opinions, everybody has one. The irresistible urge for every country on the continent to build its own, for reasons we don’t feel an irresistible urge to go into, has historically resulted in the multiplication of very illiquid markets.
Gross and Santana-Boado (2009) clearly state that when it comes to commodity exchanges ‘a high volume of transactions – “liquidity” – is the key indicator of success. Without liquidity, the market price level can be moved relatively easily with a single transaction, thus leaving it exposed to potential manipulation’. Fragmentation is the enemy of liquidity build-up. Even in developed markets, consolidation has been a dominant feature of the financial exchange sector, whilst India for example only has three commodity exchanges to service its immense market.
Commodity exchanges do have a unique potential to bring about the enhanced market efficiency and price transparency required to shift the odds in favor of Africa’s smallholder farming community. The research exists, as do well documented past successes and failures. Overcoming the ambitions of individual countries to strategically plan the development of viable exchanges is a daunting, but crucial duty for governments, operators and financial backers.
An introduction to AIR’s upcoming article series on impact investing and agriculture – Stay tuned for the rest of 2014.
- Thomas Venon -
Agriculture is a big deal for Africa.
It is a big deal for investors who see there a potentially extremely lucrative solution to the planet’s Gargantuan food needs. It is a big deal for developmental types who know it could mean an escape from poverty for sub-Saharan Africa’s circa 70% rural population. It is an even bigger deal for said rural population.
Some sources indicate small-scale farms contribute 90 percent of sub-Saharan Africa’s agricultural production. This situation is in stark contrast with that observed in the western world where the number of farms has been melting rapidly. France for example had three million farms in 1970, whilst only 600,000 remain nowadays.
There is of course no question that the advent of the large commercial farm brings about heightened efficiency and leads to more affordable food prices and heightened food securities. It has played an important role in the acceleration of urbanization in the west, as ruined smallholders and redundant farmhands steadily made their way to the factories and offices of the metropolis.
Although this forced re-deployment was hardly ever a pleasant experience for the populations involved, the demand created by strong periods of economic growth, and the fact it took place over a long period of time, often slowed down by state subsidies, helped avoid spiraling unemployment and potential starvation.
One can seriously question whether these mitigating factors are in place in much of Africa, as the continent still has to find its place in the global industrial landscape.
There is little doubt that unimpeded free market forces will force African agriculture onto an accelerated evolutionary path, and obliterate the small, inefficient farming operations. Whilst a better organized, better capitalized agricultural sector relying on larger commercial farms and an increasingly adequate infrastructure is probably desirable in the long term, it would be socially dangerous to allow this process to take place too quickly.
Investors have always been quite wary of primary agriculture investments, their vulnerability to nature’s whims making them rather too unpredictable. Add to this the generally accepted fact that the same investors have a well-documented allergy to small investments, as we have had the occasion to remark upon, and the picture looks decidedly bleak for the small scale, entrepreneurial farmer in search of funds to modernize his operation. In stark contrast, large projects have to fight back suitors with now outdated pitchforks.
A ‘maximum ticket’ metric might be an interesting concept to introduce to agri-focused impact investing funds.
Smallholders could benefit from diversifying away from their subsistence crops into cash crops in high demand in export markets. The guar bean phenomenon is a perfect example of the benefits and very real risks inherent to such an approach. After the appetite of the fracking industry for an otherwise rather dull product sent the market price into an upward spin, farmers were convinced by trading houses to dedicate an increasingly high share of their land to growing guar bean. Over-stocking and the rise of synthetic alternatives however eventually led to a collapse in demand, and to the ruin of many of the farmers involved.
Price volatility is a deadly enemy for farmers. Although it cannot be completely eradicated, there are a number of mitigating techniques. Organized, efficient and transparent exchanges are one way to allow practitioners to make informed decisions. They admittedly hardly constitute good news for the traders who control and thrive on opaque supply chains, but hey, in every life some rain must fall.
Shortening supply chains by allowing for dialogue between end users and producers is another way to placate this issue. Users of some specific agricultural products might be willing to agree on price stability in exchange for supply consistency.
There is no denying that the market can bring solutions to Africa’s poor in the long term. But we do believe that the responsibility of impact investors is to engineer solutions that ensure investment is mindful of the consequences for the livelihood of the many.
Life is not always easy for the private equity general partner operating in Africa. It is full of conflicts. Take it from a man who has gone through the exercise on a number of occasions; the last thing you want to tell prospective LPs whilst fund-raising, is that you are struggling to deploy monies committed to your first fund. And yet this clearly is the case, as exemplified by a rather endearing practitioner at the recent African Investment Funds forum in Johannesburg, when he revealed how lucky he and his team had been to raise their fund before the crisis, and therefore still had all that cash to invest. Yes, the 2008 crisis.
So why O why, we ask, is it so difficult to deploy money in a continent we know to be thriving with opportunity, and where legions of entrepreneurs are battling it out on the ground?
Well, possibly because the ground is quite a faraway place when you are sitting at the helm of large funds. Most of these entrepreneurs aspire to become millionaires, but sadly their current bank balance often prevents them from building projects that can attract the large tickets our GP friends are comfortable writing. No fund will seriously consider making dozens of small size investments. The solution to that problem is of course to raise small SME specific funds, but managing small amounts is just no fun, is it?
Possibly more annoyingly, all these entrepreneurs more often than not didn’t have the elementary courtesy of attending business schools before deciding to go into business. A decent, standardized business plan, complete with Powerpoint deck and audited accounts is a rare find. And if the aspiring business moguls can’t be bothered to provide these, well then the investment committee can’t be expected to take a shot in the dark. And it certainly is not a GP’s business to go and work with the candidate portfolio companies to make their case investable.
This however does not solve the development minded LP’s problem. If their money only goes to sizable firms who can provide the GPs with undisturbed sleep, the grass-root entrepreneurs will continue missing out, and the runaway economy will continue to create conglomerates, in an interesting parallel with early 20th century America. The US democracy was strong enough to break the conglomerates that throttled the country. Can we reasonably expect the same from African governments?
Well assuming we can’t, something else needs to happen. Since we can’t ship every energetic business person to Wharton or INSEAD, some form of technical advisory service is in order. Now of course TA funds exist, but they tend to be donor funded, and to be depleted to the rhythm of their sister private equity fund. This highlights an interesting phenomenon; unless the donors’ list in the TA fund is the same as the LPs’ list in the private equity fund,a transfer of wealth from charitable institutions to commercial investors is created.
No, decidedly, if GPs want companies to be groomed to the standards they have grown accustomed to, they will need to contribute to the process. We have recently come across a couple of initiatives that could help solve this uneasy equation. Funds could be put together to provide budding entrepreneurs with technical advisory and investment readiness services. A premium would then be added to the valuation at the private equity investment stage to pay for such services, with an added kick for the provision of funds to pay for such. The fund could also help with the negotiation with GPs.
This would allow for the creation of relatively short term horizon funds, which raise money from development conscious investors, provide TA and IR services to entrepreneurs, and return cash to investors once the business has been invested in and is in a position to repay the advanced capital.
Who then should manage such entities? Development organizations, whether backed by governments or businesses, have built platforms providing assistance to communities and business over the years. This could be an interesting way to make these sustainable at a time where budgets on both sides of the public/private divide are under pressure.
London Business School Africa Day 2012: Gabon’s President wants to reconcile economic growth with environmental protection
The 2012 edition of the London Business School’s 2012 Africa Day was by all accounts a resounding success. I feel reasonably certain those who made their way to Regent’s Park on Saturday 19 May would agree that the highlight of the day was the vibrant speech delivered by His Excellency the President of the Republic of Gabon, Ali Bongo Ondimba.
His Excellency’s opening remarks focused on the need to change the way people think of Africa. He described Africa as ‘a continent whose time has come’, reminding the audience of the continent’s claim to having the ‘fastest growing middle income class in the world’, and highlighting the fact that 17 African nations fared better than India in the most recent iteration of the World Bank’s Ease of Doing Business report. A McKinsey report was also quoted as stating that by 2020, 52% of African households would have surplus income.
There is a need for Africans, he insisted, ‘to change the perception we have of ourselves’ and to ‘believe we can define our future’. Africa is at a crucial crossroads in its quest to escape from the clutches of under-development, and President Bongo Ondimba highlighted the crucial role the current generation must play and the fact that ‘it is us that will be judged in 20 years’.
A recurring theme in the President’s remark was the importance of the natural habitat in Gabon’s future. Rainforest accounts for 88% of the country’s land mass. The African rainforest is the second largest carbon sink after the Amazon. Restating his goal to see Gabon achieve emerging nation status by 2025, His Excellency stated he has ‘placed the environment at the heart of our economic development policy’
To reconcile environmental protection with social and economic growth, Gabon will need to invent ‘new ways of collaboration between the State and business’. A first milestone will be to build a ‘clear investment case’ and to ‘reduce the perceived risk for our business partners’ through the creation of a safe and predictable business environment. To this end, special economic zones have been created and ten-year profit tax breaks and VAT exemptions have been granted to investors.
This has however been accompanied by a ban on raw timber exports in 2010, and a requirement for business partners to adhere to the highest environmental standards when operating in Gabon. Gabon’s Government ‘will not risk the well being of our country for short-term gains’. Going forward, each project will be required to offset its carbon footprint. A new agency for sustainable development is now in place, and base stations across the country help monitor the environmental impact of economic development.
Gabon, as many other African nations, is currently benefiting from oil and gas revenues. President Ali Bongo Ondimba is however conscious of the short-lived nature of this situation. Investing the proceeds to kick-start sustainable economic growth is therefore a challenge Gabon simply cannot afford not to meet. His Excellency emphasised the need to develop a skilled workforce suited to needs of businesses, to solve the energy supply issue, and to develop the region’s transport infrastructure. As the continent’s fossil fuel resources are being depleted as fast as oil majors can manage it, this can not however be done at the expense of what might well turn out to be Africa’s most valuable asset: its environmental treasure.
A conversation with Dipo Adeoye, Impact Investment Manager, The Tony Elumelu Foundation
The Tony Elumelu Foundation is an Africa-based and African-funded not-for-profit institution dedicated to the promotion and celebration of excellence in business leadership and entrepreneurship across Africa. The Foundation is committed to the economic transformation of Africa by enhancing the competitiveness and growth of the African private sector.
What does the term ‘impact investing’ mean to The Tony Elumelu Foundation (TEF)?
“The impact investment initiative of TEF is our attempt to showcase Africapitalism, our conviction that the private sector can help transform Africa by making long-term investments that create economic prosperity and social wealth. We would like to encourage Africans to invest in Africa. We want to demonstrate that our money is where our mouth is by financing social businesses. In other words, we want to use the business space to solve social issues. Impact investing bridges philanthropy and financial return.
We focus on three core areas with respect to impact investing: inclusive business, agriculture and infrastructure. In the Nigerian agribusiness space, for example, there is a large opportunity gap, exemplified by farmers from the North who lose about 60 percent of their produce value while travelling to markets in Lagos.
Our main challenge is that impact investment deals are not available off the shelf, so to speak—you cannot just shop for them. We are frequently presented with two choices: ideas which create social impact but have no financial appeal, or pitches that are ‘business as usual’, but try to wedge in a social impact aspect. There simply are not many ready-made deals that focus on solving social issues with a business mindset.
We avoid this pitfall by adopting proactive strategies to finding impact investing deals and identifying social needs that lead to the development of ideas. We then test these ideas in cooperation with our technical partners. For example, in our ICT investment strategy, TEF looked to enablers in the form of a business incubator called Co-Creation Hub (CcHub) and we arranged investors-pitch ‘dating’ sessions. From these efforts about 30 projects were carefully chosen, some of which TEF has already provided grants. If they prove to be viable, TEF has committed to deploying impact investment capital at a later stage.
How would you present your impact investment portfolio?
The portfolio is very young. The Tony Elumelu Foundation is merely two years old and the impact investment initiative is even newer, and we typically look at impact in the social sector such as education and ICT (information, communication and technology). Our deal sizes range from $50,000 to $500,000, although we engage in larger deals when we can bring partners together. Our preferred deal structure is equity, with a range of 15% to 20%, although some rates can be lower if the social impact is great. In addition to this preference, we engage in debt structures and with sponsors. The inaugural impact investment of TEF went to a farm-livestock business in Southern Tanzania, Mtanga Farms. The 2,200-hectare operation will launch a seed potato industry and ensure new varieties of potatoes in the region, which will benefit 125,000 farms. It is the first cross-border impact investment in Africa.
We aim to be engaged all over Africa, although it might be necessary to streamline our focus areas in a few years.
What are your thoughts on the need to train impact investing professionals?
As impact investing is a nascent field, there is a strong need for experts to be developed. But it is important to be mindful about developing a balance between experts of both the financial and the social sector.
Do you engage in measuring impact? How do you evaluate investments?
We are continuously working with GIIN, The Global Impact Investing Network. They assess our portfolio and put forward recommendations, which naturally happens after the investment has been carried out. Long term, we aim to develop ways of analysing the potential impact of proposals before deploying resources in order to target the deals that are likely to have the most significant impact, and we are cooperating with GIIN on how to approach this matter as well. I am in regular contact with their professionals and we bounce ideas off each other. As the industry is new to everybody, knowledge sharing is imperative in order to develop frameworks that can guide the field.
TEF is based in Nigeria, what is the potential for impact investment locally? Nigeria is often thought of as a capitalist business environment, does that influence your work?
There is definitely a more ‘strictly for profit’ mindset in Nigeria, more so than in other African countries. The bulk of impact investing deals currently come in through East Africa, primarily Kenya and Tanzania. It should tell you something that our first deal as a Nigerian-based organisation was made in agriculture in Tanzania. It is our goal to work as a catalyst for driving these deals in ‘our’ part of Africa as well.
How do you plan to merge the ‘for profit’ mindset, or ‘instant reward’ mindset with the ‘patient capital’ mindset that frames impact investing?
We work with Africapitalism as a framework for everything we do. Africapitalism is about creating value long term, which will mitigate issues related to peak investment exit strategies. These exit strategies often have a negative impact on the entrepreneurial venture in question. It is still early days for impact investment, but momentum is certainly building.
What are your thoughts on the future of the impact investing space?
Impact investing is important for foundations such as TEF, but I also see it as an integrated part of private equity funds’ portfolios as there is a strong need to focus funding where great impact can be made. I think the future returns will depend on business quality and creativity especially. Creative impact investing largely drives the innovative pay-per-use infrastructure system of the Edubridge project in India. I think we will see more of its kind in the future.
Right now there is a large spectrum of returns in the field. NGOs engaged in impact investing went from providing grants to providing returns at about 2% whereas TEF expects returns in the range of 15% to 20%. Such expectations are not new to the private equity field and hopefully, we will see more of those players in the future; perhaps going from 30% returns on their ‘normal’ deals to about 20% on impact investing deals will be the financial sphere’s contribution to increasing social impact.
Editorial notes: Recent partnership with Co-Creation Hub Nigeria
The Tony Elumelu Foundation recently partnered with Co-Creation Hub Nigeria (CcHub), Nigeria’s first open living lab and pre-incubation space dedicated to catalysing creative social technology ventures, in an effort to encourage innovative ideas that could help transform the social technology space in Nigeria. The partnership will contribute to the growth and development of Nigeria’s emerging tech industry by providing managed seed funding to 20 technological ideas/ventures targeting the social challenges of the average Nigerian. According to Dr. Wiebe Boer, CEO of TEF, the collaboration will improve the Nigerian impact investing space over time. For more information, click here.
Financial crisis & Olympic frenzy: An impact silver lining?
The world at large is going through a rough economic patch. Unsurprisingly, this translates into a sharp fall in the risk appetite of traditional investors, leaving frontier markets investment managers and entrepreneurs alike struggling for capital. This could present an opportunity for impact investors to play an increasingly important role in the way business is financed and conducted in developing nations. When financial markets are thriving and capital is abundant, no private equity manager worth his salt will allow his quest for IRR to be meaningfully hampered by impact considerations. Scarcity is however a strong catalyst for creativity and blue sky thinking. The need for capital could drive highly talented investment managers to consider developing impact investing products to tap investors willing to take on risky investments so long as they contribute to their impact goals. There should be no shame in taking advantage of a temporary crisis in the fortunes of full-cream capitalism to further a noble agenda.
Of course we could not fail to include some level of Olympic flavour in this summer issue. We recently attended an event hosted by the Royal African Society at the Africa Village in Kensington gardens. The subject matter was defined as ‘Beyond the Games: Sport for Development’. Moderated by Oliver Dudfield Sport and development adviser to the Commonwealth secretariat, the panel discussion featured professional Nigerian footballer Sam Sodje, Charlie Gamble of TackleAfrica and Robert Morini, Head of International Development at UK sport. Having resiliently battled through of a long list of the wonderful things UK sport is doing for the third world, the audience was treated to a fascinating debate of the potential for sport-based ventures to advance development agendas. TackleAfrica for example distils AIDS awareness educational content through football coaching programmes. Sam Sodje’s foundation strives to steer Nigerian youths away from a life of crime by encouraging them to engage in sports. Sport has been, and increasingly is big business in the developed world. Unlike other businesses, it possesses the ability to focus energy and has an invaluable influence on youths across the African continent. The provision of sporting facilities, whilst potentially being a sustainable business proposition with a large audience, could prove a significant impact play if coupled with an educational agenda. Food for thought?
Private equity tackles the impact measurement challenge
The Actis name will be familiar to many of our readers: the pan emerging market private equity firm manages $4.5billion invested in 65 portfolio companies across Africa, India, China, Latin America and South East Asia. Africa alone attracts 43% of Actis’ investments in terms of value.
Our first editorial highlighted the need for effective impact measurement systems. It came as a welcome opportunity to meet with Actis to discuss their new energy impact model for our second issue.
Back in 2004 when it was spun out from British development finance institution CDC, Actis’ remit was to seek financial returns for its limited partners and by so doing prove the case for the emerging markets as an attractive investment destination.
In such challenging and fast developing countries introducing the highest standards of Environmental, Social and Governance best practice was essential. At that point there were two full time specialists in house, one of them being ESG Director Mark Goldsmith. Goldsmith was able to present us with an historical account of the evolution of the impact agenda at Actis, noting that at a time when most people believed there must be a trade off between profitability and responsible investing, “having an in-house team was in itself unusual in the world of private equity”. Now it has started to become the norm.
From its very beginning Actis was sensitive to the need to prove the beneficial impact of its investments (what Actis calls ‘the positive power of capital’). While this attitude is increasingly mainstream, Goldsmith insists that Actis’ culture of integrity and strong governance has been a differentiation point with LPs, CEOs of investee companies and governments. “Constant management support, as well as the firm’s Development Finance Institution origins, has played a key role”, commented Goldsmith.
The introduction of the United Nations’ Principles of Responsibility Investment and the subsequent adherence of many limited partners now mean that elsewhere in the industry general partners have to stop and take notice.
Realising the importance of their ethos – and the need to ensure that principles were turned into practices that could be measured and assessed, Actis took the decision to be more open about its ESG agenda and started researching best practices across its sectors of activity, seeking to identify which impact metrics to track.
The firm’s investments in the energy sector seemed a good place to start, as the value created by energy infrastructure projects is closely related to impact; for example the electrification of a nation, which is often critically low, leads to increased revenues. Social impact of an energy asset which can transform quality of life with domestic access to lighting, greater productivity in manufacturing and an end to the harmful use of bio fuel in the home all contribute great benefits to citizens. The fact that the energy sector is typically subject to high levels of regulation also meant information was more readily available.
Actis duly proceeded to create an impact measurement model in collaboration with Forum for the Future. Based on Forum for the Future’s five capitals model. Actis added a specific focus on the Governance area. Six areas, then, are assessed, as detailed on Figure 1.
When building the model, Actis was faced with a challenge: management teams at portfolio companies often saw the collection of impact data as a painful process of doubtful value. It was imperative to identify impact metrics that could drive thought and discussion at both the investment and the business level.
The key to this was to identify drivers of long term value – a terminology Actis prefers to non–financial value – that could be used as part of the 100 day plans Actis puts in place at portfolio companies. Associate Santiago Alvarez explains many impact measurement schemes are designed by entities sometimes far removed from the businesses themselves, which “means the criteria selected are not always relevant to the businesses involved”.
Creating an all-encompassing impact reporting system is extremely challenging given the specifics of each sector and stakeholders’ differing reporting needs. Development Finance Institutions, foundations, private banks, general partners and business managers will all want to focus on different metrics.
A choice had to be made and the Actis Energy Impact Model is centered on metrics relevant to the company and investment manager – however many will be equally helpful to the report needs of limited partners. The Actis Energy Impact model is used throughout the investment cycle. Santiago Alvarez explains that at the pre-investment analysis level, Actis typically does not have access to all the required information the model requires. Once an investment is made, the model is however put into place at the portfolio company.
It is crucial to understand the Actis Energy Impact Model is not just as a reporting tool, but very much part of the value creation process. The model is forward looking. The idea is not only to gauge where the company stands on the various metrics used, but where Actis wants to take it while it is invested. If Actis does not think it can add long term value at a particular company, it will not make an investment.
The feedback received from both limited partners and portfolio companies has so far been very positive. The initiative, whilst clearly valuable on its own, cannot exist in isolation. Developing meaningful impact measurement systems can only be achieved through dialogue between impact investors, investment managers and entrepreneurs. In this spirit, Santiago notes that Actis is more than willing to share its methodology and engage with other stakeholders to work towards the design and wider implementation of such models. More information is available at www.act.is