By Roland Decorvet, Founder and Managing Partner, AlphaTalents Africa
The Global Impact Investing Network (GIIN) now estimates the size of the worldwide impact investing market to be USD $1.164 trillion – marking the first time that the figure has exceeded the US$ 1 trillion threshold.
This is the central finding of the GIIN’s new 2022: Sizing the Impact Investing Market report, which also goes on to note that impact investing strategies are showing significant momentum despite disruptions from COVID-19, with impact investors growing their assets under management, and new entrants joining the industry.
Indeed, we believe that impact investing is only set to grow as societies continue to pressure financial institutions to divest from unsustainable business models and fossil fuels. The road to recovery in a post-pandemic world will see investors pouring more funds into environmental and social projects, spurred on by new regulations such as the EU Sustainable Finance Disclosure Regulation (SFDR) that introduce consistency in disclosures by impact investment funds.
Why Africa?
Africa is home to the youngest population in the world, with a median age of less than 20 years, and 70% of the population under the age of 30. Nearly half of global impact investment capital goes to Africa, according to the GIIN’s 2020 survey.
Despite this increasing share in global impact capital, as the effects of climate change continue to intensify and global shocks upend business as usual, Africa is feeling the brunt of what has been coined “the perfect storm”. Indeed, the continent is facing an unprecedented food, fuel, and fertilizer crisis – exacerbated by the war in Ukraine, scarring effects from the COVID-19 pandemic, soaring inflation, rising debt, and extreme weather.
No wonder then that estimates by the Brookings Institution suggest that Africa requires an additional US$256 billion in funding every year until 2030 to meet the Sustainable Development Goals. The continent is clearly primed to experience one of the century’s biggest economic developments.
Against this backdrop, it is interesting to note the three key trends that have shaped impact investing in Africa in 2022:
Creating a digital economy
In a trend that saw its genesis in mobile money and has only been accelerated by the pandemic, Africans are going digital apace. They are conducting business online and increasing their skills in data analytics, programming, and search engine marketing. While connectivity lags in some regions, mobile device use continues to increase with a staggering proportion of African web traffic — as much as 89% in some countries — coming from smartphones.
Moreover, giving the economy a digital spur, internet-connected smartphones have given young entrepreneurs access to new markets as well as professional growth and development through online education and mentorships.
When it comes to impact investing, the role of African FinTechs in promoting financial inclusion has seen significant activity from investors. Indeed, democratising financial instrument access is not new and is widely considered critical to ensure economic progress in the region, with one of the most effective drivers to increase financial inclusion in Africa being mobile money. As an example, according to EY, the gross domestic product (GDP) of Kenya may grow by 30% solely due to increased penetration of the financial sector in the country.
Combating climate change
According to the UN, protecting the earth’s plants, animals, and ecosystems, and repairing the damage already done by humans, will require upwards of US$700 billion a year in extra funding from governments and businesses over the next decade.
The sustainability challenge is particularly acute for Africa. Indeed, although Africa is one of the lowest contributors to greenhouse gas emissions, the continent continues to experience widespread loss and damages due to climate change caused by developed countries, with the adverse effects including biodiversity loss, water shortages, reduced food production, loss of lives and reduced economic growth.
Fortunately for it then, beyond oil and gas resources, Africa has great potential for wind and solar energy generation and can play a vital role in countering climate change. The continent has already begun leveraging renewable energy sources, including hydro, geothermal, and biofuels. Indeed, Africa has boundless green energy potential, with the International Renewable Energy Agency (IRENA) estimating that the continent’s capacity could reach 310 GW by 2030. This would not only satisfy local power needs but also position Africa as a global leader in clean energy production, with investments in related infrastructure, climate-smart agriculture, and sustainable natural resources.
Countering food security threats
Global food demand will increase by 70% by 2050, with demand in Africa growing even faster, according to World Bank forecasts. With plenty of available arable land, Africa can help meet the challenge. Indeed, the agri-food industry in Africa is a force to reckon with, as the continent boasts 60% of the world’s unexploited arable land and is home to abundant water resources as well as a variety of fertile soils and conducive climates that support the growth of the world’s most important and nutritious crops.
No wonder then that agribusiness is the most important economic activity on the African continent with a contribution of almost 25% of the GDP and a staggering 70% of employment, providing a livelihood to hundreds of millions of people. Yet, Africa imports most of its food, with the continent’s food bill increasing year-on-year and expected to hit US$110 bn by 2025.
The “Agriculture in Africa 2021: Focus Report” predicts that improved agricultural operations could spur growth across the continent’s entire economic and financial ecosystem. Coupled with the creation of the world’s largest free trade area with the African Continental Free Trade Area (AfCFTA), achieving food security for the whole continent is possible as is increasing food exports. Industry experts note that investment and education are needed to modernise farming practices on the continent. Commercial lending through banks and institutions is costly, so there is an opportunity for impact investors in agricultural start-ups.
How AlphaTalents Africa can help
Unfortunately, the aims of even impact-focused Private Equity (PE) funds often do not align with those of African entrepreneurs, especially in the agribusiness sector which is made up of smallholder farmers with modest capital needs who cannot guarantee PE investors high returns within a short timeframe.
The raison d’être of AlphaTalents Africa then is to offer a much-needed alternative to the traditional equity investment model that is clearly not working as far as the African agribusiness sector is concerned. As a core value proposition, AlphaTalents Africa’s investment vehicle has a 20 years lifetime, matching the long-term funding needs of the agribusiness industry.
By bringing patient capital to the table, we seek to unlock the potential of this strategic sector with a holistic approach to agri-stakeholders that creates measurable and sustainable value across the human, social, environmental, and financial pillars of our investment model. Moreover, true to our firmly rooted conviction that agribusiness cannot thrive in a vacuum, we allocate up to 25% of the capital we invest towards such ancillary industries as education, energy, healthcare, logistics, technology and financial services that, in varying degrees, affect the agribusiness value chain.
Indeed, as our motto notes, our model is truly centered around ‘investing with purpose’ as we enable investors to generate returns while they maximise their impact.
Impact investing a must for African agribusiness
Ultimately, we believe that rising to the challenge of meeting Africa’s mounting food insecurity is becoming more pressing as Russia’s invasion of Ukraine threatens to cast longer shadows. Soberingly, according to the 2022 Global Report on Food Crises 2022 Mid-Year Update, at least one in five Africans goes to bed hungry and an estimated 140 million people in Africa face acute food insecurity. The Horn of Africa is suffering from persistent drought and countries that depend on Russia and Ukraine for wheat and sunflower oil have seen prices skyrocket out of reach of ordinary people.
For investors looking to make a difference to the continent’s ever increasing food security burden, the time is now. Talk to us, and let us work hand in hand towards realising a brighter future for African agribusinesses that lie at the heart of the continent’s economic and social fabric.
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Sources:
- https://thegiin.org/assets/2022-Market%20Sizing%20Report-Final.pdf
- https://blogs.cfainstitute.org/investor/2022/10/14/eight-reasons-why-africa-is-primed-for-impact-investing/
- https://www.ey.com/en_lu/private-equity/what-s-next-for-impact-investing-in-africa-
- https://www.imd.org/ibyimd/leadership/three-trends-to-track-as-impact-investing-eyes-the-mainstream/
- https://www.worldbank.org/en/news/immersive-story/2022/10/17/putting-africans-at-the-heart-of-food-security-and-climate-resilience
