Investing in Impact

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Investing in companies that create social, environmental and economic value is an increasing worldwide trend. This type of triple-bottom-line investing is commonly called impact investing and last year, financial services giant J.P. Morgan estimated that the market was worth $60bn worldwide — and growing quickly.

According to the Global Impact Investing Network (GIIN), SA is the regional leader for impact investing in Southern Africa. In 2016, GIIN recently published comprehensive maps of the impact investing landscape in East, West and Southern Africa, revealing that South Africa is the single-largest market for impact capital in Southern Africa. Nearly three-quarters (74%) of all impact capital disbursed in the region has been placed in South Africa, amounting to $4.9 billion, excluding investments from local and international development finance institutions.

Despite these numbers, the impact investing space in SA is still significantly underdeveloped.  One explanation is that the term ‘impact investing’ is not widely adopted in South Africa.  In the past two decades, as the country sought to rebuild and transform its economy, the impact spotlight has been on mandated BBBEE spend in the areas of socio-economic development (SED), corporate social investment (CSI), and enterprise development (ED). That spotlight, as well as a strong traditional divide between the non-profit and commercial space, to some extent has hindered the uptake of the terms ‘impact investing’ and ‘social enterprise/inclusive business’.

From both sides of the aisle, there is discomfort in blending social impact with business. Sectors such as education, health and financial inclusion are key to impact investors in countries like Kenya. In South Africa, these sectors are largely serviced by the public sector. Where this is not the case, non-profit service providers fill the gap, often subsidised by international donor funding and local giving. Ultimately, this creates a less obvious market opportunity than related activity in countries such as Tanzania and Kenya. Nonetheless, with South Africa being one of the most unequal societies worldwide, this doesn’t mean that impact investors don’t have a role to play; rather, it means they have to be more creative in their approach.

Also, local investors don’t easily identify with the term impact investing. Some SA investors who not only state and track their social impact, but even remunerate their employees based on impact performance, do not consider themselves impact investors. However, whether or not they identify with the concept, many trailblazing investors and fund managers have committed to investing in companies that blend commercial and social viability.

Some, such as Edge Growth, make strategic use of corporate funding released as a result of compliance with the enterprise development section of the Department of Trade and Industry’s BBBEE Codes to invest in early stage enterprises focused on job creation and the creation of social and environmental value. Others, such as Knife Capital, leverage investments from high net-worth individuals in order to pursue their mandate of early stage deals.

Nesa Capital is a black-owned and managed alternative investment manager focusing on unique investment opportunities in South and Southern Africa. Nesa Capital is the current investment manager for Nesa Enterprise Development Fund and Nesa Investment Holdings. Nesa Capital manages a portfolio of alternative investment funds that are suitable for corporate and institutional investors, family offices, private clients and advisors seeking an experienced management team with a track record for preserving capital and generating real term financial and social returns.

Another example is Goodwell Investments, which provides early stage capital and technical support to companies primarily operating in the financial services and technology industries and targets companies that serve the Bottom of the Pyramid (BOP) emerging consumer segment. To date, Goodwell has invested in 20 financial inclusion businesses, providing more than $1.5 billion in financial services to over nine million families. While a large focus of impact investing has been smaller deals, Mergence, reaches beyond the early stage space to provide impact investing capital for larger deals across the country. The group’s impact investing began in 2006 with the launch of its first private real estate equity fund, focusing investing primarily in previously underserved township communities. This fund grew into what is now the Dipula Income Fund, which was listed on the Johannesburg Stock Exchange in 2011.

The final reason for the underdevelopment of the space is that there is still a considerable lack of understanding about impact investing, and a lack of substantive information advising investors how to implement an effective impact-investment strategy. The time is ripe for fund managers, asset managers, financial portfolio managers and foundation management to educate themselves about the impact investment market and how they can participate not only in creating wealth for a few, but creating opportunities for millions of Africans as well.

gen37caImpact Investing in Africa is an executive education course at UCT’s Graduate School of Business. This four-day course (November 7 – 10) is taught by leading experts and practitioners from across the globe is the perfect opportunity for wealth managers, consultants, funders, lawyers and other financial intermediaries to learn practical impact investment skills and approaches for engaging effectively with clients and their families around the opportunity to adopt effective impact investing strategies.  Application deadline is 26 October.

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aunnieAunnie Patton Power is the Innovative Finance Lead at the Bertha Centre and an Associate Fellow at the University of Oxford’s Saïd School of Business.  In these roles, she manages projects on social impact bonds/development impact bonds, impact investing and sustainable philanthropy, consults to a range of organisations including start-ups, financial intermediaries, investment funds, family offices and foundations on social investment strategies, and researches and lectures in financial modeling, social finance and impact investment.

Aunnie’s work has been published throughout the world, including by the Oxford University Press, the Stanford Social Innovation Review (SSIR), the World Economic Forum, the Impact Investing Policy Collaboration.