How to catalyse impact investing in East Africa
East Africa has become a global hub for impact investing in recent years, with over US$9.3billion disbursed in the region to date. However, investors are finding it increasingly difficult to deploy their capital and there is growing recognition that a shortage of high-quality investment opportunities constrains the growth of impact investing in the region.
In our recent report Catalysing Impact Investing in East Africa, we take a look at the challenges currently preventing deal flow, and lay out a path to an improved market in which enterprises can more easily raise capital and investors are able to disburse more capital into opportunities across the region.
Consultations with over 80 impact investors, donors, social enterprises, and service providers in Kenya, Uganda, Tanzania, and Rwanda surfaced two key challenges constraining the growth of impact investing in East Africa:
- The “matching challenge” – or the difficulty in pairing investors and enterprises. From an investor’s perspective, suitable investment targets can be difficult to find, particularly at the early stage, due to geographic distance, narrow investment foci or the lack of enterprises’ self-identification as social enterprises. From the perspective of the enterprises there is limited information available regarding potential investors.
- The “preparation challenge” – or enterprises’ lack of readiness to take on investment. Enterprises often face a host of issues relating to their own investment readiness, ranging from the lack of robust growth strategies and business plans to problematic financial accounts and systems. In order to diagnose and overcome these challenges and move towards investment readiness, enterprises require tailored capacity-building support.
Our research showed that local service providers are already addressing both the matching and the preparation challenges described above. However, while a number of these service providers already operate across the region on a fully market-competitive basis (e.g., Open Capital Advisors, I-DEV and Intellecap) many face constraints themselves in scaling their services due to both delayed and conditional payment of fees resulting from a deferred success fee model. Upfront payments could allow the service providers to scale and more enterprises to access this assistance, but investors do not yet feel comfortable providing this necessary funding to enterprises that they feel are still some way from being investable.
To address these barriers, a market-responsive intervention is needed that helps to scale access to capital raising and associated capacity building services for enterprises. In Catalysing Impact Investing in East Africa, we propose the creation of a donor-funded “facility” to help service providers reach deeper into the pool of enterprises that need support and to develop a more vibrant impact investing market overall. We believe that, over time, such a facility will help enterprises receive the business development support they need and allow them smoother access to investments.
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This blog is part of the September 2016 series on Inclusive Business Development Services, in partnership with the Inclusive Business Accelerator. Don’t miss the whole series on support available to inclusive business from practitioners, donors and intermediaries including Afrilabs, DFID, Endeva, EY and many more…