Lots Of Impact Investing Activity In South Africa, But Also Many Hurdles To Tackle

In Southern Africa, the big action in impact investing is in South Africa. But even in that country, there are a great many challenges.

Those are some of the findings of The Landscape for Impact Investing in Southern Africa, a new report from the Global Impact Investing Network and Open Capital Advisors.

South Africa was the location for three-fifths of deals from venture capital firms and non-development finance institution (DFI) funders and 30% of international DFI agreements. (For a breakdown of how impact capital was disbursed in countries other than South Africa, take a look at the chart).

Why has the vast majority of the $22.53 billion in impact capital in the region been disbursed in South Africa? For starters, it's the economic and financial capital of the region and the second largest economy in Africa, according to Abhilash Mudaliar, research manager of the GIIN, with a large and comparatively advanced financial system. Like Kenya in East Africa, the country acts as a local hub for impact investors. In addition, South Africa features an active group of domestic DFIs, which have disbursed around $25 billion through 7,500 deals in South African companies.

At the same time, even South Africa needs more impact investment."Banks and traditional funds can be risk-averse, unwilling to lend to growing businesses," wrote Mudaliar in an email. What's more, the country is one of the most unequal in the world, according to Mudaliar. So impact capital can have a big impact on economic development.

Still investors throughout Southern Africa face all sorts of hurdles, according to the report, including:

• Not enough investment-ready opportunities. A complaint heard by impact investors in other regions in Africa, that's particularly true of early-stage businesses, which often have everything from informal financial records to an unclear growth strategy.
• And not enough skilled people. The shortage is especially acute for financial professionals with 5 to 15 years of experience, able to serve as a CFO.
• Limited financing in local currency. Many impact businesses target disadvantaged populations who tend to earn most of their revenues in local currencies. But the majority of investors track returns in international hard currencies and have little ability to invest in local currencies.
• And limited electrical capacity. South Africa, for example, has to import electricity from neighbors with low grid penetration, curtailing those countries' investment potential in energy-intensive sectors like manufacturing.

What can be done? The report offers a few recommendations:

Use technical assistance facilities to build an investment pipeline. That means providing companies with pre-investment  support.

Expand investment instruments. Investors should try creative approaches that fill a need for financing that traditional equity and debt deals cannot.

Go local. Locally-based investors have a big advantage in their ability to source opportunities. Only a handful have staff in the region outside of South Africa, forcing them to rely on a "fly-in, fly-out model that may require multiple trips in order to perform due diligence and manage the portfolio," according to the report. "By partnering with local players, such as fund managers, incubators and accelerators, investors can identify potential companies and help build organizational capacity," says Mudaliar.

The report follows previous work research done into impact investing in East Africa and West Africa.