Closing the capital gap on impact investment in Africa, report

African fund managers face unique obstacles that impede their access to capital for social impact. Given their lived experience, networks, and access to opportunities, they are well placed to deploy impact capital on the continent. Bridgespan Africa's new research surfaces ways that “first-mover” investors can back African fund managers with confidence while also achieving financial goals.

Bridgespan interviewed 25 stakeholders for the study, including a range of private market investors, philanthropists, and other field experts.

The research notes that bias is a significant hurdle to unlocking these funds’ potential. “While the challenges of scaling the African impact investing industry have been well documented, the on-the-ground experiences of African fund managers have received less attention. We believe African general partners (GPs) can and should play a prominent role in impact investing, whereby their proximity, lived experience, networks, access to opportunities, and leadership can inform how impact capital shapes the continent,” Nkanyiso Hlongwa, Bridgespan Partner and co-author of the study said.

African GPs’ experiences, shared with Bridgespan, highlighted three additional constraints to accessing impact capital. These include the traditional “rules” of due diligence work against African GPs receiving capital, and the “impact” label deters, rather than spurs, investor engagement with African GPs. While seeking investment capital, many African fund managers either downplay or avoid calling themselves “impact funds,” citing that it drives LPs away, even as evidence from the global impact investing market shows that impact investors can do good and perform well financially.

Impact-first capital is also not reaching the African GPs who need it. One way for African GPs to bolster their case, they say, is for “first-mover” LPs to kickstart their credibility amongst other LPs by providing patient, risk-tolerant “catalytic capital.” Philanthropists, typically regarded as the most likely supporters of catalytic capital, have been reluctant to provide it. 

The study found that “first-mover funders” - asset managers and owners with longer investment horizons and more flexible mandates - can help close the capital gap African GPs face, and the continent’s Sustainable Development Goals finance gap, if they are willing to try new approaches, including seeding GPs directly: First-mover funders can seed African GPs directly, serving as an important source of capital, especially for new funds. For example, the Mastercard Foundation launched the $200 million Africa Growth Fund with a consortium of partners in late 2022. The fund seeks to invest in African-owned and -led investment fund managers, particularly those focused on youth and women’s employment.

Building GPs’ track record: First-mover funders can enable GPs to “warehouse” deals, which involves investing in a handful of deals before a fund reaches its first fundraising close. Low-interest loans can also provide access to liquidity to cover administrative expenses as GPs work towards the close. In addition, African GPs can build a track record by managing a portion of another fund’s investment pool. For instance, Barka Impact Capital is building its investment track record by managing a $3 million mandate on behalf of philanthropic investors to invest in restoration champions, as part of the AFR100 TerraFund and reevaluating approaches to due diligence: First-mover funders have both the position and the opportunity to rethink approaches to standard diligence criteria. For example, Oryx Impact has developed proxies for evaluating track records that take previous individual experience into account. 

“Africa has abundant natural resources, vast potential for sustainable agriculture, transformative pan-African free-trade agreements, and other soaring opportunities,” said Bernard Chidzero, Senior Advisor to Bridgespan and one of the report’s authors. “There are challenges ahead, to be sure, and more LPs who can adopt these approaches will be needed to make a difference.” 

Read the full report here.

www.bridgespan.org