East Africa is emerging as a hotspot for impact investing that promotes not just profits but also sound environmental and social principles.
In the past five years, about $9.3 billion in impact investment funds has flowed into the region. Nairobi has been identified as the hub of the funding and headquarters of the managers handling the deals, with about half of the $9.3 billion being invested in the country. Uganda and Tanzania have received 13 per cent and 12 per cent of the total investments respectively. On the other hand, Rwanda, with an economy just one-eighth the size of Ethiopia’s, has received four per cent of all disbursements.
However, Ethiopia — the largest economy in public-private-partnership (PPP) terms — has received only around seven per cent of disbursements to date.
“Nairobi is the physical hub for impact investing in the region, where 48 impact investors have local offices, and is often the first port of call for impact investors operating in the region,” says the report.
“Notably, the research team was unable to find any evidence of impact investment activity in Eritrea or Somalia, and only minimal activity in Burundi, Sudan, South Sudan and Djibouti,” the report says, adding that the bulk of support provided in the six countries is through bilateral or multilateral government loans.
According to the document, impact investment ought to be taken seriously, since it is becoming a significant component of overall investment in the region.
One of the main reasons driving such investments in the region is early evidence of the effectiveness and profitability of past impact investment, which has encouraged the private sector actors to enter the market. Another reason is the growing commitment of asset-owners and corporations to deploying capital in an accountable, responsible, and transparent manner.
Increased confidence by governments and philanthropists regarding co-operation with the private sector after finding that capital deployed with positive intentions is both effective and critical in coming up with solutions for social challenges such as poverty, job creation and environmental challenges.
The report identifies development finance institutions (DFIs), non-DFI impact investors and impact capital vehicles as the main drivers of the increased investments in East Africa.
DFIs, according to the report, are government-backed financial institution that provide finance to the private sector for investments that promote development. An example is the International Finance Corporation.
A non-DFI impact investor, on the other hand, can be an organisation or individual actively making impact investments directly or through funds. This includes family offices, foundations, fund managers, pension funds and banks.
Throughout the region, the report said, DFIs have provided the vast majority of impact capital to date, accounting for more than 85 per cent of disbursements.
Kenya receives almost 50 per cent of the regional disbursements for both DFIs and non-DFI impact investors; however, in the recent past, the former have generally spread investments more evenly throughout the rest of the region.
DFIs, the document added, continue to favour large deals in sectors such as infrastructure, energy, and financial services, which are able to absorb large amounts of capital while still offering a clear and compelling development story.
The report identifies IFC as one of the earliest movers in the region, and the largest impact investor in East Africa, saying the corporation has set many of the standards and investment patterns for other DFIs.
It is expected that Kenya will continue to attract bulk of the impact investment in the region, partly because of its highly educated workforce and relatively open markets.
Although Uganda’s investment climate is improving, investors still face many challenges such as difficulties in acquiring talent for middle management, managing informally operated businesses, and few examples of successful exits that have kept deal flows below potential.
The report described Tanzania as an increasingly attractive destination for impact investors looking to avoid comparatively competitive markets in Uganda and Kenya.
However, despite a GDP that is approximately 50 per cent higher than Uganda’s, Tanzania scores poorly in impact investing as investors continue to face several challenges.
“Tanzania’s large land area, comparatively low population density, and weak road infrastructure hamper efficient distribution and logistics,” the report said.
The report warned that the positive financial outcomes of impact funding, mainly terms of profits, are yet to be seen broadly, as a result, only few funds have successfully exited investments.